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Computerized Accounting

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Computerized Accounting
Computerized Accounting

Over the past two decades the way accounting data is entered, stored and processed has changed considerably. This is due to the introduction of computerized accounting packages.

It is no longer necessary for large companies to have huge store rooms full of ledgers and records. Instead all information can be stored in computer hard disks.

Accounting packages give many advantages over manual systems, for example entries do not have to be recorded in multiple ledgers. A single entry is made and the package will update all the appropriate accounts automatically.

Computerized accounting packages also make it possible for people in other departments, not just accounting to enter data. It does not require a vast amount of accounting knowledge for a pay role clerk to enter wages details into the accounts. Just a basic understanding of how to use the package is needed.

Furthermore these packages simplify the use of the double entry system greatly. In a manual accounting system, as well as creating an audit trail to record all transactions, a trail balance, profit and loss account and a balance sheet would have to be manually drawn up.

Computerized accounting packages have the ability to do all this from just having the companies transactions entered into the relevant spreadsheets. [1]A great benefit of these packages is that, as the business grows the cost of using the software will remain constant, unlike a manual system where the cost will increase in proportion to business transactions. The downside to this is that some of the cheaper packages on the market cannot grow beyond their capacity. This means that if a company grows too big the package will have to be replaced by a better one.
Although some advanced packages can be customized to grow with the company. Computer systems make tracking down clerical errors much faster than in manual systems, and respond immediately to requests for accounting information instead of having to go and find the correct ledger.

So overall accounting packages save extra clerical work, time and expense. But it must be remembered, that if a mistaken entry is made and is not picked up by the computers controls, then all relevant accounts will have the wrong data transferred to them by the system.

In a manual system only one ledger would have the wrong info entered, meaning it is easily recognized and put right.

A Sage Scenario

Ralph Jones worked as an apprentice for a mechanic in his home town.
After learning the trade Ralph decided that he wanted to set up his own business.

As he lives in a small town where there is already a mechanic Ralph decided that he could use his skills to buy old cars, fix them up and sell them on at a profit.

He decides to run his business from a car lot, based on a leasehold of
£10,000 PA to be paid up front.

He planned to start off with cheap cars and gradually build up his business to selling more expensive models.

He also decided to set it up as a private limited company issuing 250 shares. Keeping 180 shares or himself and selling the rest to family and friends.

Ralph plans to use 'Sage Line 50' to record his accounts.

The following is a list of transactions taken from the first two months of the business year 2002

Date Details N/C code VAT code

04/01 Ralph opens up a current account under the name of 2300 N/A

Ralph's Motors Ltd using £15,000 from his own savings

(REF 001)

04/01 Ralph's Motors Ltd issue 250 shares at £1 each 3000 N/A

(REF 002)

05/01 One years leasehold is paid for car lot costing £10,000 0011 N/A

(REF 011)

06/01 The company buys a computer and office equipment 0030 STD

from HGB office supplies Ltd for £1000 on credit to

be paid within 150 days.

(REF 012)

07/01 Ralph buys two old Ford Fiestas from jimmy for £600 5000 STD

each, paying by cheque.

(REF 013) (Stock No 1)

15/01 Mr. Brown buys one of the Fiestas from Ralph for £900. 4000 STD

Ralph gives him 3 months to pay for it.

(REF 003)

30/01 The other Fiesta is sold to Jane for £850 cash. 4000 STD

(REF 004)

01/02 Ralph Buys a Nissan Micra off Jimmy for £800. Jimmy 5000 STD

gives it to him on credit, needed to be settled in four

months. (REF 0014) (Stock No 4)

03/02 Ralph puts adverts out in local papers costing £500 6201 N/A

(REF 015)

20/02 Mrs. Kelly Buys the Micra for £1,300 paying by cheque 4000 STD

(REF 005)

25/02 Ralph buys an Astra and a Ford Mondeo he sees advertised 5005
STD

in a paper paying £3500 by cheque for both of them

(REF 016) (Stock No 5)

05/03 Mr. J King buys the Astra for £2000 paying cash 4000 STD

(REF 006)

Importance of Effective Internal Control

Enron, Bearings Bank and World Com are all recent, well known examples of what can happen if a company does not implement effective internal controls. So what do internal controls do?

- They provide reasonable assurance that assets are safeguarded, information is timely and reliable, and errors and irregularities are discovered and corrected promptly

- They promote operational efficiency and effectiveness

- And encourage compliance with managerial policies, laws, regulations and sound fiduciary principles.[2]

It can be easily argued that internal control is not just important, but a necessity to any company. But measuring just how many and what controls to have is important, as having too many can slow down efficiency and de-motivate staff.

It is an unfortunate truth that the majority of companies will have at least one dishonest employee that will be tempted to exploit an ineffective control system for their own personal gain.

As well as this, human and machine error can easily lead to mistakes, often very costly ones.

As with the examples above, without effective controls, it is likely that fraud or mistakes will go unrealized until it is too late.

[3]A survey conducted by KPMG found that internal control is the most effective way of detecting fraudulent activities above all other means. The majority of internal controls can be classed as either preventive or detective.

A preventative control for example would be not having the same person who collects payments bank the checks. This would have prevented [4]Able
& Co loosing over $2,000,000 to a fraudulent ledger accountant.

Also by having a second trader to check transaction and documents,
Bearings Bank would have been able to monitor and prevent the activities of Nick Leeson.

Other examples of preventative controls are

- Having a computer program to check validity, preventing entry's of invalid account numbers.

- Having a manager check and approve purchases prevents any inappropriate expenditure

- Segregating responsibilities cuts the risk of theft.

Obviously it is always more important to prevent the deed, than for it to happen and be detected later. But no matter how efficient and numerous a companies controls are some mistakes and crimes are always going to slip the net.

When this happens it is necessary to have detective controls in place.

Detective controls are constructed to find errors or irregularities after they have happened. Some examples of detective controls are

- A review of expense account receipts will detect any improper claims. - Comparing validated cash receipts to financial statements will detect any deposits made into untrue accounts.

- A check to find any incorrect or invalid entries.

It is possible now to see just how important controls are to a company. Not having them can lead to all kinds of problems, no matter how large or small the company is.

The age of technology has changed the way companies store data and execute transactions. Computers can hold more data than any amount of shelves of books, and can perform more operations and at a faster pace than a whole room full of employees.

Sound great, but by entrusting so much to computers companies open themselves up to a whole range of new problems. Effective internal control has never been so essential. Why?

Well to start with computers are susceptible to infiltration not only from people within the building, (as with a manual system) but can also be accessed from outside, through hacking etc. This gives the opportunity for an unauthorized person to gain access to information that they can use for their own personal gain or sabotage.

[5]As well as this computers can transfer data at a much faster rate than a person can copy. So in a manual system any unauthorized person wanting to duplicate or destroy data would have to physically do so where with a computer it is as simple as slipping in a disk or hitting the erase button.

As well as the security problems using computers brings to accounting, mistakes are a lot easier to make without preventative controls in place. For example entering data into the wrong ledger is as easy as selecting the wrong file. In a manual system the clerk would easily see that the ledger they were holding was the wrong one.

Furthermore, a slip of a finger adding a thousand pounds to an employee's wages can go undetected unless the program has [6]'reasonableness' checks written in.

Again companies have problems with losing data. It is much easier to accidentally erase a whole set of purchase ledgers on a computer than accidentally destroying physical ledgers. To solve this problem, backups will always be necessary.

The main problem with accounting packages is that they don't have the human capacity to identify a problem. So once data has been inputted into the system it will just be processed without any checks. For example if a transaction is given the wrong code the software will put the entry in the wrong account.

[7]So the main control factors in a computer based system is to ensure that all input data is complete and correct.

As for security issues, the system must keep a permanent record of all data entered into the system. This helps detect errors and irregularities. Also different users with different levels of authority should be given different security codes so they are able only to access data they are authorized to.

Discussion of Specific Controls

When purchasing, it is important that a company implements controls.
By not doing this a company can open themselves up to all kinds of problems. For example, all spending should first be approved by the correct level of management. This is so spending budget is not exceeded.

Sage can have a maximum amount to spend on certain products built in, so a manager can use sage to check if that spending is allowed.

The company should have a uniform purchasing policy and a procedure policy, and should make sure every one in the company knows them. If everyone follows the procedures then no mistakes should be made during purchasing. It should always be confirmed that adequate funds are available before any purchasing is done. This stops over spending in the company. Sage can facilitate this by showing a balance sheet upon request.

[8]It is important to segregate duties when dealing with purchasing.
For example, the person who authorizes the purchasing should not be the person processing the payments. This is so a manager cannot authorize the purchase of 100 pencils for £2000 from a fake company, with an account set up in his name.

Sage and accounts packages in general help keep duties segregated, by having different codes for different people. So a person authorizing a payment cannot access the accounts payable screen and enter the purchase. [9]When dealing with suppliers, it is always good to mark any duplicate copies of invoices immediately upon receiving them. This will stop payment being made twice by mistake. Sage can help detect if duplicate payment to a supplier is suspected by showing I the audit trail the date of payment, the supplier and the amount.

Mistakes can always be made so invoices should always be reviewed for their accuracy. If they are not payments which should not be made may occur. As well as this all incomplete deliveries of supplies, equipment or produce etc should be always followed up. This is so your suppliers do not end up charging you for goods you have not received or an employee is not helping themselves to the delivery.

It can be imputed into sage whether a delivery has been completed or not, so it is possible to tell if the company is receiving the right amount of supplies.

If any purchases are returned for whatever reason it must be ensured that the refund is received. By looking at the audit trail in sage it is possible to see where any refunds have been received.

It is also important to make sure any discounts that are allowed to us by suppliers have been deducted from payments. Sage records supplier information and it is possible to log any discounts the company gets.

If there are any past due balances, they must be reviewed and followed up on. Sage will also show if there is any past due balances in its supplier info.

Bibliography:

Accounting in the business environment. John Watts

Introduction to Computerized accounting.

Financial Accounting. Alan Melville

Auditing- An Intergrated Approach Arens & Lobbecke

Financial Reporting. Alexander & Britton

Financial Accounting Britton & Waterston

www.rrb.gov/oig/pdf/reports

Internal Audit and Management Services

Internal Controls. A Guide For Managers.

---------------------------------------------------------------------

[1] Financial Accounting. Alan Melville

[2] Definition according to NBD Bancorp's Auditing Divisions Training
Program, revised 6/1/95

[3] Auditing-An integrated approach. Arens and Lobbecke.

[4] Auditing-An integrated approach. Arens and Lobbecke.

[5] Introduction to computerised accounting

[6] Introduction to computerised accounting.

[7] Financial Accounting. Alan Melville.

[8] Internal controls: a guide for managers.

[9] Internal Audit and Management Services.
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