THE IMPACT OF ACCOUNTING INFORMATION SYSTEMS

(AIS) ON THE QUALITY OF FINANCIAL REPORTING

Table of Contents

ABSTRACT ........................................................................................................................... 3
INTRODUCTION .................................................................................................................. 4
LITERATURE REVIEW ....................................................................................................... 5
METHODOLOGY ................................................................................................................. 6
DISCUSSION OF THE FINDINGS ...................................................................................... 7
CONCLUSION .................................................................................................................... 10
REFERENCES ..................................................................................................................... 11

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ABSTRACT

This work addresses the ever-growing development of accounting information systems (AIS)
and how they help or hinder the various fields in which they are employed, with a specific focus
on the quality of financial reporting when using AIS. This is done with the goal of establishing
whether using accounting information systems has a predominantly positive effect on the
condition of financial statements, which is what this project claims. To do this, a variety of
research, done mostly in Southern Europe, is utilized. This data is analyzed qualitatively in
order to gather arguments for and against using accounting information systems as a means of
automatizing financial reporting. The final aim of this research is to determine the beneficial
impact of implementing AIS into this particular branch of finance management.

Key words: AIS, financial reporting, qualitative analysis, positive effects

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INTRODUCTION

Accounting information systems are described as structures used by businesses in order to

“collect, store, manage, process, retrieve and report its financial data so that it can be used by
accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors,
regulators and tax agencies” (Fontinelle, 2018). For decades, these systems have been employed
by various companies and individuals to compute the abundant amounts of financial details and
thus reduce the time it takes to process data. While there are a number of kinds of these systems,
most businesses use “computerized systems, also called electronic data processing (EDP)
systems” (Peavler, 2017a). In the USA, these structures are regulated by the Sarbanes-Oxley
act which, when signed in 2002, cut down on corporate fraud specifically (Peavler, 2017b).
However, there are still reservations with regards to applying AIS to financial reporting given
the highly sensitive nature of the information dealt with. Nevertheless, it is argued in this work
that such fears are overshadowed by the positive impact accounting information systems
provide when considering the various steps in the process of providing a financial statement.

Accounting information systems are part of the larger unit of the information systems
framework which, other than AIS, also includes the MIS, or management information system
(Hall, 2011, pp. 7). The distinction between these two is that the MIS processes nonfinancial
transactions which would usually not be done by traditional accounting information systems,
such as “sales forecasting, inventory warehouse planning, market research, and so on” (Hall,
2011, p. 9). Writing specifically of AIS, Belfo and Trigo write that they are usually composed
of the "[T]ransaction Processing System (TPS) that supports daily business operations; General
Ledger System and Financial Reporting System (GLS/FRS) and the Management Reporting
System (MRS)” (Belfo & Trigo, 2013, p. 537). They continue by stating that these elements
work together to create a structure which “encompasses all the essential functions to support an
organization and is implemented in almost all large organizations” (Belfo & Trigo, 2013, p.
537). According to Agung, AIS adds value through more planning and decision-making control,
which in turn increases overall quality of business (Agung, 2015, pp. 955). Keeping all of this
in mind, the applicability of AIS in financial reporting seems obvious.

This compatibility becomes more evident when delineating financial reporting with more
precision. On Investopedia, it is described as the process of “recording, summarizing and
reporting the myriad of transactions resulting from business operations over a period of time”
(2015). As Wohlner elaborates, most meaningful financial reports are based on the Generally
Accepted Accounting Principles (GAAP), so that they are comparable to other companies’

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statements (Wohlner, 2018). Citing Liu and Vasarhelyi, Mitrović names five characteristics of
accounting, namely that (1) it is based on data, (2) entails a large amount of information
processing, (3) deals with business measurement, (4) involves an abundance of data analysis
and (5) is finally delivered through reporting (Mitrović, 2016, pp. 407). When looking at these
elements, it can conceivably be held that AIS can handle the processing stages more accurately
and rapidly than a worker would. Further, it could produce a final result after going through the
given data, in the form of a financial report. The importance of this cannot be understated, with
Mitrović calling these reports the crown of accounting and writing that they are the “bearers of
accounting information and the basic tool for financial communication of a company with
interested users outside the company” (Mitrović, 2016, p. 408). Evidently, accounting data
needs to be constantly uniform in order to present itself as useful as the financial backbone of
any enterprise. Thus, AIS, conceptually at least, seem like an excellent match with the needs of
financial reporting. With this in mind, the following chapters will pursue this connection
further.

LITERATURE REVIEW

The primary literature consulted in the writing of this work consists mostly of critical qualitative
research on the topics of accounting information systems, as well as publications which inspect
their connection to various fields where they can be put to use. One of the sources, however,
approaches this question using a quantitative method.

James Hall’s Accounting Information Systems (2011) is one of the staples for the research of
this topic and a cornerstone for the academic and scientific approach to finance management
and report. It is a book of substantial coverage and large importance in the field of accounting
systems and explains almost all of the relevant advances and hindrances made in the field. It is
especially admirable that the information within the book is presented in a very understandable,
yet thorough way. Furthermore, Hall approaches the subject matter from various angles, such
as management, accounting and IT, thus giving a varying overview of the benefits and
disadvantages of accounting information systems.

Accounting Information Systems as a Support to Financial Reporting of Companies (2016) by

Aleksandra Mitrović, on the other hand, takes a more precise and directed approach, focusing
on the usage of AIS as a tool to help businesses. As a goal, the paper tries to map the
development and attempts of integration of accounting information systems into companies,
focusing both on the upsides, as well as the downsides of such an approach. Mitrović writes a

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short, yet concise introduction to the topic of AIS and financial reporting, before focusing her
paper concerning the current and future developments of these systems in the field. While a
more focused look at the elements, which might influences this future expansion is lacking, the
paper nonetheless offers an adequate starting point for the research of this specific topic.

Fernando Belfo and António Trigo’s Accounting Information Systems: Tradition and Future
Directions (2013) does provide a much more in-depth look at the prospective situation of AIS.
It is a well-informed reflection on the current and future position of accounting information
systems which is established by analyzing the duties of accountants and financial professionals,
looking at technological advancements related to AIS and positing how this progress can be
redirected towards various business branches, including financial reporting. Belfo and Trigo’s
work also connects various modern devices to the branches of accounting where they show a
potential for improving the effectiveness of work, thus providing quite succinct an
argumentation regarding their pertinence.

Vlasta Roska and Jasenka Bubić’s Accounting Information Systems for Management Decisions:
Empirical Research in Croatia (2013) offers a quantitative approach to the topic of AIS in
business and is therefore a relevant source for a more practical look at the topic. Various
enterprises using accounting information systems in Croatia are looked at and analyzed in order
to establish the change in efficacy caused by the introduction of accounting information
systems. The conclusions they arrive to point to AIS significantly improving the performance
of almost all of these companies. However, the importance of Roska and Bubić input for this
work is that it provides a very detailed overview of the regulations governing the use of
accounting information systems in Croatia, Bosnia and Herzegovina, Serbia, Slovenia,
Montenegro and EU member states. This allows for a much more thorough analysis into the
potential restrictions of AIS in terms of privacy, security and ethics.

METHODOLOGY

The research methodology of this work consists of a combination of critical qualitative research
and qualitative comparison. Firstly, the primary and secondary literature, made up of literary
and online sources, are researched with a focus on those which imply a connection between
accounting information systems and financial reporting. Arguments for and against AIS are
thoroughly examined and noted, while a firm grasp of the basic and essential qualities of
financial reporting is established. These arguments are further compared, while the specific
sources are evaluated for correlating opinions. Especially important, in this case, is data on the

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regulation of AIS, the quality of work of companies using accounting information systems and
potential flaws in the system.

This is done with the specific goal of determining the accuracy of the hypothesis that accounting
information systems considerably improve the quality of financial reporting in any given
situation and that, despite some of the flaws or concerns AIS bring, this is a worthy investment
for any forward-thinking accountant and business.

DISCUSSION OF THE FINDINGS

The research done for this work has yielded a number of findings. First of all, accounting
information systems prove to be highly compatible with financial reporting in a number of
ways. Further, they not only show exceptional accuracy in the results the produce, but also offer
a more rapid solution to producing financial statements. However, slight insecurities and doubts
still exist when considering the elements of privacy, ethics and legislative regulations,
especially in the setting of Balkan countries.

Based on the definition Mitrović cites, financial reporting, as mentioned before, revolves
around data, involves a significant amount of information processing, measures business
efficiency, deals with an abundance of data analysis and shows its end results through reporting
(Mitrović, 2016, pp. 407). Taking a look at how AIS correspond to these qualities can help in
determining its suitability to the branch of finances discussed herein. Accounting information
systems are essentially data processing structures, meaning that, in this regard, they perfectly
match the needs of financial reporting. Next, given the significant computing power necessary
to run these systems on a large scale, it is obvious that they can handle a great amount of
information rapidly, thus fulfilling this requirement of financial reporting as well. Further,
measuring business efficacy is a part of financial reporting that inevitably requires human-
computer interaction, but a combination of the accuracy and speed of AIS and a proficient
accountant using a statistical analysis tool such as SPSS quickly resolves such situations. Then
there is data analysis which, again, accounting information systems configured for such a task
easily handle given the processing power necessary to run them in the first place. Finally, AIS
can be set up to produce a report at the end of this cycle, whereas this can also be done by an
accountant at a slower pace. In any case, this is another key element of financial reporting which
correlates perfectly with the qualities accounting information systems offer.

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A look at the most important types of financial reports also reveals some favorable qualities of
AIS. Bumpres identifies four essential kinds of financial statements, namely income statements,
cash-flow statements, balance sheets and statements of capital (Bumpres, 2017). Income
statements are used to represent a business’ income and expenses over a period of time, usually
yearly, quarterly or monthly (Bumpres, 2017). Accounting information systems can be
particularly useful in this regard given the accuracy with which they process the data necessary
to conclude the net revenues and expenses. Other qualities of AIS include an improvement of
external reporting, faster processing and increased functionality (Mitrović, 2016, pp. 409).
This final quality is particularly important in cash-flow statements, given that these represent
summations of all of a business’ incomes and expenses, both short-term as well as long-term.
In this regard, the capacity of AIS to accurately survey and collect even the minutest details is
of essential value. Whereas this has previously been done manually by accountants, this option
shows an increase in the potential for mistakes, as well as a decrease in speed. Balance sheets
and statements of capital also benefit from the four qualities accounting information systems
bring, given that both deal with owners and stakeholders capital and thus entail more data
processing, time-consuming for accountants but seamless for computers. Considering the four
main types of financial reports, AIS thus seem a quite suitable tool in supporting accountants.

A branch of financial reporting AIS have shown considerable potential in is real-time reporting.
Trigo, Belfo and Estébanez posit that the traditional financial and non-financial reports done on
a yearly, quarterly or monthly basis are becoming outdated given rapid market changes (Trigo,
Belfo & Estébanez, 2014, pp. 118). With this in mind, companies have already started making
use of the key capabilities of accounting information systems to keep up to date with the swiftly-
shifting situation on various business fronts. Financial reporting, in this case, includes both real-
time market changes, as well as company dealings. Given such an expeditious situation, it is
obvious that accountants would not be able to keep pace with all the developments during a
longer period of time. However, since AIS naturally include faster processing and increased
functionality, they can be an invaluable tool going forward. Further, with the increase in
accuracy to be expected with time, accounting information systems seem likely to become
irreplaceable in the future. Given the all-round technological improvement we are currently
witnessing, AIS can be combined with other instruments to provide an even more efficient
solution. Amongst others, mobile devices, cloud computing and business intelligence can offer
a way forward in order to keep accountants up to date and improve the quality of financial
reporting (Trigo, Belfo & Estébanez, 2014, pp. 122–124). AIS, combined with SPSS or similar
programs, allow for real-time accounting in the literal sense of the word, since modern

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computers can process data and produce results within seconds, meaning that the traditional
concept of yearly, quarterly or monthly statements might soon be less relevant.

While accounting information systems show obvious advantages when applied to financial
reporting, there are also some issues which need to be discussed. The main ethical principles of
AIS need to be discussed in order to establish whether these systems do meet the necessary
conditions. According to the American Institute of Certified Public Accounts, the five main
conditions classified are security, availability, processing integrity, confidentiality and privacy
(2018). In terms of security, the AICPA defines this convention as protection against
“unauthorized access, unauthorized disclosure of information, and damage to systems” (2018)
which could lead to lost or compromised data. Whilst accounting information systems do
contain code pertaining to security, measures to keep information safe are primarily
implemented on the user-system level, with staff responsible for the actions of the structure.
Availability entails information being available for supervision and operation which, given the
necessary precautions against legacy software, again depends more on staff. Processing
integrity means that system processing is “complete, valid, accurate, timely, and authorized to
meet the entity’s objectives” (AICPA, 2018) and in this case, AIS delivers satisfactory results
given that complete, accurate and timely processing is one of its key elements. However, since
many companies choose to develop their own variations of the system, processing integrity can
suffer as a result of insufficient coding. Such situations require an overall change to the
accounting information systems in use so that they meet the necessary standards and avoid the
risk of compromising sensitive data. Confidentiality is another user-dependent variable in the
AIS and requires reliable usage and channels of communication within the company. Finally,
privacy relates to the collection, management and storage of personal information and connects
strongly to the legislature of specific countries. As Roska and Bubić state in their investigation
of Southern Europe and EU member states, AIS falls under accounting legislation of almost all
countries, including the Republic of Croatia, Federation of Bosnia and Herzegovina, Republic
of Serbia and so on (Roska & Bubić, 2013). In all of these states the focus is on providing
enough transparency so that accounting information systems meet regulations to satisfy internal
and external users (Roska & Bubić, 2013) in a number of categories which could be equaled to
the principles defined by the AICPA. It can be concluded from this that AIS require a
straightforward and competent management in order to produce the optimal results while
ensuring legal clarity.

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CONCLUSION

This work can offer a number of findings on the topic of the impact of accounting information
systems on the quality of financial reporting. However, the most important ones state that
businesses can benefit greatly from implementing AIS into their finances, the systems offer an
important way forward in terms of real-time financial reporting and the possible flaws they
bring with them can be reduced considerably through competent and transparent use.

As is clear through the comparison of financial reporting principles and the capabilities of
accounting information systems, the latter are superbly suited to improve the work of
accountants. This is due to the main qualities of AIS, namely their functionality, accuracy, faster
processing and improved external reporting. Furthermore, these characteristics correspond
perfectly to the main types of financial reports, namely income statements, cash-flow
statements, balance sheets and statements of capital. Accounting information systems also seem
poised to be of invaluable importance for real-time accounting which is already a trend that is
substituting the more traditional process of yearly, quarterly and monthly financial statements.
Whereas a fully-manual approach to real-time accounting would be nigh on impossible, the
processing power and speed of AIS means that this can become a routine process. On the other
hand, this work states that, while there are potential dangers given that accounting information
systems often deal with highly sensitive personal data, these issues can be minimized by a
cautious and transparent use of the structures. With all of this in mind, it can be concluded that
AIS does not only benefit companies significantly, but also shows promise to be a key
component for the quality of financial reporting in the future.

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