The Impact of Enterprise Resource Planning Systems onManagement
Accounting: An Australian Study
Abstract
Information technology is significantly changing theoperating practices of an increasing number of companies globally.These developments have important implications for the accountingprofession and in particular accounting practices in thetwenty-first century. This study examines the development ofenterprise resource planning (ERP) systems as a means ofillustrating how changes in information technology allows allsystems in a company to be linked to manage operationsholistically.
The study investigates the change in accounting systemsusing a sample of Australian companies with emphasis on theadoption of ERP systems including the potential impact of ERP oncapital budgeting processes. The results show that ERP systems arechanging management accounting practices, although at this stage,the impact on capital budgeting techniques appears to be limited.The findings contribute to the emerging body of literature on thedevelopment of ERP systems and its impact on management accountingteaching and research.
Key words: Management accounting, capital budgeting,enterprise resource planning systems, informationtechnology.
1. Introduction
During the past decade an increasing number of companies have beenimpacted by information technology in terms of computerizedtransaction processing and electronic telecommunications such asthat done with the Internet, intranet, and extranet. Forcompetitive reasons, companies have had to change from manual andthen mainframe systems to what has been called enterprise resourceplanning (ERP) systems. An ERP system has a common database or datawarehouse that links together all systems in all parts of a companyincluding, for example, capital budgeting with financial, control,manufacturing, sales, fixed assets, inventory, human resourcesmodules, etc. An ERP system, by linking all systems through a datawarehouse, allows a company to manage its
operations holistically.
A second impact of ERP systems has been a general shift tomanage at the activity level rather than at the more abstract levelof financial transactions. This means that management accounting,with its focus on activities, can be most effective when it is usedwith ERP systems to incorporate the activity level for costing andperformance measurement. To be effective an ERP system will containan extensive chart of accounts or codes for activities such asaccurate recording and tracking of activities, revenues and costs.The coding incorporates stable entities of a business, such asdivisions, plants, stores, and warehouses. At a detailed levelthere are codes for functions such as finance, production, sales,marketing, and materials management. There are also the traditionalfinancial account codes such as assets, liabilities, revenues, andexpenses, and the central ERP feature of coding processes,activities, and sub-activities. There must be consistent codingamong all parts of a company in order for them to relate to oneanother.
As the ERP system incorporates activities in terms ofquantities of resources, including labour, a record of resource useis maintained. Therefore, performance can be measured in physicalterms and compared to standards, which allows for the calculationof variances. This performance measurement at the activity levelserves as a feedback system on efficiency and effectiveness. Theconfusion from abstract monetary measures is erased, and what isactually happening with the conversion of resources into goods andservices can be seen. ERP systems have the potential to changemanagement accounting systems with more detailed, more integrated,and faster produced information.
To date the research on the impact of ERP systems onmanagement accounting can best be described as preliminary. It hasinvolved case studies of one or two companies at a time and somefield studies. The findings from these studies have been largelyanecdotal. Also, some have been deductive in that arguments basedon ERP attributes have been made on how management accountingshould be affected. For instance, in a field study, Cook et al.(2000) described activity-based capital budgeting at a division ofa US telecommunications company. The findings from Cook et al.’sfield work suggests that ERP systems can increase the effectivenessof capital budgeting by anchoring financial numbers to activitiesrather than stopping at monetary measures with pre-ERPpractices.
The goal of this paper is to investigate the change inaccounting systems using asample of Australian companies withemphasis on the adoption of ERP systems including the potentialimpact of ERP on capital budgeting processes. Prior research in theAustralian environment has indicated that theeconomic/institutional setting is significantly different from theUS and European environments as Australian companies are smaller,with fewer multinational subsidiaries and more homogenousmanagement background in terms of culture and educationalbackground (Matolcsy et al., 2005).
Given these differences in the Australian environment Matolcsy etal claim that the benefits of ERP systems are likely to be morepronounced and measurable, at least in the short run in Australia.The significance of the study is its contribution to the emergingbody of literature on the development of ERP systems and has thepotential to provide useful contrast and/or confirmation of thelimited research from mainly US based studies. Furthermore thisstudy contributes to the body of knowledge of the impact of ERP onmanagement accounting teaching and research using a broadly basedsample of corporations in an Australiansetting.
In ascertaining the impact of information technology on managementaccounting, this paper will have the following additional sections.The second section contains a literature review of the impact ofinformation technology on management accounting. With theliterature review, the third section develops the research methodand determines the sample used to ascertain the impact of ERPsystems on management accounting practices of Australian companies.The fourth section will contain the findings, while the fifth andsixth will be the discussion and conclusion, respectively.Recommendations for future research will be included in theconclusion.
2. Literature Review
2.1 The integration of ERP systems into managementaccounting
Expectations for ERP systems to change management accountingwere introduced by Kaplan and Cooper (1998, pp. 11-24), especiallywith the fourth of their four-stage model for cost and performancemeasurement systems. When a company had first stage systems, thosesystems were basically inadequate for all purposes, even forfinancial reporting. When they make improvements, the first stagecompanies tend to add financial systems to meet regulatoryrequirements. As a result, they evolve into second stage systemswhere financial reporting systems dominate; these companies arefinancial reporting driven. The companies with third stage systemshave customized, managerially relevant cost management, financialreporting, and performance measurement systems, however, thesesystems are standalone. ERP systems only occur with the fourthstage systems where the ERP systems integrate cost management,financial reporting, and performance measurement (Kaplan andCooper, 1998, p. 299).
An ERP system has a common data structure that permits data to beentered and accessed from anywhere in the world (Kaplan and Cooper,1998, p. 275). An activity-based costing system is an integral partof an ERP system, and thus managers have information about presentand future activities at operational levels when making decisions(Kaplan and Cooper, 1998, pp. 275-277, 285). With activity-basedinformation, monetary distortions can be reduced. Feedback withactivity information improves learning. Thus, in managing at theactivity level, costing, budgeting, performance measurement,bonuses, resource spending, forecasting, budgeting, production,etc. can beimproved in terms of efficiency and effectiveness. AnERP system will allow the company to obtain cost and performanceinformation more frequently, even daily, rather than waiting amonth (Kaplan and Cooper, 1998, p. 279).
Kaplan and Cooper (1998, pp. 301-306) state that the integrationwith ERP systems allow all managerial processes, includingbudgeting, what-if analysis, and transfer pricing to be also basedon activities rather than only dollars. Activity-basedbudgeting gives companies the opportunity to authorize and controlresources based on accurate demand information. Accuracy increasesbecause activity-based budgeting is based on facts, and less uponpower, influence, and negotiating ability. Furthermore, theactivity-level focus of budgeting leads to more accuracy inforecasting the demands for all direct and, especially indirectactivities.
At the same time as Kaplan and Cooper’s (1998) importantbook, Davenport (1998, p. 122) wrote “the business world’s embraceof enterprise systems may in fact be the most important developmentin the corporate use of information technology in the 1990s.”Davenport (1998, p. 127) expected companies to change with theimplementation of ERP systems:
In addition to having important strategic implications, enterprisesystems also have a direct, and often paradoxical, impact ona company’s organization and culture. On the one hand, by providinguniversal, real-time access to operating and financial data, thesystems allow companies to streamline their management structures,creating flatter, more flexible, and more democratic organizations.On the other hand, they also involve the centralization of controlover information and the standardization of processes, which arequalities more consistent with hierarchical, command-and-controlorganizations with uniform cultures.
The paradox with ERP systems – streamlined, flatter, and moreflexible and democratic (i.e., more control at the frontline) andcentralization of control over information and the standardizationof processes (i.e., more control at the centre) -- makes Davenport(1998, p. 131) ask how will ERP systems affect companies? Anotherequally relevant question would be, how will ERP systems affectmanagement accounting? Taken together, Kaplan and Cooper (1998) andDavenport (1998) suggest that ERP systems will change companies,but these researchers do not specify the nature of these changes.They certainly do not explicitly specify how ERP systems willimpact on management accounting. Nevertheless, it is possible toinfer that changes will occur to management accounting from theintegration among cost management, financial reporting, performancemeasurement, and all other systems. Thus, it is not surprising thatthere has been some exploratory research prompted by Kaplan andCooper (1998) and Davenport (1998) on the impact of ERP systems onmanagement accounting.
2.2 The practical application of ERP systems – capitalbudgeting.
As previously outlined, a field study conducted by Cook etal. (2000), described the operation of activity-based capitalbudgeting as a division of a US telecommunications company. Intheir study Cook et al. found that the activity informationwas linked to the financial accounting system, thus behaving likean ERP system for the purpose of capital budgeting. This approachwent beyond the traditional capital budgeting by linking thetraditional incremental monetary revenues and costs with underlyingactivities. The authors concluded that by separately identifyingthe level of revenues and costs associated with process activities,the uncertainty with such activities and related revenues and costscan be closely examined. They added that this activity-levelcapital budgeting gives managers far more information andunderstanding than possible from the traditional financialsimulation of aggregated income-statement approach. Their argumentswere convincing but could not beverified.
Hope and Fraser (2001; 2003) disclosed that some companies haveceased traditional budgeting processes. Four reasons have been putforward by Hope and Fraser (2001) as to why existing budgetingprocesses are failing:
- few companies are satisfied with their budgetingprocesses
- far too much time is spent on budgeting and too little timeis spent on strategy
- Financial capital is now a small part of marketvalue
- Budgeting is expensive and adds little value either to thecompany or its users (Hope and Fraser, 2001, pp.7-8).
They claimed that hierarchical companies have devolved to networks,where the planning capacity and control inherent in budgeting canbe accomplished by other means (Hope and Fraser, 2003, p. 108). ERPsystems, which they label enterprise-wide information systems, areimportant for eliminating budgeting, particularly when accompaniedby the balanced scorecard, shareholder value models such as EVA,activity-based costing and management, rolling forecasts, andbenchmarking (Hope and Fraser, 2001, pp. 5-6).
Some of the companies identified by Hope and Fraser (2003)-- for example, the Scandinavian bank, Svenska Handelsbanken, --abandoned budgeting before ERP systems. This suggests that, forthose companies, ERP systems would not have been essential foreffectiveness without budgeting. Perhaps, ERP systems will allowcontemporary companies, with ERP system, to be effective withoutbudgeting. The impact of ERP systems on budgeting is still anempirical question.
It was noted from the findings of Cook et al. (2000) andHope and Fraser (2001, 2003) that there was a lack of empiricalstudies on the impact of information technology on capitalbudgeting. Additional empirical testing was provided by Granlundand Malmi (2002). Following from Kaplan and Cooper (1998) theynoted the “lack of studies examining the organizational andbehavioural aspects of these systems” (p.300). Their purpose was“to examine the effects of integrated, enterprise-wide informationsystems on management accounting and management accountants’ work.”As they concluded there was “no scientific evidence on the researchtopic” they decided to use an exploratory field study to provide“insights” for subsequent research. Sixteen persons wereinterviewed at 10 large almost exclusively SAP R/3 adopters. Theyfound no major direct or indirect impacts of ERP on managementaccounting systems (p. 309). The changes that did occur did notlead to changes in the logic of management accountingsystems.
2.3 ERP and its impact on the work of managementaccountants
Although none of the recent studies on the impact of ERPsystems have indicated changes to management accounting systems,there have been some studies that indicated effects on the work ofmanagement accountants. For example, Burns andBaldvinsdottir(1999), Coglio (2003), Quattrone and Hopper (2001,2005), Granlund and Malmi (2002), Baxendale and Jama (2003), Meall(2003), Scapens and Jazayeri (2003), and Dechow and Mouritsen(2005) have addressed the effects of changes to managementaccounting systems. Each of these studies will be discussed brieflybelow.
In a field study of a single company, Burns and Baldvinsdottir(1999) observed that SAP centralized the accounting function anddecentralized control to many people in the company who became“hybrid accountants”. The traditional core activity of managementaccountants, posting the books, was delegated to others in thecompany. They cite the director of finance saying: “They may postthe odd correctional entry. In fact some analysts aren’t allowed topost. They generally are analytical people rather than analyticalaccountants.” Management accountants have becomeanalysts.
Caglio (2003) studied an Italian company to understand howthe implementation of an ERP system challenges the definition ofthe expertise and roles of accountants. Caglio (pp. 140-141) foundthree structurational characteristics that jointly materializedduring the project:
- a higher degree of standardization of accounting activitiesand practices;
- a stronger need for integration and interfunctionalcollaboration; and
- a more prominent role for the accounting department in themanagement of the new IT system.
Quattrone and Hopper (2001, p. 403) undertook two case studies ofERP implementations to obtain insights into how new systems giverise to multiple spaces and times within [companies].” Thecase studies were conducted over 12 months at multi nationalcompanies that were implementing SAP systems (pp. 410-411). Onestudy included various hierarchical levels and locations in a largeAmerican multinational company. Twenty managers were interviewed.The other study was the sales and distribution function of theEuropean headquarters of a Japanese multinational company. Twelvemanagers were interviewed in this secondstudy.
Quattrone and Hopper (2001, pp. 420-426) found that with theimplementation of the ERP system, control went from a single pointor “totalitarian” view of control with the controller duringperiodic reporting to a multiplicity of loci of control availableat anytime. Anyone with access to an ERP system can “exert controlas they wish, slicing and dicing the organization and information,and defining what should be controlled, how and why, differently.”They add that, “integrated business functions decide what is bestfor each business area and accountants analyze how this can beobtained.” They conclude that if the centres of control are changedas with ERP implementations, it is necessary to re-conceptualizeaccounting and control (p. 430).
In a later paper dealing with the same two subjectorganizations, Quattrone and Hopper (2005, p. 760-761)) concludedeach organization adopted different strategies, which resulted indifferent configurations, implementations and usages of the ERPsystem. Granlund and Malmi (2002), mentioned earlier, also studiedthe effects of ERP systems on management accountants’ work withpreliminary and brief field studies at 10 companies. The workinghypothesis that ERP systems would allow management accountants todevote more time to business analysis was supported by five of the10 companies (p. 311).
Baxendale and Jama (2003), from an assessment of ERP systemfunctionality,conclude that management accounting data integrityand reliability will increase. The use of relational databasesallows information to be shared rather than re-entered. Formalprocesses exist in ERP systems to ensure reliability by automaticcounts and reconciliations. These conclusions were not empiricallytested.
Meall (2003) studied the transition of budgeting at the UK company,Southern Water from spreadsheet application to ERP basedbudgeting. Anecdotally, Meall reported that the ERP-based budgetingsystem reduced budget preparation time, allowed more time foranalyses, and increased collaboration. This case study did notsuggest that the ERP system could make budgeting redundant as didHope and Fraser (2003), but instead suggested that ERP systems canimprove the efficiency and effectiveness ofbudgeting.
Scapens and Jazayeri (2003, p. 203) reviewed the literatureto find that “ERP systems are having relatively limited impacts onmanagement accounting and management accountants.” In view ofthe literature, the purpose of Scapens and Jazayeri study (2003, p.204) was “to explore the processes of change and to examine in moredepth the nature of the changes in management accounting which haveaccompanied the implementation of an ERP system … within a specificorganization.” The field study was conducted from 1996 to 1999 atthe European division of a US company. The process focus to studymanagement accounting was crucial, according to these authors, asERP systems are process systems. The latter lead to moreinformation sharing and teamwork on one hand and greatercentralization of information processing activities (pp.216-218).
Scapens and Jazayeri (2003, pp. 224-229) judged the ERPsystem to have led to a number of changes to management accounting,i.e., the elimination of routine jobs, the development ofaccounting knowledge in line managers, the production of moreforward looking information, and a wider role for managementaccountants. More specifically, Scapens and Jazayeri (2003,p. 224) state that the move from record-keeper to internalconsultant requires management accountants to acquire new skills.Rather than information reporters, management accountants need tobe sales persons and change agents. In their view managementaccountants need to sell ideas for accomplishing strategy withinformation. Scapens and Jazayeri (2003, p. 226) were not convincedthat ERP systems drive the change in management accounting. Overalltheir findings were unclear in suggesting causes of the changes tomanagement accounting.
Dechow and Mouritsen (2005) studied two Danish organizationsto understand the impact of ERP systems on integration and control.They found that ERP systems “are highly involved in transformingand establishing management control agendas through concerns forintegration.” (pp. 724-725). In particular, Dechow andMouritsen concluded that integration is not a solution but rather ameans by which to problematize through the process. They noted thatthis represented a way of transporting information acrosslocalities in such a way that suited the needs and requirements ofdifferent parties and different times.
2.4 Summary of findings from priorliterature
Overall the findings from prior literature on the impact ofERP systems on management accountants do not completely agree thatERP systems will change the work of management accountants inparticular ways. Nevertheless the prior literature suggests thatmanagement accountants will be less likely to do routine tasks andmore likely to be involved with analysis. Similarly, the priorstudies suggest that the output of managementaccountants willlikely be more precise, more accurate and produced morefrequently.
However, there is no conclusive evidence to support theseexpectations from the research on how ERP systems impact capitalbudgeting, budgeting, and other components of a managementaccounting process. In summary, there is confusion in theliterature as to the potential for ERP systems to change managementaccounting and a lack of clear identification of the changes thathave actually occurred. Burns and Scapens, (2000) suggest thatperhaps, management accounting will take longer to reflect changesbecause of institutional forces.
3. Research Method
3.1 Background to the research approach
This preliminary study will be guided by the literature,which contains substantial ambiguity about the impact of ERPsystems on management accounting. Although the focus of this studyrelates to the process of management accounting, special attentionis devoted to the impact of ERP systems on capital budgeting as aspecific and important management accountingtechnique.
In committing to investments with returns that come later, capitalbudgeting has the inherent challenge of dealing with uncertainfuture events. In addition, the economic effects of capitalprojects are difficult to track to future revenues, expenses andcosts because the spreadsheets that have been used for analysis arenot typically connected to the company’s accounting and operatingsystems, past, present, or future. This has resulted in thesometime approval of the wrong projects, and more importantly theinability to ascertain what the implemented projects willaccomplish in terms of revenues, costs, expenses, and resultingprofits. According to Cook et al. (2000), these shortcomings incapital budgeting techniques can potentially be reduced oreliminated with the increasingly prevalent ERPsystems.
3.1.1 Traditional approaches to capital budgeting
Capital budgeting can be changed by ERP systems. As noted, it hasbeen done separately from the firm’s accounting and operatingsystems, past, present, or future. In a traditional non-ERP settingcapital budgeting may be completed separately with a spreadsheet.For example, given a project for outlays for replacement equipmentwhere the time frame for the internal rate of return or net presentvalue calculation could be 10 years. The project could include animproved production process to reduce material waste as well aslabour costs. Also, the new process could reduce the time for setups for different product runs, and thus enable the capture ofspecial orders where quick response isnecessary.
As IRR/NPV analysis is incremental, the spreadsheet would show theincremental cash flows for capital outlays, reduced material costs,reduced labour costs, and the contribution from the additionalsales. However, the data items on the spreadsheet of pre-ERPcapital budgeting are not explicitly linked with what activitieshappened, what activities are happening, or what activities willhappen in the future. This separateness can be resolved by ERPsystems integrating capital budgeting with companies’ accountingand other systems.
3.2 Benefits of ERP for capital budgetingdecisions
Potentially, capital budgeting can be done significantlydifferently with a functioning ERP system because of theintegration of accounting and other systems. The common unifieddata warehouse is able to integrate, for example, financialtransactions, activities in activity-based costing (ABC) andactivity-based management (ABM) sub-systems, budgets and plans, andperformance measures such as customer satisfaction or an entirebalanced scorecard. Of course for these expectations to berealized, companies would need to have a full range of ERP modules,which may be presently uncommon.
Consider how ERP systems impact capital budgeting in its threestages, (1) preparation and approval, (2) operational, and (3) postaudit. During the first stage, the ERP system will allow therevenue and cost items to be linked to actual activities. Forexample with new equipment, if some of the costs are labour, theactual model for labour use in manufacturing will be assessed andimprovements in labour productivity due to the new asset will bemodelled. Modelling allows alternative approaches or variants to betested and understood. Similarly, if there is a change in materialusage, this will be modelled and the impact considered in thecapital project evaluation. In effect, ERP systems allow capitalprojects to be modelled as mini independent businesses orinvestment centres.
For the second operational stage, the models used in thefirst stage, preparation and approval can be compared to the actualmodel in use regarding labour, material, and asset input and theactual outputs. In effect, the modelled assumptions can beexplicitly validated with experience. Similarly, for the thirdstage at or near the end of the project the models can be assessedto do a post audit to determine the life-time success of theproject and to provide feedback on the capital budgetingprocess.
As with capital budgeting, the impact of ERP systems couldbe deductively specified, or more precisely conjectured for othermanagement accounting practices such as budgeting, operationalstatements, forecasting, performance measurement, andcosting.
The above capital budgeting example indicates that ERP systems havethe potential to lead to greater integration, accuracy, speed, andeffectiveness. As management accounting techniques involve companyinformation, it would be reasonable to expect, from theimplementation of ERP systems, improvements at least inintegration, accuracy, speed, and effectiveness, if not a majorchange such as the elimination of budgeting.
3.2 Research Design
Most of the earlier research on the impact of ERP systems onmanagement accounting have been field studies. Additionally, giventhe lack of conclusive findings in the literature about the impactof ERP this research will employ a survey of large corporationsincorporating open-ended questions about changes in capitalbudgeting and other management accounting practices. However, it isproposed that this will be an exploratory study given that there isuncertainty as to whether there have been any significant changesto management accounting with greater use of ERPsystems.
3.3.1 The sample
This exploratory study of the impact of ERP on managementaccounting was tested with Australian companies of sufficient sizeto have acquired ERP systems in the past 10 years. The sampleconsisted of 105 companies among the ASX-listed companies withsales of more than $400 million according to DatAnalysis Thecompanies represented classified industry groups including:automobiles and components; capital goods; chemicals; commercialservices and supplies; construction materials; consumer durablesand apparel; container and packaging; energy; food, beverage andtobacco; food and staples; hotels, restaurants and leisure; media;metals and mining; paper and forest products; retailing; softwareand services; telecommunication services; transportation; andutilities.
Larger firms tend to implement ERP systems for two reasons: theirsize indicates they can afford the required monetary outlays andthey require the systems to look after their extensive androutinized transactions. Capital budgeting was deemed important forthe above industries, which tend to be capital intensive. The ChiefFinancial Officers (CFOs) of the companies were identified throughDatAnalysis in order to telephone them to verify the incumbent CFO,exact name and title, address, and telephone number. New Zealandand foreign headquartered companies were eliminated because of theexpected difficulty in gaining responses. In addition, companieswere dropped from the sample where the CFO could not be identifiedor verified. This process resulted in a reduction of the samplesize from 105 to 90 companies ranging in size from $400 million to$34 billion in sales.
3.3.2 The Survey Instrument and its Administration
As there has been a lack of conclusive findings in theliterature, it was decided that open-ended questions about thechanges that are occurring with capital budgeting and othermanagement accounting practices would be a feature of the surveysent to participating companies. This approach recognizes Scapensand Jazayeri’s (2003, p. 226) concern that the changes occurringwith management accounting may be caused by non-ERP factors. Thesurvey asked various demographic questions about the role of therespondent within the organisation, the type of industryrepresented by the firm and the gender of the respondent. In termsof the questions specifically related to management accountingpractices and capital budgeting, there were a range of yes/noquestions as well as questions inviting respondents to describepractices and changes in practices over the past 10 years withinorganisations. A copy of the survey is provided in Appendix1.
The survey was sent to the 90 CFOs in May 2005, with follow uprequests being made in June and August. Respondents were given achoice of responding either by mail or through a web response.Telephones contacts were made to non respondents together with asecond and third mailing of the survey. There was a greatwillingness among most telephone-contacted CFOs to respond, butthey often admitted to pressing priorities.
Those CFOs who claimed to have responded or who were unwilling torespond were eliminated from subsequent mailing and telephonefollow ups. CFOs with less than 10 years of experience tended toinvolve an employee with the required experience or stated theychose not to respond.
4. Results
4.1 Demographics of Respondents
Of the 90 CFOs sampled, 35 responded giving an overallresponse rate of 38.9 percent. Table 1 shows the demographics ofrespondents. Two respondents self identified as female and 33 asmale. The median size of the sampled companies was $1.1 billion(based on information from DatAnalysis) and respondents wererepresentative of a range of industry types with Industrial (17 percent), Consumer Staples and Materials (both 20 per cent) being themost highly represented industry groups.
INSERT TABLE 1 HERE
4.2 Impact of information technology on CapitalBudgeting
The first five questions in the second section of thequestionnaire related to the impact of information technology oncapital budgeting techniques. Table 2 provides a summary of theresponses to the summary questions, while the open-ended responsesare summarised in each category of discussionbelow.
INSERT TABLE 2 HERE
4.2.1 Changes in Capital Budgeting Techniques
In the first instance respondents were asked to indicatewhether or not the firm’s capital budgeting techniques had changedin the past 10 years. Twenty-nine (83 per cent) of respondents stated there had been changes to capital budgetingtechniques, while six indicated that there had been nochanges.
In identifying the nature of the changes in capitalbudgeting techniques, respondents were asked to specify the natureof the changes. Responses were received from 26 companies. The mostcommon themes were (1) an increased use of analytical ormeasurement tools for capital budgeting, such as risk adjustedprofitability index, risk adjustments, ROI, WACC, DCF, IRR,payback, and (2) an increase in formalisation and rigor in theoverall process, such as an investment management committee, capexmanual.
4.2.2 ERP and its impact on Capital Budgeting Techniques
Seventy-seven per cent (26) of respondents indicated thattheir companies had ERP systems such as SAP, Oracle or PeopleSoft.In addressing the possible impact of ERP systems on capitalbudgeting techniques, only nine respondents stated that this wasthe case. Respondents who stated that their ERP system affectedcapital budgeting, noted that ERP systems provide capital budgetingwith better information. Recognizing that the ERP system providedbetter information, one respondentsaid,
The amount and quality of information available with which to makecapital budgeting decisions has vastly increased. The systemessentially is a database of information that can be mined. Higherlevels of system integration feeding into the core accountingsystems have also increased the sophistication of theprocess.
Another respondent admitted the ERP system provided betterinformation, but added that “the information is available in thesystem but most of the process is Excel driven therefore largelyunchanged.”
The ERP systems also allow the capital budgeting processes to bestored online, which allows for approvals by various levels to bedone more easily. This improvement in the process occurs despitecapital budgeting becoming more integrated and morecomplex.
4.3 Changes to Management AccountingSystems
The second part of the questionnaire addressed the impact ofinformation technology more generally on management accountingsystems. For example, respondents were asked to describe how theircompanies’ management accounting systems changed in the past 10years using five headings: budgeting, operating statements,forecasting operating performance, performance measurement andcosting.
4.3.1 Budgeting
Thirty-one respondents reported changes to budgeting in thepast 10 years. The change to budgeting identified by respondents inorder of frequency was: more rigorous, aimed at maximizingshareholder value, more accurate, more automated, morecomprehensive, more integrated among financial statements, for moreperiods of time, revised more frequently, more sophisticated, morestructured, more disciplined, simultaneously “top-down” and“bottom-up,” more detailed, more transparent, easier to review, andmore strategic. Many companies were replacing spreadsheetswith integrated budget modelling software. The budgeting processwas the same, but information technology made budgeting morefunctional. One respondent stated:
Divisional and segment budgets have moved from being focussed onoutputs (i.e. particular categories of expenditure) to beingfocussed on outcomes (i.e. overall profitability). The budgetprocess has also been rationalized to ensure information submittedto the board is concise enough for useful decisionmaking.
4.3.2 Operating statements
There were 29 responses; outlining changes to operatingstatements in the past 10 years. These changes included indeclining frequency: more automated; more focus on KPIs; morerefined; more transparency; more comprehensive; more focus onnon-financial performance measures; more detailed; more focus oncash flows; more focus on marginal returns and ROC; morestandardization; more segmented reporting; more analysis of costs;more in line with accounting standards and best practices;operating statements now available online in real-time or next day.Several respondents summed up the changes to operating statementsas follows:
- “No substantial change other than greater use ofinformation technology in the process.” Some respondentsmentioned the use of advanced tools such as OLAP (online analyticalprocessing), Hyperion, and Cogros in addition to various ERPsystems.
- “A feature of the last 10 years has been differentdivisions operating on different ledgers and charts of account.Moving to a single ledger and chart of accounts is one objective ofthe ERP system.”
4.3.3 Forecasting
There were 31 responses related to changes to forecasting inthe past 10 years. The responses in declining frequency were: morefrequent forecasting or re-forecasting; rolling forecasts; moredetailed; moved from spreadsheets to Hyperion or other managementsupport system; better integration; longer forecasts; moreaccurate; more use of spreadsheets; and more consistency amongorganizational units. One respondent, with an ERP system,summarized the changes:
Forecasting was completed on Excel spreadsheets and consolidated.Now forecasting is made easier as the actual data can be copied andforecast out within the one database, producing standard reportsand consolidated within a much shorter timeframe. The focus is moreon accuracy and analysis
4.3.4 Performance measurement
Responses were received from 32 of the 35 respondentsin relation to performance measurement with only three respondentsreporting no changes during the past 10 years. The changes indeclining order of prevalence were: more KPIs; more non-financialperformance measures; more financial performance measures: moreanalysis focused on leading indicators; greater emphasis on balancesheet and cash flow; greater depth and more targeting; more timelyor real time; performance based incentives; extensive analyticalsupport from the data warehouse; greater use of informationtechnology; online goals and objectives; and performance measuresprovided to board.
One respondent, from a company with an ERP system,summarized the impact on performance measures asfollows:
“Increased complexity of performance measurement systems dueto increased knowledge of key business drivers, and the increasedcapabilities of a fully computerized integratedsystem.”
Another, with the ERP system, said timely performanceinformation is no longer difficult toobtain.
4.3.5 Costing.
There were only 27 of a possible 35 responses related tochanges in costing over the past 10 years. The changes to costingin declining frequency were: improved modelling; ABCintroduced; more rigor and accuracy; refinements; morefrequently updated; more summarization; more detail; bettertracking; improved with centralization of plant costing; greateruse of information technology; internal charging introduced; andabsorption base used more widely.
4.4 Impact of computerisation on managementaccounting
All respondents indicated that computerisation had an impacton the company’s management accounting system in the past tenyears. From question 3, it was learned that 27 of the companies hadERP systems, thus eight companies must have used non-ERPcomputerisation to respond positively to this question. A furtheropen-ended question sought to gain feedback on the specific typesof computerisation that had changed the firm’s managementaccounting and control system. This question provides a differentperspective on understanding management accounting change.Respondents from 30 of the companies explained how computerisation,which includes ERP systems, affected their management accounting.The most common response was similar to the followingquote:
“Computerisation has considerably shortened reportingtimeframes and increased levels of accuracy. Detail information isnow available on a dailybasis.”
Another respondent basically said the same, but added that this wasall done while work volumes increased and staff levels remainedstable/unchanged. Other descriptions of the changes included inorder of declining frequency: more integrated; more computerized;more automated; streamlined and faster consolidations; fasterproduction of information; greater transparency; more dataintegrity; real-time control; better understanding of fixed andvariable costs; able to calculate profitability at lowerorganizational levels; more accuracy; year-end results can be morereadily forecasted; increasing use of ABC and its derivatives; andmore emphasis on value added activities. One respondent, at acompany with an ERP system stated:
“More a case of better use by management of the existingcomputer systems platform than major investment in newplatform.”
This with other responses implies that benefits from ERP take timeto accrue.
5. Discussion
The process of capital budgeting, at the companies where the CFOsresponded to this survey, would appear to have not changed greatlyover the past ten years. There is no indication from the findingsof this study that capital budgeting is being linked to theactivity level as suggested by Cook et al. (2000). Only nine of therespondents with ERP systems stated that those systems affectedcapital budgeting suggesting that the impact of ERP systems oncapital budgeting has been minimal and, probably, preliminary. ERPsystems and other forms of computerisation have contributed tocapital budgeting by (1) an increased use of analytical ormeasurement tools for capital budgeting, such risk adjustedprofitability index, risk adjustments, ROI, WACC, DCF, IRR,payback, and (2) an increase in formalisation and rigour in theoverall process, such as an investment management committee, capexmanual.
The 90 companies were selected from the largest manufacturing andretail companies operating in Australia. There was no indicationthat the responding companies were biased, thus the results arehighly suggestive of the status of capital budgeting in largeAustralian companies.
It was found that computerisation impacted the managementaccounting processes at all responding companies, although only 27of the 35 had ERP systems. This finding suggests that non-ERPcomputerisation was also impacting on management accounting. It isdifficult to separate out the exact impact of ERP systems from themore general computerisation which improved the functionality ofmanagement accounting. Every aspect of management accountingimproved, including more detail, more accurate, faster, moreintegrated, and improved data integrity. However, the samemanagement accounting techniques were being used, but they wereperforming at a higher level.
Changes had occurred to all management accounting at thefive identified areas in the past 10 years. Budgeting had beenreported as changed in 31 of the 35 firms. In particular thefunctionality of budgeting had greatly increased by moving tospreadsheets and then to integrated budget models with ERP systemsand such management support systems as Hyperion. There were 28responses out of a possible 35 that stated that operatingstatements had changed in the past 10 years. In particular,functionality had improved with computerisation, specifically ERPsystems with their single chart of accounts and relational datawarehouse. The operating statements had changed with moreautomation, real-time or next day production, with for example,more focus on KPIs.
Twenty-nine respondents said forecasting had changed in thepast 10 years. Functionality improved by moving production tospreadsheets and then to ERP systems and management support systemssuch as Hyperion. Functionality also improved with performancemeasurement during the last ten years in 29 of the respondingcompanies.
Performance measurement was extended because of a greaterunderstanding of operations and because of computerisation,particularly ERP systems; performance measurement was moreextensive and timelier. Moreover, this greater level of performancewas accomplished without increases in staff.
Costing was the management accounting technique where theleast changes occurred, with only 21 companies being cited forchanges in the past 10 years. Computerisation had contributed tocosting improvements such as improved modelling, ABCimplementation, and more rigor and accuracy.
6. Conclusion
ERP systems and computerisation are changing the practicesof capital budgeting and management accounting. Based on thissample of Australian companies, the impact is important but,probably, preliminary. Computerisation is affecting managementaccounting, but it is difficult to sort out the impact of each. ERPsystems lead to highly standardised and highly computerisedinformation. Without fundamentally changing them, ERP systems areallowing capital budgeting, budgeting, operating statements,forecasting, performance measurement, and costing to be moredetailed, more accurate, and reported morequickly.
The results of this study suggest that there have been nomajor changes to management accounting in the Australian context inthe last ten years. The predictions of Cook et al. (2000) were notable to be substantiated from the findings of this study. There wasno mention in responses of capital budgeting being done at theactivity level. Actually, the findings were without any discussionof activity level management accounting, other than a few mentionsthat ABC had been implemented. In addition, there were noindications from the respondents that budgeting was being abandonednor was there consideration being given to eliminatebudgeting.
Computerisation, including ERP systems, is changing the waymanagement accounting is being done in the current economicenvironment and thereby improving the functionality of managementaccounting techniques. The findings of this study suggest that theleast changes appeared to be occurring withcosting.
There is another important inference to be gleaned from thispreliminary survey.
Prior to ERP systems, the main systems were owned by the CFO’sunit. With ERP systems, the CFO is just one of the many owners, andmanagement accountants must start accessing information produced bythese others systems, which are integrated with managementaccounting systems, to assist management. Some respondents referredto these changes, especially to increased non-financialinformation. In other words, management accounting must move beyondaccounting systems.
This research has limitations. The sample is not large, and therespondents may have biased and defective memories. Admittedly, thebest method for studying management accounting change islongitudinal. However, archival data for longitudinal studies arevery difficult to obtain and studies themselves are time consuming.This preliminary study suggests that such longitudinal studieswould be valuable.
From this preliminary research a number of suggestions for futureresearch and teaching have been inferred along three themes. Thefirst is for a detailed examination of exactly how computerisationand ERP systems can improve capital budgeting and managementaccounting. There is need for more understanding of ERP systems,and how they relate to the existing management accountingtechniques and more importantly identification of the commonfunctionalities. There is also a need to understand how ERP systemsare implemented, the time required and the costs and benefits fromthe various modules and various management accounting techniques.The strategic importance of ERP needs to be established. Is itnecessary or an alternative to other forms of computerisation? Theanswer to this question requires detailed, longitudinal field work.The research to date on ERP has largely been done without detailedunderstanding of the system processes. In the past ERP systems wereconsidered “black boxes” that would have some impact on managementaccounting. The initial step in further research would be tocarefully examine the functionality of ERP systems, particularly,in regard to management accounting. This should be done withcolleagues in the information technology department/school, ERPvendors, and vendors offering management support systems such asHyperion. Then there is the requirement to track thecomputerisation and ERP use at a group of companies longitudinallyto understand how computerisation, including ERP systems, impactsmanagement accounting and creates competitive advantage. Publicinformation would be available, but also there would be the need tocontact persons from the CFO area as well as persons in the IT areaof the sampled companies.
The second theme for future research is an advocacy role forresearchers, which may be a problem. However, if we considermanagement accounting to be an applied science like medicine, thenlike medical researchers we need to advocate. James McKinsey (1922)advocated budgeting, and founded the consulting company that hashis name, McKinsey and Associates. Similarly, it was Cooper andKaplan (1988) and Kaplan and Norton (1992) who, respectively,established activity-based costing and the balanced scorecard asmanagement accounting techniques.
Third, there is an opportunity to instruct students on capitalbudgeting and management accounting in an ERP environment. It islikely that the simulation of a company and its ERP system would beneeded to adequately prepare students for this change inenvironment. The pre-ERP approach to management accounting as paperandpencil or Excel calculations would need to be replaced with theERP approach to management accounting recognising ERP as a processwithin a set of systems.
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