Accounting information systems

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Assessing the role of accounting information and accounting information system at Barratt Development

Abstract

Accounting information and accounting information systems (AIS) in today's information age play critical roles in facilitating decision-makers with accurate financial status of the organization and activities to pursue strategic objectives. Accountants, who are the disseminators of accounting information, need to ensure that the information provided to decision-makers such as managers, executives and board of directors is up-to-date to achieve organizational objectives, monitor performance and/or amend strategic objectives when needed. Sometimes accounting information is not as useful and even impacts negatively on the users. This is due to a host of issues that plague accounting information and its systems including authenticity, integrity and quality of the information generated. For these reasons, companies have to develop and maintain accounting information systems congruent with their business objectives to ensure usefulness, integrity and transparency to avoid ethical, legal and business conflicts. In the following evaluation, the researcher shall demonstrate the role of accounting information and accounting information system at Barratt Development Plc, with special emphasis on how the implementation of computerized accounting information systems affects issues of quality, integrity and reliability.

Barratt Development - Overview

Barratt is one of the UK's largest homebuilders. Founded in 1958, the company today has an extended growing network of divisions spread throughout the UK. The breadth and scope of Barratt’s organizational structure can be measured by the number of resources and other pioneering projects development it serves to the communities. The company boasts market share with specialization in "creating high quality, value for money homes for sale, rent and shared ownership, often in partnership with local authorities, housing associations and others" (Official Website 2007). The majority, that is 80%, of the projects, are based on brown field recycled land. This commitment towards sustainable development has been congruent with the Government's future plan in sustainable development and innovation in homebuilding and construction (Official Website 2007).

Even though the company has been founded since four decades, it is growing at an unprecedented speed. Since its listing in the London Stock Exchange in 1968, Barratt Development Plc has achieved high turnover. For the year 2006, the company has had a group turnover of £2,431m. With 33 operating divisions throughout the country to serve all sectors of the market, Barratt is considered one of the most powerful groups of builders in planning and developing of the country's housing sector (Official Website 2007).

According to its executives, Barratt's success lies in its geographical spread and extensive product range. The company has always ensured that sales of its homes and buildings are congruent with the average market place to appeal to a variety of buyers, yet maintains quality throughout the project. In addition, Barratt does not believe in remaining stagnant and following other players. Instead, part of its success lies in its ability to grow through innovation, and using green technologies effectively to develop projects that cost less, have more valuable benefits to the customer and environment, as well as customized to the end user's preferences. Problems such as energy efficiency, health and safety, and regeneration are taken into consideration seriously (Annual Report 2006). With a strong team of specialists on its hand, Barratt's management is confident in its performance and in creating value for its shareholders and stakeholders.

Role of Accounting Information and AIS at Barratt Development

The emergence of the digital economy and globalization has precipitated the concept of organizational systems for managing knowledge and information. In the financial context, digitized information reporting has become a link between the different units of the organization. It is through this network of information that organizations are able to utilize information in individualized management. Accounting information systems are enablers of information provision to synthesize financial information such as reports for non-standard managerial decisions. The AIS has come to be the manager's knowledge through which the organization deploys knowledge for various purposes in decision frameworks (Bhimani 2003). Thus, AIS can be defined as a subsystem of the organization's information system in which quantitative data are processed to provide information for individuals or group of people with similar information needs, to use in understanding organizational activities and support decision-making. Accounting information refers to processed data converted into information for the purpose of decision-making (OpenLearning ).

This ideology can be exemplified by studying Barratt Development and its AIS. Accounting information at Barratt serves various groups of individuals and mainly those who are in direct relation with the business. From the top of the decision tree, the board of directors who need to direct and control the organization are the principal users of accounting information. Accounting information is used to study the trend in revenues, pre-tax profit, losses, group activities, cash flow, return on capital employed, forward order book, land, net assets, interest rates, selling price, volume of business, product sale and earnings per share to estimate the status of the business. They base their assessment on future plans, the types of project they will focus on, the kind of resources they plan to employ, and the kind of risks involved in the business (Annual Report 2006).

Apart from the board of directors, accounting information provides valuable information for monitoring purposes for external groups of individuals such as the auditing committee. They study the integrity of the financial statements to objectively evaluate its relation with the organizational performance. They are also responsible for studying the financial management and reporting system to ensure that accounting procedures, system of control and processes are congruent with standards prescribed by the regulators (Annual Report 2006). The accounting information also provides useful status of the kind of credit transactions that have taken place with suppliers, the terms for repayment and how much debt the company is in without risking the company's integrity.

After the Board of Directors, the auditors, and the creditors, the executives and managers are the ones who make use of the accounting information. They utilize make use of accounting information for assessing operational performance and how to improve it through strategic plans. Accounting information provides insight pertaining to the gaps or problems inherent in the skills, resources, and financial constrains that hinder the maximization of efficiency of resources to achieve organizational objectives and targets (Annual Report 2006).

External users of accounting information also include the shareholders and speculators who are keen on studying the performance of the company from time to time to safeguard their interests. Information pertaining to earnings per share, share pricing, profitability, rates of returns and announcement of new shares being floated are all useful for shareholders to make investment decisions.

Apart from the above-mentioned core decision-makers, accounting information is also used at the operational level for information like salaries, benefits, bonuses, pension benefits, as well as ensuring that divisional leaders are able to gauge the status of inventory, receivables, cash flow activities, assets, land, payables and taxes etc. which will impact on the overall status of the projects.

The accounting information that these individuals utilize is processed by an accounting information system, which generates information from daily transactions such as sale receipts, invoices, payment slips, taxation forms, salary slips, suppliers transactional slips, and trade receivables etc. The AIS comprises of sub-sub systems set up based on accounting standards such as inventory system, supply chain system, sales proceeds systems, human resource system, and capital investment systems. The AIS is also formed based on various internal transactions recorded in these systems. Hence, the AIS at Barratt Development is based on both internal and external accounting information processing.

Accounting Information Strategy at Barratt Development

Although AIS has been in existence in organizations since the invention of accounting, today it is interpreted synonymously with the computerization of accounting function. The fundamental purpose of AIS is to collect, record and process data from activities related to the organizations (Stefanou 2006). The resultant information has implications in maintenance, decision and communication by internal and external stakeholders, depending on the extent of the impact of environmental factors, social factors, technological factors and organizational factors. According to Stefanou (2006), accounting information and AIS are critical for organizations to respond to highly competitive and dynamic business environments that often alter production processes and organizational structures. For this purpose, information systems such as AIS play an important role in facilitating change management and allow cross-functional requirements.

At Barratt, the company has engaged Weber Shandwick Square Mile as the financial PR advisors to develop a communication framework especially designed for providing information to its shareholders and stakeholders at all times. However, this step towards transparency is limited by the company's policy not to divulge sensitive financial information to the public without the expressed approval of the Company Secretary. The company believes that this strategy helps it to ensure that key accounting information is only communicated to those genuinely concerned such as investors, private shareholders and analysts (Annual Report 2006).

Barratt's AIS is based on the International Financial Reporting Standards, complies with the Companies Act of 1985 and uses the generally accepted accounting principles. Under GAAP, the company also has to include estimates and assumptions that affect the company's overall financial performance, especially on assets and liabilities, while reporting of revenues and expenses. Accounting information is based on the management's interpretation of amount, activities, actions and actual/estimates and their impact on the performance of the company. For this purpose, Barratt takes into account of results/estimates from holding companies, as well as its subsidiaries, to be included in it financial statements to record revenue, expenditures, assets, liabilities, and cash flows. For example, when considering cost estimation, the company includes materials, labour and overheads of work in progress. Similarly, when considering property, plant and equipment, the company includes deferred purchase credit terms and costs, less depreciation of the assets (Annual Report 2006). Developing and managing accounting information is critical for inter and intra organizational information dissemination. Accurate information is required for decision support throughout the organization, as well as to ensure that the quality of information supports efficiency of operational activities. By using the GAAP principles, the company's decision-makers are able to negotiate and manage costs for determining cost price, selling price and service price of its products in the market. It is also critical for the decision-makers at the divisional level to gauge the financial implications of the project undertaken and, hence, determine its value to the overall organizational strategy. In smaller companies, it is easier to emphasize on control mechanisms such as cash, monitoring performance and maintaining relationships with external entities (Collis and Jarvis 2002). However, in an organization such as Barratt, where holding companies, subsidiaries, supply chain and such external value chain units are connected with the company's operations, accounting estimates, though give a rough picture of the financial status, do not really provide correct financial status (Ramos 2004).

Furthermore, due to the changing business environment and trend, traditional notions of control systems no longer prove effective in understanding and controlling factors that affect organizations. Bhimani (2003) is of the view that management operational strategies nowadays require a balance of all units within the organizational framework linked by an effective communication network, which emphasize on information and knowledge transfer. Any information system must facilitate information for monitoring and evaluation of the knowledge. Boland (1999) too is of the view that information systems such as the AIS must be present in the organization to create reports, support report regeneration, support decision systems, smoothen workflow and provide enquiry function. Therefore, the AIS should represent the organizational control system (Stuerke 2005). To begin with, Barratt maintains an effective financial information system that provides relevant and up-to-date information pertaining to the organization for the purpose of maintaining investment relations. One cannot deny the fact that information pertaining to earnings forecasts, capital returns, announcements, financial performance and the like are easily available at the click of a button at Barratt's investor relations web site. The purpose of this web site is to smooth the workflow of the investors, traders and analysts so that they engage in trading Barratt's shares and securities (Barratt Official Website 2007).

Likewise, one observes that Barratt has used its financial information system to effectively direct and control its corporate governance through which it sets standards and values for maintaining its relationship with shareholders, customers, staff, suppliers, contractors and stakeholders. It is through its corporate governance strategy that the company is able to develop an operational plan, budget, financial statements, decide on projects, conduct acquisition and disposal of units, as well as monitor business performance, set internal control for risk management and ensure transparency is existent throughout the organization (Annual Report 2006).

An effective information system is dependent on a regulatory body. It is this body that monitors and evaluates the efficacy of the implementation of policies and strategies. Maintaining an information system with sensitive information, such as financial data, is useless if there are no regular checks and balances. In a financial context, this is usually carried out by the auditors. Congruent to the breadth and size of the company, Barratt has two groups of auditors - internal and external. The Audit Committee (internal) comprises of executive directors with financial experience who are responsible for monitoring the effectiveness of the audit process, financial management and reporting systems, as well as ensuring the integrity and effectiveness of its accounting processes. The internal control systems are reviewed regularly to monitor potential risks or discrepancies in the audit function. An external auditing company, PricewaterhouseCoopers LLC has been engaged to authenticate the validity of the internal audit committee's reports (Annual Report 2006). This approach is not new in terms of company's evaluation and monitoring.

Apart from the auditing committee, Barratt's Directors are also responsible for safeguarding the company's assets by monitoring for fraud and irregularities in its financial system and operations. Their task is governed by an internal control and risk management system. Although, this system may seem effective in defining risk control operations and reportage, nevertheless it is usually limited by the authority of the same directors who report, evaluate and audit the financial information disseminated at interim and annual meetings. The directors are a select group who are made responsible for the transparency of the whole company's accounting system. For example, when considering issues of land viability for acquisition, work in progress, and sub-contractor payments etc., the executive directors are dependent on the "input" system, which is controlled at the divisional level. Accounting of purchases, sales, and acquisitions is authenticated by the divisional heads, while the executive directors are dependent on these divisional units for authentication of their own reportage. Consequently, the researcher is of the view that the system only provides reasonable assurance. The risk of fraudulent activities cannot be really assured at all levels as the checks and balances are limited to the top executives only.

Conclusion

>From the above discussion, one understands that although the digital economy has substantially revolutionized accounting information systems, it is essentially based on the same framework. Traditional accounting values such as integrity, authenticity and quality of information for the purpose of decision-making critically have remained the same. All processes in recording and processing accounting data for generating information serve the purpose of accountability and authentication of the factors of production, work in progress and performance of the firm. What has changed is the significance of the AIS as the intra and inter communication framework for stakeholders and shareholders. This is evident from the above study of Barratt Development, one of UK's top house-builder companies. Barratt, based on its operational infrastructure, has developed a complex financial information system governed by policies, procedures and disciplines for governing it. Its management has appointed top decision-makers (its directors) as "gatekeepers" for monitoring, evaluating and safekeeping of financial information. It has adopted standardized accounting principles for reportage and accountability so as to facilitate its shareholders and stakeholders with easy-to-access accounting information for making decisions that affect the company. Nevertheless, if one analyzes this accounting system, it is filled with gaps, which may compromise the integrity and quality of information provided to its users. Consequently, the researcher is of the view that AIS cannot guarantee authenticity, quality and integrity of information, regardless of the kind of system adopted. What is needed is a check and balance system integrated, congruent with the AIS, at all levels of the organization to ensure independent authentication of information and knowledge management.

Bibliography

Barratt Official Website. Company Profile. Online accessed on 20 January 2007 from: http://www.barratt-investor-relations.co.uk/corporateoverview/companyprofile.aspx

Barratt Report and Accounts 2006.

Bhimani, A. (2003) Management Accounting in the Digital Economy. Oxford University Press: Oxford.

Boland, R. J. (1999) "Accounting as a Representational Craft Lessons for Research on Information Systems" in Rethinking Management Information Systems: An Interdisciplinary Perspective, Currie, W. and Galliers, B. (eds) Oxford University Press: Oxford. pp. 229

Collis, J. and Jarvis, R. (2002) Financial Information and the Management of Small Private Companies. Journal of Small Business and Enterprise Development, Vol. 9, No. 2 pp.100-110

Ramos, M. M. (2004) Interaction between management accounting and supply chain management. Supply Chain Management: An International Journal. Vol.9, No. 2, pp.134-138

Stuerke, P. S. (2005) Financial analysts as users of accounting information. International Journal of Managerial Finance Vol. 1 No. 1, pp. 8-24

Bibliography

Barratt Report and Accounts 2006.

Barratt Official Website. Company Profile. Online accessed on 20 January 2007 from: http://www.barratt-investor-relations.co.uk/corporateoverview/companyprofile.aspx

Bhimani, A. (2003) Management Accounting in the Digital Economy. Oxford University Press: Oxford.

Boland, R. J. (1999) "Accounting as a Representational Craft Lessons for Research on Information Systems" in Rethinking Management Information Systems: An Interdisciplinary Perspective, Currie, W. and Galliers, B. (eds) Oxford University Press: Oxford. pp. 229

Ramos, M. M. (2004) Interaction between management accounting and supply chain management. Supply Chain Management: An International Journal. Vol.9, No. 2, pp.134-138

Collis, J. and Jarvis, R. (2002) Financial Information and the Management of Small Private Companies. Journal of Small Business and Enterprise Development, Vol. 9, No. 2 pp.100-110

Stuerke, P. S. (2005) Financial analysts as users of accounting information. International Journal of Managerial Finance Vol. 1 No. 1, pp. 8-24