Introduction to Accounting Information Systems (AIS)

A company uses a structure called an accounting information system (AIS) to gather, store, handle, process, retrieve, and submit its financial data. In this way, consultants, business analysts, managers, chief financial officers (CFOs), auditors, regulators, and tax authorities may access such data whenever needed.

To guarantee the greatest level of precision in a company's financial operations and record-keeping and make financial data readily accessible to those who truly need access to it-all while keeping data safe and secure-specially trained accountants work closely with AIS.

Acquiring Knowledge of Accounting Information Systems (AIS)

An accounting information system is a method for a firm to monitor all bookkeeping and business activity. Internal controls, data, software, infrastructure for information technology, protocols & directions, and people make up the six main parts of an accounting information system. Each component is thoroughly broken down below.

1. AIS People

AIS members are individuals within it and are usually called system users. Cooperation between a company's various divisions is facilitated by AIS. The following specialists could require AIS access from an organization:

• Accountants
• Consultants
• Financial experts
• Managers
• Officials in charge of finances
• Auditors

For instance, management could set up sales targets, and based on which, employees would purchase the right quantity of stock. An additional payable is reported to the bookkeeping section by the inventory order. In a company, the following individuals and divisions may be engaged in the sales process:

• The AIS is updated by salespeople based on the purchases made by clients.
• Customer invoices are sent by accounting.
• It is put together in the storage section in warehouses.
• The customer's purchase is delivered by the transportation division.
• The account receivables from the client that is usually paid within 30, 60, or 90 days are given to the bookkeeping department.
• The customer support division keeps track of client shipments and orders.
• Management performs cost analysis, which can include expenses for production, transportation, and inventory, using AIS to produce sales reports.

Everyone within a company can reach the same system and get the same information by using AIS when it is well-designed. When required, AIS may also make the process of reporting information to individuals outside the organization simpler.

For instance, consultants may use the data in an AIS to examine expense, sales, and revenue data to evaluate the efficacy of the company's pricing system. Additionally, inspectors can evaluate a company's internal processes, financial health, and compliance with laws like the Sarbanes-Oxley Act using the data.

The requirements of the users of the AIS should be taken into consideration during construction. Additionally, the system must be simple to use and should boost productivity rather than reduce it.

2. Instructions and Procedures

The methods AIS employs for gathering, saving, retrieving, and processing data are described under its instructions and procedures. Both human and automatic techniques are used here. The information may originate from both internal (such as workers) and external (such as internet purchases from customers) sources. The AIS software will be programmed with certain directions and procedures. Through paperwork and training, workers must also be taught about procedures and instructions. To be successful, the guidelines and directions must be consistently observed.

3. AIS Data

To hold information, an AIS needs a database framework, such as one that uses structured query language (SQL), a computer language frequently used for databases. The AIS's data can be modified and obtained using SQL for reporting needs.

The AIS will also require a variety of input screens for the various system users and data inputs, as well as a variety of output forms to satisfy the requirements of various users and information of various kinds.

All of the financial data relevant to the company's operational procedures are stored in an AIS. An AIS should contain any business information that has an effect on the company's funds.

Depending on the character of the company, the data included in an AIS may include the following:

• Purchases made
• Billing records for clients
• Papers analyzing sales
• Requests for purchases
• Bills from vendors
• Registers
• Receipt book
• Data regarding the inventory
• Data regarding payroll
• Timekeeping
• Financial data

Accounting statements and financial records, such as accounts payable aging, depreciation or amortization schedules, a trial balance, and a profit and loss statement, can be created using the corresponding data. A company's record-keeping, reporting, research, monitoring, and decision-making processes are made easier when all of this data is available in one location-in the AIS. Data must be comprehensive, precise, and pertinent in order to be helpful.

On the other hand, documents like memoranda, letters, presentations, and instructions are instances of data that wouldn't be included in an AIS. With the exception of the usual annotations, these papers are not really a part of the company's financial record-keeping, despite the possibility that they are tangentially related to its finances.

4. AIS Software

The computer programs that are used to keep, retrieve, process, and evaluate the financial data for the business are considered the software component of an AIS. An AIS was a manual, paper-based method prior to the invention of computers, but today, the majority of businesses center their AIS on computer software. There are many accounting programs like Quickbooks and Sage 50 Accounting that companies may use. Business One from SAP may be utilized by small to midsize companies. For mid-sized and big companies, Sage Group's MAS 90 or MAS 200, Oracle's PeopleSoft, or Epicor Financial Management may be more helpful.

Effective AIS software must have high standards of performance, dependability, and security. Managers depend on the retrieved data that the software produces to make choices for the business, and so they need high-quality, accurate data to do so.

AIS software applications can be modified to suit the particular requirements of various company types. The software can also be created internally with significant feedback from end users, or it can be created by a third-party business, especially for the organization, if a current program does not satisfy a company's requirements. In addition, outsourcing the system to a specialist business is also an option.

For publicly traded businesses, Sarbanes-Oxley (SOX) regulations, to some degree, often determine the structure of the AIS regardless of the software program and customization choices the company selects. This is due to the fact that public businesses are required to follow the internal controls and auditing processes established by SOX regulations.

5. IT Infrastructure

The combination hardware that powers the accounting information system is simply referred to as the "information technology infrastructure" in formal language. The majority of these mechanical products, which can include the following, are necessities for any business:

• Computers
• Mobile gadgets
• Servers
• Printers
• Surge protection
• Routers
• Archival medium
• Backup electricity source

When choosing technology, variables like speed, storage capacity, and expandability should be taken into account in addition to the price.

The hardware chosen for an AIS must be compatible with the selected software program, which is perhaps the essential requirement. In an ideal world, it would be not only interoperable but also optimum, as a slow system will be much less useful than one that is quick. The purchase of a complete system that includes all necessary hardware and software is one method for companies to satisfy hardware and software interoperability requirements quickly. Theoretically, if a company purchases a complete system, it will receive the best possible hardware and software for its AIS.

In order to ensure that confidential data is fully obliterated, a good AIS should also include a plan for repairing, replacing, and updating software and hardware system components. It should also include a plan for getting rid of obsolete and damaged hardware.

6. Internal Controls

The security precautions an AIS has in place to safeguard confidential data are called internal safeguards/ controls. These can range from straightforward passwords to intricate sensor authentication. Fingerprints, voice, and facial identification are a few examples of non-changing human traits that may be stored as part of biometric security procedures.

Internal controls are necessary for AIS to guard against illegal computer access and to restrict access only to approved users, which may include some internal users. Additionally, it must stop users who are only permitted entry to certain sections of the system from accessing unauthorized files from other sections.

The AIS typically includes private data that belongs to the business as well as to its customers and workers. These particulars could consist of the following:

• Indicators of social security
• Details about employees and pay
• Information on credit cards
• Details about clients
• Company financial information
• Financial data of customers and providers

Access to the system should be tracked and monitored, and all data in AIS should be protected. Additionally, system action should be visible.

Internal safeguards that guard against computer viruses, hackers, and other internal and exterior dangers to network security are also necessary for an AIS. Additionally, it must be safeguarded against natural catastrophes and power outages that could result in data loss.

Real-World Examples of Accounting Information Systems

A well-designed AIS makes it possible for a company to operate normally on a daily basis, whereas a badly designed AIS can make it difficult. Another benefit of AIS is that it can be used to find out what went wrong for a company when it is having problems. Lehman Brothers and WorldCom instances serve as two illustrations of AIS:

WorldCom

Internal accountants Eugene Morse and Cynthia Cooper at WorldCom used the AIS in 2002 to find nearly $4 billion in erroneous cost assignments, fraudulent expense allocations, and other accounting records.

Section 404 of the Sarbanes-Oxley Act, which governs businesses' internal financial controls and processes, was passed as a result of their inquiry. This also resulted in the firing of CFO Scott Sullivan.

Lehman Brothers

When investigating the collapse of Lehman, collecting and reviewing AIS and other data systems, documentation, and talking to witnesses were all important parts of the investigation into the cause of the company's failure. According to the 2,200-page, nine-volume examiner's report, the exhaustive inquiry and examination of Lehman's operating, trading, valuation, financial, bookkeeping, and other data systems were necessary to determine the reasons for the company's demise.

Lehman's systems serve as an illustration of how an AIS shouldn't be set up. According to the examination report by Anton R. Valukas, Lehman kept using more than 2,600 software tools and applications at the time of its bankruptcy case. Numerous of Lehman's methods were obscure, antiquated, or unorthodox.

The evaluator selected the 96 systems that he thought would benefit from his attention the most. Just to understand how to use the systems for this test needed training, research, and trial and error.

According to Valukas' assessment, "Lehman's systems were extremely interdependent, but their connections were obscure and poorly documented. Untangling these networks in order to get the required information required a great deal of effort.

The Bottom Line

Key employees can gather, store, handle, process, retrieve, and submit their financial data with the assistance of the six parts that make up an AIS. An essential element of a thriving company is an effective, accurate accounting information system that is well-developed and regularly maintained with required data.