BUSINESS SCHOOL

INFS2001 Information Systems for Performance Improvement Financial Reporting and Management

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Objectives for Financial Reporting and Management

› Understand the operational features of the General Ledger System(GLS), financial reporting system(FRS), and management reporting system(MRS).

› Be able to identify the principle operational controls governing the GLS and FRS.

› Be familiar with the financial reporting issues surrounding XBRL.

› Understand the factors that influence the design of the MRS.

› Understand the elements of a responsibility accounting system.

• The journal voucher is the source of input to the GL with the manager offering a degree of control against unauthorized GL entries.

GLS Database

› General ledger master file is the principal file in the GLS database and is based on the chart of accounts. - FRS draws upon the GL master to produce financial

statements.

GLS Database

› General ledger history file has the same format as the GL master. - Provides historical financial data for comparative reports.

› Journal voucher file provides a record of all GL transactions and replaces the traditional general journal.

› Journal voucher history file contains journal vouchers of past periods for the audit trail.

› Responsibility center file contains financial data by responsibility centers for MRS reporting.

› Budget master file contains budget data by responsibility center.

Financial Reporting Procedures

1 Capture the transaction. 2 & 3 Record in special journal and post to subsidiary ledger. 4, (7) & (10) Post to GL periodically. 5 Prepare unadjusted trial balance. 6 & 7 Make, journalize and post adjusting entries. 8 Prepare the adjusted trial balance. 9 Prepare the financial statements. 10 Journalize and post closing entries. 11 Prepare the post-closing trial balance.

Systems Flow Chart

Real-Time Systems Flow Chart – Using IT XBRL: Reengineering Financial Reporting

› Many companies post financial statements on their websites using HTML (Hyper Text Markup Language). - Cannot be conveniently processed through IT automation. - Performing analysis on data requires them to be manually

entered into the user’s information system. › The solution to the problems is XBRL (extensible

Business Reporting Language). - Internet standard designed for business reporting and

information exchange. - Objective is to facilitate the publication, exchange, and

processing of financial and business information. - Derivative of XML (extensible Markup Language).

XML

› XML is a meta-language for describing markup languages.

› Extensible means that any markup language can be created using XML. - Includes the creation of markup languages capable of storing

data in relational form, where tags (formatting commands) are mapped to data values.

- Can be used to model the data structure of an organization’s internal database.

Formats the document “book order”

Embeds the data values of “book order” from the database

XBRL

› XML-based language for standardizing methods for preparing, publishing, and exchanging financial information.

› First step is to select an XBRL taxonomy. - Classification schemes that specify the data to be included in an

exchange or report.

› Next step is to cross-reference each GL account to an appropriate XBRL taxonomy element (tag). - Mapping organization’s internal data to XBRL taxonomy elements.

- Tags are used whenever data is disseminated to outsiders.

› Computer programs that recognize and interpret tags general XBRL instance documents (financial reports) that can be published and made available to users.

Current State of XBRL Reporting

› Likely to be the primary vehicle for delivering business reports to investors and regulators in the near future.

› Developments in XBRL Reporting: - Required for US banking quarterly “Call Reports”.

- SEC ruling requires large publicly held companies to adopt SBRL by December 2015 to meet financial reporting requirements.

- Comparable developments to encourage or require SBRL in Tokyo, Canada, China, Spain, Australia the Netherlands and the UK.

› Use of XBRL facilitates fulfillment of legal requirements specified in SOX.

Controlling the GL/FRS

› Potential risks to the FRS include: - A defective audit trail.

- Unauthorized GL access.

- GL accounts that are out of balance with subsidiary accounts.

- Incorrect GL account balances due to unauthorized or incorrect journal vouchers.

› Six categories of physical controls under the COSO framework.

› Transaction authorization - Journal vouchers must be authorized by a manager at the source department.

Controlling the GL/FRS

› Segregation of duties – GL clerks should not: - have record-keeping responsibility for special journals or subsidiary

ledgers. - prepare journal vouchers or have custody of physical assets.

› Access controls - Unauthorized GL access can cause errors, fraud, and misrepresentations in financial statements. - SOX requires controls that limit database access.

› Accounting records – Audit trail ensures transactions can be accurately traced from initiation to final disposition. - Files should be detailed enough to: (1) answer inquiries, (2)

reconstruct data if destroyed, (3) provide historical data, (4) meet government requirements and (5) prevent, detect and correct errors.

Controlling the GL/FRS

› Independent verification - GL department provides this step within the accounting information system. - Journal voucher listing provides relevant details of each journal

voucher posted to the GL. - General ledger change report presents the effects of journal voucher

postings on GL accounts.

› IT application controls apply to the GL/FRS too. - Edits and check digits ensure error free data in the GL. - Process and output controls serve the same objectives. - Real-time transaction processing bypasses human reconciliation and

review which provides both benefits and risks. - Eliminating human element reduces the possibility of some error and increases

efficiency.

- Risk of applicable logic errors that could have widespread and devastating implications for the FRS.

Internal Control Implications of XBRL

› Taxonomy creation: Incorrect generation results in incorrect mapping between data and elements that could result in material misrepresentation of financial data.

› Taxonomy mapping errors: Correctly generated XBRL tags may be incorrectly assigned to internal database accounts, results in material misrepresentations of financial data.

› Validation of instance documents: Independent verification procedures need to be established to ensure that appropriate taxonomy and tags have been applied before posting to a web server.

Management Reporting Systems

› Usually seen as discretionary reporting, but can argue that Sarbanes-Oxley requires an effective MRS. - Critical element of organization’s internal control structure. - Directs attention to problems on a timely basis which promotes

effective management and supports business objectives.

› Formalization of tasks principle divides organizational areas into tasks with clearly defined limits of responsibility. - Purpose is to avoid an organizational structure that depends on

specific individuals.

- Organizational chart shows typical job positions in a firm.

- Allows formal specification of information needed to support tasks, regardless of the individual performing them.

Management Reporting Systems

› Responsibility and authority refer to an individual’s obligation to achieve desired results and the right to make decisions within the limits of that obligation. - Define the vertical reporting channels through which information flows.

› Span of control refers to the number of subordinates directly under the manager’s control. - Managers with narrow spans of control need detailed reports with

summarized information for managers with broad spans of control.

› Management by exception suggests managers should limit their attention to potential problem areas. - Reports should focus on changes in key factors that are symptomatic

of potential problems and avoid unnecessary details.

Management Function, Level, and Decision Type

› Short-term planning involves the implementation of specific plans that are needed to achieve long-range objectives (strategy).

› Control function ensures firm’s activities conform to the plan. › Strategic planning decisions include:

- Setting firm’s goals and determining scope of business activities. - Determining organizational structure and management philosophy.

› Strategic planning decision are long-term, require highly summarized information, tend to be nonrecurring, have a high degree of uncertainty and require both internal and external sources of information.

› Strategic decisions are broad in scope and have a profound impact on all levels of the organization.

Management Function, Level, and Decision Type

› Tactical planning decisions subordinate to strategic decisions. - Shorter term, more specific, recurring, have fairly certain outcomes,

and a lesser impact on the firm.

› Management control decisions involve motivating all managers to use resources as productively as possible. - Difficult to separate manager’s performance from that of the

operational unit.

› Operational control decisions deal with routine tasks. - Structured, narrow focus, dependent on details, short time frame.

- Three basic elements: (1)Attainable standards; (2) Performance evaluation with differences from standard noted as variances; and (3) Taking corrective action.

Problem Structure

› Reflects how well decision makers understand problems. › Three elements:

- Data: values used to represent relevant factors – use of ERDs. - Procedures: sequence of steps used in solving the problem – DFDs and

SFCs. - Objectives: results decision maker desires to attain – efficiency,

effectiveness, risk, control. › When all three elements are known with certainty, it is a structured

problem. - Not unique, well suited for traditional data processing techniques.

› Unstructured problems exist when any characteristic is not known with certainty. - Normally complex and unique making traditional data processing

techniques ineffective.

Systems and data mapping techniques (DFDs, SFCs and ERDs) are more useful at the operational level – although higher level decision makers will use aggregated data from operational systems

Management Reports

› May be in paper or digital form and express information verbally, numerically and/or graphically (see Appendix B Chapter 14 for some examples).

› Report objectives: To be useful, must have information content with two general objectives: - Reduce the level of uncertainty associated with a problem facing the

decision maker. - Influence the behavior of the decision maker in a positive way.

› Programmed reporting provides information to solve anticipated problems: - Scheduled reports are produced at specified intervals. - On-demand reports are triggered by events, not time.

Management Report Attributes

› Relevance – useful to decision making.

› Summarization – appropriate level of detail.

› Exception orientation – identify risks.

› Accuracy – free of material errors.

› Completeness – essential information.

› Timeliness – in time for decisions.

› Conciseness – presented with coding schemes and calculations as appropriate to be understandable.

General Model of AIS !!

Management Reports

› Managers cannot always anticipate information needs. › Database technology provides direct inquiry and report

generation capabilities that allow the generation of ad hoc reports without assistance.

› Data mining is the process of selecting, exploring and modeling data to uncover relationships and patterns. - The verification model uses a drill-down technique to either verify or

reject a user’s hypothesis. - The discovery model uses data mining to discover previously

unknown but important information hidden in the data.

› Successful data mining requires a data warehouse of archived operational data. (as outlined in Database Management)

Responsibility Accounting

› Every economic event that affects the organization is the responsibility of and can be traced to an individual manager.

› The budget process helps achieve objectives by establishing measureable financial goals for each organizational segment.

› Performance measurement and reporting take place at each operational segment. - Information flows upward as responsibility reports.

› Operations organized into responsibility centers: - A cost center has responsibility for cost management within budget. - A profit center has responsibility for cost control and revenues. - An investment center manager has general authority to make

decisions that affect the organization including product development and other investment decisions.

Behavioral Considerations

› Properly applied principles of authority, responsibility and task formalization promote goal congruence. - Carefully structured MRS plays important role in promoting goal

congruence while a badly designed MRS can cause actions in opposition to organizational objectives.

› Information overload occurs when managers receive more information than they can assimilate.

› Inappropriate performance measures can lead to behavior that is inconsistent with firm’s objectives. - Performance measures should consider all relevant aspects of

a manager’s responsibility – both financial and nonfinancial.

Which is better? Cost, profit or investment centre reporting? What sort of behavior and decision making would each type of reporting encourage?

INFS2001 IS for Performance Improvement

PhonETic “Green” Phone Accessories - Case Study (Amended)

Introduction to the Company

Emily Tan is a phone accessories entrepreneur. After completing her bachelor’s degree at Sydney University (in BIS) she wrote to her family in Hong Kong to see if they would stake her in a start-up business in Australia. As she explained to her mother and father, when shopping at her local shopping centre in Broadway, she noticed the lack of “green” phone accessories outlets. In order to build her start-up company Emily decided she could combine her business and IS knowledge and love of the environment to fill this market gap. She knew a lot about:

1) Business and systems from her degree training; 2) Production of “green” phone accessories, within the Chinese market (Emily’s

cousin Eric has a phone accessories manufacturing plant in Guangzhou that utilizes recycled plastics and metals); and

3) Environmental issues. Since moving to Australia Emily had become a member of the Australian Conservation Foundation https://www.acfonline.org.au

After many telephone conversations and development of an initial business plan, Emily’s parents were eventually convinced of the merit and worth of idea and they organized a business loan and line-of credit for her with a local bank.

Together with another University of Sydney student and close friend Anthony (Tony) Ibrahim (who had also just completed his BCom in Marketing), Emily founded PhonETIc late last year. Emily and Tony found themselves having to organize everything that included:

1) Registering their business and domain name; 2) Renting, and outfitting their head office (which also included space for storing

inventory) and shopping centre kiosks; 3) Dealing with information systems and technology issues; 4) Hiring and paying staff; 5) Keeping track of inventory and shop orders; 6) Managing customer data; 7) Dealing with suppliers (not just Emily’s cousin); 8) As well as compliance with accounting standards and government business

regulations.

Emily and Anthony spent some time deliberating over a suitable name for their phone accessories business that could incorporate their names in a creative way and they finally settled on PhonETIc i.e. PhonEmilyTan(also Tony)Ibrahimc. They were finally on their way in the business world!

PhonETIc Staff

Luckily, Emily was able to recruit an experienced office manager (Sara) who had left a larger and more stable and secure manufacturing organization for the opportunity to work

PhonETIc “Green” Phone Accessories ‐ Case Study © Deborah Bunker (2016)

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in a dynamic small business start-up environment.

Located at their Head Office in Ultimo are:

 1 partner (Emily) who owns the business and looks after the information systems and technology platforms;

 1 partner (Tony) who also owns the business and looks after sales and marketing issues;

 1 full-time office manager (Sara) who co-ordinates all aspects of the business (a bit like an “orchestra conductor”);

 1 full-time receptionist (Keith) who answers the phones and looks after the store orders;

 1 part-time Accountant (Linda) who looks after accounting requirements and government compliance; and

 1 part-time Purchasing Manager (Bart) who deals with suppliers and product orders.

PhonETIc also rents 5 shopping centre kiosks from Westfield at CBD, Bondi Junction, Parramatta, Miranda and Chatswood. These kiosks are staffed by10 casual personnel who are given monthly rosters detailing the number of days/hours they are to work and in which location. These staff members are generally university students, working mothers and semi-retired older workers who identify with PhonETIc’s green corporate philosophy.

Quote from Phil (PhonETIc Casual Employee)

I really like working at PhonETIc. Emily and Tony have established a great business with good corporate values that makes me also feel like I am making a contribution to making the world a better place. When I retired from the bank I thought I had retired from work for good, but working for PhonETIc is not only good for the pocket but it’s good for the soul.

While the business is reliant on the knowledge and experience of the partners it wouldn’t be able to function without the Office Manager (Sara) who is very experienced in managing all aspects of a business in its entirety. She understands various aspects of accounting and legal compliance, how to manage staff and the problems and issues that accompany balancing business risks with adequate management controls. Having had experience in the manufacturing sector, Sara understands what can go wrong with revenue and procurement cycles and processes and how organizational efficiency and effectiveness can be impacted as a result.

Quote from Sara (PhonETIc Office Manager)

As a start up business, Emily and Tony will need to take care that they establish sound, efficient and effective business processes right from the start. As a small business they will not have the luxury of having access to huge amounts of working capital and so will need to spend their start up funds carefully and establish a stable customer base quickly. Establishment of an adequate and stable cash flow to meet the expenses of the business will be a key focus for them in the first year of operation.

The following outline gives us a “window” into the everyday working business that is

PhonETIc “Green” Phone Accessories ‐ Case Study © Deborah Bunker (2016)

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PhonETIc. We are able to see what motivates the partners (Emily and Anthony), office staff (Sara, Keith, Linda & Bart), the casual staff and PhonETIc suppliers and customers, against the backdrop of the phone accessories industry.

The Business Model

Core to the business model is sourcing and selling green and fashionable phone accessories to end consumers, by offering an incentive of donating a percentage of all sales to green not-for-profit organizations like the Australian Conservation Foundation.

Quote from Emily (PhonETIc Business Partner):

I have always had a dream to start a green business. My parents taught me that we have to share this planet with all other creatures to which we have a profound obligation to keep everything in balance. By combining these values with my business education I hope to make a difference to the quality of all life on the planet.

PhonETIc currently sells phone accessories to walk in customers (many of them return customers). Emily and Tony are also finding that many of their existing customers are also referring new customers to their business. Casual store staff feedback, highlights that PhonETIc market share is on the increase. PhonETIc prides itself on sourcing and supplying fashionable green phone accessories to its customers, maintaining close and ongoing customer relationships via a rewards system that donates a percentage of a customer’s purchase to a green not-for-profit organization.

Customers

A typical customer identifies closely with green and environmental values. PhonETIc customers (to date) have been young urban professionals and university students. Emily and Tony have been making an effort to source accessories manufacturers who mainly use recycled materials (metal and plastic) but who also have paid close attention to product design and quality elements. They have been active in establishing their green credentials through their customer incentive program, by developing relationships with green not-for-profit organizations by donating a percentage of PhonETIc sales to them on a quarterly basis.

Quote from Eleanor (Phonetic Customer)

I shop at PhonETIc because the staff are professional and friendly, but also because I like the idea of my purchase making a contribution to cleaning up the planet. It gives me some control and a say over the end result of my purchasing decisions, at a time when climate change is a big problem.

PhonETIc “Green” Phone Accessories ‐ Case Study © Deborah Bunker (2016)

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Potential Customers

PhonETIc is keen to develop other types of customers and to expand its presence in the marketplace. Key to this strategy is to attract older customers who may value PhoneETIc’s dedication to a cleaner and greener environment (for their children and grandchildren) and who may want to purchase accessories for both themselves and their offspring. Tony is currently working with Bart and some of the casual employees, on a sales and marketing strategy to increase sales to the over 40’s demographic by 50%, by the end of the calendar year.

Suppliers

A PhonETIc supplier is a typical small manufacturer. Some of their suppliers focus solely on the manufacture of phone accessories (like Emily’s cousin Eric) but others produce a range of products including phone accessories, computer accessories, bags, plastic containers etc. PhonETIc will only deal with suppliers who use at least 70% recycled materials (generally plastics and metals) in their production processes. Tony and Bart have spent a great deal of their time identifying manufacturers who comply with this requirement but who also produce good quality and stylish accessories that are suitable for, and attractive to, their current customer base. With the development of their new marketing strategy, Tony and Bart realize that they may have to review their current supplier list to meet the demands of their potential client base (older customers).

Quote from Bill (PhonETIc Supplier)

I have been in phone accessories manufacturing business for many years. I have seen production processes become greener and cleaner over the years, providing companies are willing to invest in the technologies and staff to achieve these outcomes. It is expensive to upgrade your manufacturing business and then you must invest in the people to run the equipment, and designers who can work with recycled materials and produce good quality products. All of these costs must be managed and either absorbed by the business and/or passed on to our customers, however, we do make some savings by using recyclable materials, so our product costs are dependent on recycled material availability and costs. This is somewhat variable as it depends on collection and extraction processes of the recycling companies. Thankfully the staff at PhonETIc, understand the variability of the market for recycled materials are willing to work with us (and our variable material cost structures). We have established a close working relationship with them to achieve our (and their) strategic objectives.

Potential Suppliers

With a new customer base will come a requirement for different types of product designs. For example, whereas younger customers may want to “keep up with fashion trends” and will regularly purchase a new or multiple phone covers, older customers may want a more robust and “classic” design that will last longer. Older customers may also want to purchase “trendy” products for their children and grand children for special occasions such as birthdays and so will also want access to, and advice on these products.

Phone Accessories Supply Chain

The PhonETIc business model is essentially a finished goods (phone accessories)

PhonETIc “Green” Phone Accessories ‐ Case Study © Deborah Bunker (2016)

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purchase and distribution model, which is based on retail customer sales, word�of� mouth customer referrals and social media recommendations. The company does not invest any significant amounts of money in traditional advertising. PhonETIc operates a “green” high quality business model at the upper end of the market, with “green aware” customers, based on their personal relationships. Tony is very outspoken about how he perceives traditional advertising.

Quote from Tony (PhonETIc Partner)

“Our products speak for themselves. Our customers are valued and discriminating consumers who know what they want. Once we have a customer we want them for life. Key to this is our ability to align our company values with those of our customers. This requires us to ensure that our entire supply chain is working towards “clean and green” products and that we also pass on some of our profits to organizations that are caring for and doing something about our environment. We need to be able to effectively tell this story to the marketplace. We have achieved our market share so far, by establishing a high profile web presence where potential customers can learn about our company values and view our products, as well as our relationships with not-for-profit environmental groups who refer their members to us. We also get strong referrals off friends and relatives of our exiting customers.

Moreover, PhonETIc prides itself on its approach to nurturing relationships with customers and suppliers. For example, every year they run two special customer events at their Head Office where they invite selected customers to a lunch and then run focus group discussions on current product feedback and future product development. In addition to this they also regularly meet with their suppliers via Skype to get their input on current market trends (that they are seeing in sales to their customers) as well as supplier suggestions as to how to make their products more “green and clean”.

Typical Products

PhonETIc focuses on fashion accessories (not batteries or complex hardware) in their product range which includes:

 Cases and covers;  Screen protectors;  Stylus pens;  Decorative phone jewelry;  Arm bands;  Ear buds;  Car holders and cradles;  Selfie sticks; and  Tripods

They work closely with their suppliers on differentiating their products from those of their competitors paying strict attention to innovative product design, quality and green materials and construction. Tony and Bart are also always on the look out for new and innovative products (in current product categories but also in new categories) that can be added to their range.

INFS2001 IS FOR PERFORMANCE IMPROVEMENT INDIVIDIUAL WEEKLY REPORT

Week 11 Submission Submissions for Weeks 7, 10, 11 & 13 will be worth 10% of your final grade (one will be randomly selected for grading).

DUE: Please UPLOAD Your Individual Report to Turn-It-In PRIOR To 9am, Monday 16th October, 2017.

Please ensure that your Name and Student number appear in the first line of your submission.

You can only submit your file once so please make sure it’s your final answer to the question.

PLEASE NOTE: Late assignments will not be accepted.

ASSIGNMENT DIRECTIONS

Please ensure that you have downloaded and read the PhonETIc Phone Accessories Case Study from the BlackBoard website prior to answering the question.

Please read the PhonETIc Case Study carefully.

Please read the following question carefully and provide your answer in no more than 1 page (approximately 400 - 500 words). Extra pages will not be marked.

QUESTION

Linda (PhonETIc’s accountant) is responsible for preparing corporate financial analysis and monthly statements, and for reviewing and presenting the financial impacts of proposed business strategies to Emily and Tony. Data obtained for this financial analysis is currently obtained from the “flat-file” systems in operation at the kiosks and head office as well as directly from the kiosk managers and the relevant PhonETIc head office staff.

Reports and charts are then prepared by hand and typed up (by Linda). Multiple copies are prepared and distributed to Emily, Tony and the kiosk managers. Emily and Tony are also thinking of sharing this information with their suppliers and wholesale customers (wherever relevant). As pressure mounts for more up-to-date and comprehensive information, this reporting process is becoming increasingly problematic i.e. the time lag producing information means that it’s out of date before it can be used to make decisions. This would also prove embarrassing if this information was shared with suppliers and wholesale customers (in its current state).

While Emily and Tony anticipate that this reporting problem may be rectified with the implementation of an appropriate ERP system, Emily is especially concerned about the accuracy, completeness and currency of data reports that would be automatically produced by an ERP system. She has heard about a reporting system called XBRL and wonders whether reporting based on this type of technology would be more effective and reliable.

Questions

1) Research the current state of XBRL and determine if this technology is appropriate for internal reporting such as that which Linda is currently producing;

2) Identify the enhancements to either their current (i.e. “flat file” systems) or future (proposed ERP solution) information and reporting that the company could realise by using XBRL; and

3) Discuss any integrity, internal control and reporting concerns associated with the use of XBRL for PhonETIc.

Individual Weekly Report Grading Criteria

PLEASE NOTE: Submissions for Weeks 7, 10, 11 & 13 will be worth 10% of your final grade (one will be randomly selected for grading).

The grading scheme is outlined below.

Format and Presentation (3% of Available Marks)

1. Presentation, communication & style (written – remember this is a report to management and so must be presented in that way);

2. Clarity of expression (incl. accuracy, spelling, grammar, punctuation)

Answering the Question in Critical Way by Synthesizing and Applying Knowledge of the Topic (7% of Available Marks)

1. Attention to purpose (answering the question that has been asked)

2. Use of literature/ knowledge of theory (from the text, UoS notes and your readings)

3. Analysis (of the case and the literature/ knowledge of theory)

4. Critical reasoning / critical thinking (how you apply your knowledge)

5. Synthesis (how you tie it all together)

6. Originality (interpretation of the case in your own words)

7. Reflection/evaluation (what are the limitations)