Implementaion of an ERP package and its effect on the management accounting system

85 Financial Internet Quarterly „e-Finanse” 2012, vol. 8, nr 3 www.e-finanse.com University of Information Technology and Management Sucharskiego 2, 35-225 Rzeszów IMPLEMENTATION OF AN ERP PACKAGE AND ITS EFFECT ON THE MANAGEMENT ACCOUNTING SYSTEM – AUTHOR’S OWN RESEARCH INTO ENTERPRISES IN POLAND Ewelina Zarzycka1 Abstract The systems have revolutionized practically all aspects of business processes in enterprises. They improve the processes by ensuring their integration. Data are entered into an ERP system only once and immediately afterwards they can be accessed through any of its modules, which makes them a valuable source of information on the enterprise. Integrating the financial and non-financial data, an ERP package gives new quality to the management of enterprise value. These features make ERPs particularly useful for management accounting processes and for specialists providing management information. This article seeks to answer whether following the implementation of an ERP package the enterprise’s management accounting system becomes more innovative and whether new, modern management accounting tools and methods are introduced. The ERP impacts on management accounting and its practices will be evaluated using six case studies involving enterprises owned by multinational corporations. JEL Classification: M41 Keywords: management accounting, Enterprise Resources Systems, information Received: 28.12.2011 Accepted: 27.08.2012 Introduction The characteristics of the new economic reality include accelerating dynamics of changes that shortens product life cycles and hypercompetition that makes enterprises adopt competitive strategies emphasising customers, quality, time and product prices (Szychta, 2007). As today’s priority is to ensure that customers’ orders are fulfilled quickly and on a timely basis, efficient, flawless and fast production processes are increasingly in demand. Managers struggling with fierce competition in the global markets have realised that they lack information systems capa- ble of producing well-timed information, which they could use to plan, control, make decisions, and manage multinational corporations. A response to these needs is integrated information systems known as Enterprise Resource Planning (ERP) systems. The systems have revolutionized practically all aspects of business processes in enterprises. They improve the processes by ensuring their integration. Data are entered into an ERP system only once and immediately afterwards they can be accessed through any of its modules, which makes them a valuable source of information on the enterprise. Integrating the financial and non-financial data, an ERP package gives new quality to the management of enterprise value. 1 Dr Ewelina Zarzycka, Department of Accounting, Faculty of Management, University of Łódź, ezarzycka@uni. lodz.pl. 86 Financial Internet Quarterly „e-Finanse” 2012, vol. 8, nr 3 www.e-finanse.com University of Information Technology and Management Sucharskiego 2, 35-225 Rzeszów These features make ERPs particularly useful for management accounting processes and for specialists providing management information. This article seeks to answer whether following the implementation of an ERP package the en- terprise’s management accounting system becomes more innovative and whether new, modern management accounting tools and methods are introduced. The ERP impacts on management accounting and its practices will be evaluated using six case studies involving enterprises owned by multinational corporations. The research being presented is consistent with other studies on ERP effects on management accounting and confirms the earlier findings. The nature of ERP systems The management accounting systems that enterprises use today will be greatly determined by the new possibilities offered by computer technology. The enormous progress in computer science that we have witnessed in recent years has provided financial controllers with a range of new tools that can improve their performance in various ways. Today’s advanced computer technologies make available efficient hardware platforms, and new inventions bring hardware prices down, so even the small and medium-sized enterprises may afford high-tech computer systems. Integrated information systems use the minimal set of data that is available to generate all piec- es of information that may be needed for decision-making and reporting purposes. This feature of ERP packages allows an enterprise to shut down all independently running and overlapping systems for data collection and processing. The most effective among these solutions are the distributed open information technology systems using client/server topology, which give man- agers access to each unit’s data as soon as they are entered, as well as enabling all enterprise personnel to exchange and distribute information – this feature has become characteristic of the turn-of-the-century information technologies (Granlund and Malmi, 2002). In addition to being multi-modular structures, the integrated management systems are also spe- cial in that all data are entered only once and immediately afterwards they become accessible through all system modules. Their other features include functional comprehensiveness, the ability to integrate data and processes, customization, ease of configuration and compatibility, with local laws (Shang and Seddon, 2002). The integrated management systems started to evolve in the 1960s, the process resulting in successive standards. The standard called Enterprise Resource Planning or MRP III (Money Resource Planning) was created in the 1990s. Its main purpose is to ensure a possibly high degree of integration between all levels of management. An ERP package covers all production and distribution processes in the enterprise, integrates various business areas, streamlines the flows of critical information and enables instant responses to changes in the market. The ERP data are updated on an on-going basis and can be accessed any time they are needed (Spathis and Constantinides, 2004, p. 235). The integrated information systems known as ERPs have revolutionised the way enterprises do their business. They are readily implementable sets of integrated modules that can handle all business functions in the enterprise (Kavanagh, 2001). They are also dynamically customizable, which means that they can be adapted to address the needs of any industry. ERPs can build comprehensive models of business processes, which places the systems among all-embracing solutions containing large numbers of modules of different complexity (Scapens and Jazayer, 2003, p. 202). ERP packages contain the elements of organizational integration because of their different ap- proach to information as the organization’s main resource. While other IT solutions, which are 87 Financial Internet Quarterly „e-Finanse” 2012, vol. 8, nr 3 www.e-finanse.com University of Information Technology and Management Sucharskiego 2, 35-225 Rzeszów still used, treat information only as a basis for preparing reports and statements, the ERPs as- sume that information is an inexhaustible resource that can fully meet enterprise’s operational needs. Besides, the ERP-generated data can be used multiple times and can be shared among different modules, which saves additional, often superfluous data processing. Enterprise mergers and acquisitions that are frequent these days make it necessary for manag- ers to direct, plan and manage very dissimilar conglomerates in a clear and transparent manner. Unlike many earlier IT solutions that primarily ran on the mainframe computers, the ERP sys- tems are useful also for multinationals operating in different industries and having branches in remote locations, because all multinationals, although structurally different, tend to standardise their operations. The comprehensive integration offered by ERP packages helps enterprises solve most problems with keeping data exchange standards and interfaces, with monitoring the management costs of IT projects and of personnel training, etc. Notwithstanding all their advantages, ERP systems are increasingly criticised for being likely to deteriorate the quality of management and decision making in enterprises, because of the pos- sibility of flaws in some of the real-time data (Cooper and Kaplan, 1998). A review of the literature discussing ERP impacts on management accounting ERP developers compete with one another in showing the benefits of their products. For instance, SAP AG assures that its package allows the buyer to realize financial profits soon after its imple- mentation. Oracle advertises its products as providing the users with information that is both reliable and essential for making decisions and for operational improvements, thus capable of reducing their costs (Oracle, 2011; SAP AG, 2011). The websites of the leading ERP developers present a wealth of case studies on enterprises that have successfully implemented their packages. The reasons why en- terprises choose to purchase ERP systems range from the need to have a single system for handling all business processes and the necessary support for a new business model, to a wish to solve some logistics or materials management problems, etc. (Granlund and Malmi, 2002). However, the research dealing with ERP impacts on enterprise management and with the sys- tems’ financial benefits has a relatively short history, as the first studies from this field were published only in the early 21st century. Particularly interesting among them are those that attempted to find out whether ERPs really help improve enterprise’ financial condition. The hypothesis that it is so is based on the assumption that because an ERP changes an organization its better performance can be expected. R. Poston and S. Grabski (2001) studied 50 US enterprises for the behaviour of 4 financial variables before and after ERP systems were introduced. Their findings are not quite clear, because they found the number of employees to sales to decrease within the 3 years after the implementation and the cost of goods to sales ratio not to drop until the third year. The selling, administrative and general costs to sales ratio and residual income failed to show major changes following the implementation of the system. J. E. Hunton (2003) et al. sought to determine how an ERP implementation influenced the gen- eral condition of an enterprise. They compared the rates of return from assets, the rates of return from investments and total asset turnover in ERP users and non-users. The first group was not found to be significantly better off. However, in the period in question the analysed ratios did not deteriorate in the first group, unlike those among ERP non-users. A. I. Nicolaou et al. (2003) also compared financial data on ERP users and non-users. The au- thors showed that in the second year following ERP implementation the first group had much better financial results. 88 Financial Internet Quarterly „e-Finanse” 2012, vol. 8, nr 3 www.e-finanse.com University of Information Technology and Management Sucharskiego 2, 35-225 Rzeszów Z. P. Matolcsy et al. (2005) concentrated on ERP benefits in three business areas: internal lo- gistics, operations and marketing/sales/distribution. Their study of 35 Australian enterprises demonstrated that ERP improved the inventory turnover ratio and the assets turnover ratio, as well as the management of liabilities. Most available studies do not clearly indicate whether ERPs actually improve, or not, the fi- nancial condition of enterprises. This relationship is extremely difficult to capture and analyse. In many cases a detailed examination of the firm’s situation and its surroundings is necessary, rather than a comparison of several ratios derived from its financial statements2. How ERP affects the accounting area in an enterprise, particularly its management accounting, has been studied relatively infrequently. The main advantage of an ERP system – the accessi- bility of a wide range of newly entered data from any place or geographical location – gives a new value to the work of a financial controller or a management accountant. This feature brings controllers closer to their area of responsibility. It is particularly important for multinational corporations, where the management accounting specialists are frequently required to service remote branches (Quattrone and Hopper, 2001). A very interesting study was undertaken by P. Quattrone and T. Hopper (2005), who thorough- ly analysed and compared SAP R/3 systems in two multinational corporations. The authors’ main goal was to establish how the systems affected the exchange of information between the branches and the headquarters, as well as the management accounting and internal control solutions. In the first corporation the ERP system consolidated the existing internal control methods – the relations between the functional, operational and hierarchical areas remained in- tact. The implementation was planned to reflect the organizational, geographical and functional structures without making modifications to the control methods and tools. The system did not improve management control in the corporation. The other organization was a multinational US-based corporation that implemented SAP R/3 while carrying out a major reorganization of the existing processes and structures. The changes failed to bring the expected benefits and the managers pointed to much lower quality of the management control system. In their opinion, the system was not complete and worked effectively only at some points of time. Booth at al. (2000) reviewed the experiences of Australian enterprises implementing ERPs to determine the systems’ benefits to broadly understood accounting. According to the enterprises, the ERP systems proved useful in processing transactional data and as a source of informa- tion necessary to make the short-term decisions. At the same time, though, their capability of supporting more advanced strategic decisions was very limited. Besides, they did not induce changes in accounting practices. C. Spathis and S. Constantinides (2004) surveyed Greek enterprises to find out why they chose to implement ERP systems and what accounting practices were used in the new environment. The findings showed that more than half of the enterprises used ERPs to calculate the financial and non-financial indicators of performance, to carry out multidimensional analyses of profit- ability, to plan and control their budgets, and to manage cash. Only few added operational man- agement, activity-based costing, target costing or marginal costing to this list. One of the most interesting studies dealing with ERPs impacts on management accounting and management accounting specialists was conducted by M. Granlund and T. Malmi (2002). It showed that ERPs only moderately affected control and management accounting systems. The sampled enterprises did not implement new management accounting solutions, preferring to 2 For other studies on ERP effects see, for instance, B. Wieder et al. (2006), S. Beretta (2002). 89 Financial Internet Quarterly „e-Finanse” 2012, vol. 8, nr 3 www.e-finanse.com University of Information Technology and Management Sucharskiego 2, 35-225 Rzeszów improve the methods and tools they already used. Moreover, their more advanced management accounting tools functioned outside the ERPs. Analysing the SAP implementation in BM (Europe), a branch of the global BM corporation, R. W. Scapens and M. Jazayer (2003) also found that although SAP did not induce the changes taking place in the corporate management accounting system, it made their introduction much easier. As reported by the authors, the changes were made because of corporate management being refocused to stress business processes and the measurement of performance. Case study This study concentrates on determining how an ERP implementation affects the management accounting area in an enterprise. Another objective is to find out whether the implementation entails innovative management accounting techniques and methods. ERP characteristics and functions encourage the conclusion that it is so. The integration of business data, the online availability of their most recent versions and practically unlimited possibilities of processing them remove some obstacles impeding the implementation of new management accounting techniques (e.g. activity-based costing or more advanced budgeting processes). An ERP imple- mentation frequently involves the reorganization of business processes or structures, or induces other major changes in enterprise management that must be reflected in the accounting system. An ERP project is a good opportunity for reviewing the management accounting solutions, particularly those concerning cost accounting, budgeting or the evaluation of performance. An ERP system allows automating some cumbersome analyses and procedures, giving the con- trollers more time to implement new management accounting practices and techniques. The available studies show, however, that ERPs only moderately affect the shape of management accounting. The following research hypothesis is formulated: HYPOTHESIS: The implementation of an ERP system entails the introduction of new, innova- tive solutions concerning management accounting. In order to determine ERPs’ effects on enterprises’ management accounting systems the case study approach was adopted. R. K. Yin (1994) defines this approach as an empirical investiga- tion that allows examining a transient phenomenon in its real environment. It is particularly use- ful when the relationships between a phenomenon and its circumstances are not clear. Although the approach does not justify deriving generalizations from the findings, it seems to be the most suitable tool for explaining the questions raised in this study. A questionnaire survey of financial controllers and financial directors from enterprises that have implemented their ERPs over the last two years was initially considered, but this technique was abandoned for being unable to clarify all issues and for being likely to result in the misrepresentation or omission of ERP-induced changes in management accounting because of the relative simplicity of the questionnaires. In exploring the management accounting area a case study-based research method is frequently em- ployed. The list of authors who have used it to analyse ERPs and the relationships between them and management accounting, financial accounting and internal control systems includes, inter alia, M. Granlund and T. Malmi (2002), S. C. Lodh and M. Gaffikin (2003), R. W. Scapens and M. Jazayeri (2003), A. Caglio (2003), as well as P. Quattrone and T. Hopper (2005). According to M. Granlund and T. Malmi (2002), the method offers more possibilities of explaining the occurring phenomena than a questionnaire survey, and does not suggest any answers to the respondents. R. W. Scapens and M. Jazayer (2003) also recommend a case-study analysis as a tool providing a better insight into management accounting changes following from the implementation of ERP systems. 90 Financial Internet Quarterly „e-Finanse” 2012, vol. 8, nr 3 www.e-finanse.com University of Information Technology and Management Sucharskiego 2, 35-225 Rzeszów Between 2010 and 2011 a total of nine interviews were conducted with the representatives of six Poland-based manufacturers owned by multinational corporations. The interviews in- volved 2 financial directors, 3 financial controllers, 2 heads of controlling departments, and