Integration of ERP Systems in Accounting Practice - Essay Example

Integration of ERP Systems in Accounting Practice Beginning the early 1990s, the world has embraced technologicaladvancement in literary all fields of application, including business management and organization. A prime example of technological adoption is Enterprise Resource Planning (ERP) in business management. ERP is software for business management that enables organizations to use an integrated applications system for the business management. The software integrates all paradigms of business operation, including manufacturing, development, marketing, and sales. ERP software incorporates various enterprise software modules that an organization may decide to purchase, depending on its technical capabilities and business needs. Particular ERP modules focus on specific areas of business processes, such as marketing or development. Among the popular ERP include those that tackle material purchasing, product planning, accounting, distribution, human resource, distribution, inventory control, marketing, and finance. The consistent growth of the popularity of the ERP methodology, businesses, and organizations are increasingly adopting the use of ERP for management and organization, particularly in the accounting field (Wagner, Moll, and Newell, 2011:182). Based on the cased study of socio-material perspective on the integration of ERP systems in accounting practice, this paper seeks to highlight the accountability and management issues associated with ERP as well as theoretical perspectives. In their case study on the introduction of an ERP system in an Ivy League University, Wagner, Moll, and Newell outline an array of accountability and management control issues associated with the system, including dependency of the ERP systems on the entanglement of technology and users (socio-material assemblage). Others include the probability of ERP packages not to capture management accounting despite the particularity of the design, affordability, and power of community practice that influence the integration of the accounting logics within the system. Moreover, the study highlights the possibility of employee resistance in cases of incompatibility with practice legacy logic, and the need for reconfiguration, which is in misalignment with traditional system development theories and vendors (Wagner and Newell, 2004:314). Another significant challenge that the ERP systems face is different context of use concerning the scope and type of modifications made in the post-roll-out phase, a factor that may influence the relational and on-linear nature of accounting literature. Summarily, the main problem result from misalignments legacy practices in the adopting organization and best practise embedded in the ERP systems. The authors of the study attribute the above problems are particularly common in packaged software implementation, thus necessitating early detection of any misalignments in system configuration and selection. Nonetheless, the authors acknowledge that complex and externally regulated misalignments tend to surface much later in the implementation phase, citing the case of the one of the Ivy League Universities (hereafter “Ivy”) as an example. Empirical evidence from recent studies indicate that conflicts and intense efforts surface in the early stages of custom-built software development-use cycle, but in tailor-made software, these issues only surface at the later stages of implementation (Pouloudi and Whitley, 2000:341). Consequently, this highlights the need to address misalignment issues in the post-roll out phase. Indeed, the case study focuses primarily on this particular stage, highlighting the turnaround processes that address the misalignment and the subsequent emergence of a working ERP system. It is important to note that a working ERP system is essentially one that is different applicant within the organization use and accepts, but not necessarily the ideal one from any particular perspective (Yeow and Sia, 2000:15). The “Ivy” case study has three major theoretical perspectives: organizational context (organizational theory), reconfiguration (contingency theory), and social material practice (agency theory). Organizational Theory Perspective Ivy is one of the Ivy League institutions that offer selective private education and academic excellence in the US. These institutions have a relatively decentralized governance structure, with disparate support and academic departments being the focal administrative points reconciled and consolidated centrally for purposes of meeting regulatory concerns and financial status reporting. According to the authors, a research university such as Ivy depends on research grant monies, with responsibility for 4000 grants. Contract revenues and grants contribute about 30% of the university’s operational budget. Thus, it is imperative to use and manage the contracts revenue and grants efficiently. The legal counsels in the university’s Internal Audit department coordinate with external auditors to scrutinize closely the grants-related activities. Therefore, compliance to audit plays an integral factor that determines the modernization of the institution’s administrative system. Any instance of grant funds mismanagement could have significant reliability impacts. This, therefore, means that the leaders must ensure reduction of inconsistencies in all faculty grants (Ramiller, 2005:59). Prior to the inception of the ERP system, the authors depict the grant funds system as prone to inconsistencies. Faculty members receive grants from external agencies, which for obvious reasons require expenditure reports based on the project of the member. The funding agencies often determine awards based on grant application requests, which is the total grant award. The principal investigators on grants typically handle numerous proposals and awards simultaneously. In other words, their scientific activities are project-driven, though the university’s accounts do not incorporate project-oriented reports. The primary focus of faculty is scientific endeavours enabled by grant funding. This means that the investigators do not maintain a consistent record of grant as they spend the funds based on the remaining grant money. Consequently, this practice leads to overall inconsistencies in the accounting practise of the institution. This led to the introduction of ERP systems with integrated functionality to replace all administrative systems. The perception was that introduction of a computerised information system would contribute to an enhanced level of accountability in the accounting practise of the institution. In theory, however, the ERP accounting practise may be sensitive to local circumstances despite the inscription of a particular accounting logic (Leonardi and Barley, 2008:163). Ivy embarked on business process redesigning and system modernization, emphasizing on human resource and payroll, financial management, and contracts and grants administration. The key criterion for designing the system was the capability in management of project management. All the central administrators and academic constituents were in consensus on the importance of the integration of the ERP system. The common idea was a more transparent accounting practise that would enhance the management of institutional risks, avoid litigious hazards, function competitively, and comply with regulatory requirements. The ground was set. The institution required a set of new practices that would address accountability by maintaining official records and enhance control of financial transactions. It was also important to shift the accounting practises through iterative cycles of reporting, review, planning, and budgeting. Thus, the design of the ERP system phased out ‘commitment accounting’ budgeting practise logic and introduced ‘time-phrasing’ institutional standards. This gave rise to a significant problem; some academics refused abide with the requirements of financial management module (Burns, 2000:571). The authors of the case study capitalize on this particular event to highlight misalignment of ERP systems with idiosyncratic local knowledge, which may result to creation of other alternatives. The creation of work-alternative that deviates from the recognized standards of operations is a form of resistance that results from introduction of computerized information systems. The users try to resist the inception of the new system due to a number of factors, including lack of application of commonplace practices or principles, significant differences with the previous system, or complexity of the new system (Briers and Chua, 2001:245). The ERP system seems to encroach on the accounting practice of the institution, but it does not really deliver the expected results upon its implementation. Consequently, the users (organization employees) tend to behave different in response, a central concern in the organizational theory. Agency Theory Perspective Prior to the inception of the ERP system, the institution had devised a way to manage grant-funded scientific activities. The authors refer to this socio-material configuration as commitment accounting, which primarily meant that people had particular meaning and shapes through situated use. Discrepancies adjustment responsibilities resided with faculty and their subsequent support staff, balancing the actual funds spent by PIs and the budget. There were several methods used for reconciling these figures, including notes or emails to administrators, Distributed Accounting System (DAS) PI reports, and printed reports from the financial system (Allen and Kern, 2001:151). In essence, faculty administrators received instructions from PIs on the amount of money to spend on project activities, referring to these obligations as ‘commitments’ categorized as future plans and pending actual. Pending actual were expenditures that occurred but did not reflect on the general ledger of the institution due to timing reasons, while the ‘future plans’ were activities that the PIs expected to begin later on but prior to completion of the grant. Consequently, administrators had to seek explanation and clarifications of the PIs’ scientific activities, which often occurred in local negotiations. Thus, identification of future funds became reliant on professional working relationship, available time, individual temperament, departmental norms, and nature and stage of research. Moreover, these factors determined the entry of future funds into the DAS interface (Ewert, Wagenhofer, and Schuster, 2009:490). This creates an ad hoc-like accounting practice, which reflects how minute variations need clarification for proper work conduct. The main problem was that PI report differed from the financial system report (which reported the actual expenses and income as reflected by the general ledger in any given financial cycle). These variations required administrators to reconcile the financial reports with the reports from the PIs. The result was a compromised financial data with possibility of different interpretation by users. In essence, the PIs adopted a particular way of carrying out accounting practices that supports commitment accounting. To central administrators, this was an indication of poor financial planning by faculty. However, the ‘imperfect’ configuration is part-and-parcel of accounting practice from the PI’s point of view. On the contrary, central administrators gave out the standard architecture of the ERP system as the time-phased budgeting practise. This resulted to differences between the PIs and the administrators, with the authors citing the comments of director of financial planning as evidence (Venkatraman, 2011:46). Similar to the principal-agent problem, the central issue here is that the two parties have a similar organizational objective but with different short-term interests. Contingency Theory Perspective The central aspects of the contingency theory in accounting highlights that there is no single “accounting logic” that ideally suits a given organization on a long-term basis. Thus, there is need for occasional reconfiguration based on organizational changes. In the Ivy’s case study, the central administrators intentionally adopted time-phased budgeting practice rather than the previous commitment accounting calculations (Chapman, Hopwood, Shields, 2008:84). The authors reassert that the faculty had invitations to attend project information sessions, though only a small portion turned out as their perception was that the system would obviously accommodate their needs. Therefore, the design stage did not suffer any contention regarding the exclusion of commitment accounting. After the rollout of the ERP system however, the replacement of the commitment accounting logic by time-phased budgeting practice became extremely contentious, resulting to resistance and tension between the faculty and central administration. The inception of the new accounting practice highlights the differences between humans and technology. In other words, the configuration of the new system introduced some hindrance to the relationship between the ERP system and the PIs, limiting the interaction scope the capacities of human action and the grant accounting figures, allocating monies based on the preferences of the central administration (Harwood, 2003:97). The ERP system did not incorporate a provision for reports similar to the legacy system, thus it did not have sufficient interaction to access the situation of PIs and gather important information. After implementation of the system, many academic staffs and PIs had negative perceptions on the system, the main concern that the new system would reduce their ability to control and manage their spending. Another major concern was the academic freedom eminent in the commitment accounting practice, as it gave room for flexibility in the accounting practice. The customized monthly reports were no longer available, and thus the financial evaluation of the position of the PIs spending. Consequently, the staffs were under great pressure as the ERP system failed in recording and capturing accurately the changes in research activities. The authors incorporate sentiments from several staff members of the institution, highlighting their displeasure and decries. Summarily, the configuration of grant accounting practice in a manner that the interaction of things and people in the ERP environment resulted to loss of information and knowledge. The PIs could no longer contribute important information to the relevant objects within the administration of the institution (Harwood, 2003:107). The result was confusion and resistance, including some influential constituencies contacting majority of grant donors. Consequently, the central administration organized a series of meetings with faculty members, ERP system team leader, and other staffs, which led to a consensus on the issues: the central administration agreed to some reconfigurations that would ensure reinstatement of functionality of commitment accounting practice within the ERP system. This highlights the aspects of the contingency theory, that different accounting logics suit different organizations in different times. Compare and Contrast The three different theoretical perspectives are similar since they all seek to explain the implementation of ERP systems in organizations and the subsequent accountability and management control issues. The different perspectives also highlight the issues that organizations need to address prior to new systems rollout, including reconfiguration to address any misalignments in legacy systems. Nonetheless, the theoretical perspectives are rather different insofar as their central ideas are concerned. The organizational theoretical perspective bases on the organizational structure prior to the implementation of new ERP systems and after the implementation. In essence, it examines all organizational changes and relates them to the system. The central ideas is to identify both the positive and negative impacts of the system, and try to outline some pre-implementation measures that organizations should adopt, including any changes to the system and the organization itself (Ptak and Schragenheim, 2004:281). For instance, the case study examines resistance of the academic staff and PIs because of the new system in Ivy. The impacts of these forms of resistance and confusion to the structure and the normal operation of the organization especially based on accounting and management practice may be devastating. The agency theoretical perspective focuses on the problem of information asymmetry resulting from implementation of the ERP. This results from adopting an architecture that suits only a portion of the stakeholders or users. For instance, Ivy as an institution seeks to improve its financial and accounting practices, thus they embark on the design of a new ERP system. At this instance, both the central administration and the PIs have mutual interests. However, the architecture of the system accommodates the interests of the central administrators by adopting the time-phased phased accounting practice. The resultant problem is similar in nature to the principal-agent problem. The last perspective focuses on the aspects of the contingency theory. It examines the accounting practices that different stakeholders perceive as ideal and those that the ERP system implements (Vamosi, 2000:46). In the case study, the ideal accounting practices based on the preference of the central administrators is the time-phased accounting logic while the PIs prefer the commitment accounting logic. Bibliography Allen, D.K., and Kern, T. (2001). “Enterprise Resource Planning Implementation: Stories of Power, Politics and Resistance”, in Realigning Research and Practice in Information Systems Development: The Social and Organizational Perspective, N. L. Russo, B. 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