The Impact of Enterprise Resource Planning Systems on Management Accounting:  An Australian Study    Abstract     Information technology is significantly changing the operating practices of an increasing number of companies globally. These developments have important implications for the accounting profession and in particular accounting practices in the twenty-first century. This study examines the development of enterprise resource planning (ERP) systems as a means of illustrating how changes in information technology allows all systems in a company to be linked to manage operations holistically.     The study investigates the change in accounting systems using a sample of Australian companies with emphasis on the adoption of ERP systems including the potential impact of ERP on capital budgeting processes. The results show that ERP systems are changing 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 the development of ERP systems and its impact on management accounting teaching and research.  Key words:  Management accounting capital budgeting enterprise resource planning systems information technology. 1. Introduction During the past decade an increasing number of companies have been impacted by information technology in terms of computerized transaction processing and electronic telecommunications such as that done with the Internet intranet and extranet. For competitive reasons companies have had to change from manual and then mainframe systems to what has been called enterprise resource planning (ERP) systems. An ERP system has a common database or data warehouse that links together all systems in all parts of a company including for example capital budgeting with financial control manufacturing sales fixed assets inventory human resources modules etc. An ERP system by linking all systems through a data warehouse allows a company to manage its operations holistically.    A second impact of ERP systems has been a general shift to manage at the activity level rather than at the more abstract level of financial transactions. This means that management accounting with its focus on activities can be most effective when it is used with ERP systems to incorporate the activity level for costing and performance measurement. To be effective an ERP system will contain an extensive chart of accounts or codes for activities such as accurate recording and tracking of activities revenues and costs. The coding incorporates stable entities of a business such as divisions plants stores and warehouses. At a detailed level there are codes for functions such as finance production sales marketing and materials management. There are also the traditional financial account codes such as assets liabilities revenues and expenses and the central ERP feature of coding processes activities and sub-activities. There must be consistent coding among all parts of a company in order for them to relate to one another.   As the ERP system incorporates activities in terms of quantities of resources including labour a record of resource use is maintained. Therefore performance can be measured in physical terms and compared to standards which allows for the calculation of variances. This performance measurement at the activity level serves as a feedback system on efficiency and effectiveness. The confusion from abstract monetary measures is erased and what is actually happening with the conversion of resources into goods and services can be seen. ERP systems have the potential to change management accounting systems with more detailed more integrated and faster produced information.   To date the research on the impact of ERP systems on management accounting can best be described as preliminary. It has involved case studies of one or two companies at a time and some field studies. The findings from these studies have been largely anecdotal. Also some have been deductive in that arguments based on ERP attributes have been made on how management accounting should be affected. For instance in a field study Cook et al. (2000) described activity-based capital budgeting at a division of a US telecommunications company. The findings from Cook et al.’s field work suggests that ERP systems can increase the effectiveness of capital budgeting by anchoring financial numbers to activities rather than stopping at monetary measures with pre-ERP practices.    The goal of this paper is to investigate the change in accounting systems using asample of Australian companies with emphasis on the adoption of ERP systems including the potential impact of ERP on capital budgeting processes. Prior research in the Australian environment has indicated that the economic/institutional setting is significantly different from the US and European environments as Australian companies are smaller with fewer multinational subsidiaries and more homogenous management background in terms of culture and educational background (Matolcsy et al. 2005). Given these differences in the Australian environment Matolcsy et al claim that the benefits of ERP systems are likely to be more pronounced and measurable at least in the short run in Australia. The significance of the study is its contribution to the emerging body of literature on the development of ERP systems and has the potential to provide useful contrast and/or confirmation of the limited research from mainly US based studies. Furthermore this study contributes to the body of knowledge of the impact of ERP on management accounting teaching and research using a broadly based sample of corporations in an Australian setting.  In ascertaining the impact of information technology on management accounting this paper will have the following additional sections. The second section contains a literature review of the impact of information technology on management accounting. With the literature review the third section develops the research method and determines the sample used to ascertain the impact of ERP systems on management accounting practices of Australian companies. The fourth section will contain the findings while the fifth and sixth will be the discussion and conclusion respectively. Recommendations for future research will be included in the conclusion.  2.  Literature Review  2.1 The integration of ERP systems into management accounting   Expectations for ERP systems to change management accounting were introduced by Kaplan and Cooper (1998 pp. 11-24) especially with the fourth of their four-stage model for cost and performance measurement systems. When a company had first stage systems those systems were basically inadequate for all purposes even for financial reporting. When they make improvements the first stage companies tend to add financial systems to meet regulatory requirements. As a result they evolve into second stage systems where financial reporting systems dominate; these companies are financial reporting driven. The companies with third stage systems have customized managerially relevant cost management financial reporting and performance measurement systems however these systems are standalone. ERP systems only occur with the fourth stage systems where the ERP systems integrate cost management financial reporting and performance measurement (Kaplan and Cooper 1998 p. 299).   An ERP system has a common data structure that permits data to be entered and accessed from anywhere in the world (Kaplan and Cooper 1998 p. 275). An activity-based costing system is an integral part of an ERP system and thus managers have information about present and future activities at operational levels when making decisions (Kaplan and Cooper 1998 pp. 275-277 285). With activity-based information monetary distortions can be reduced. Feedback with activity information improves learning. Thus in managing at the activity level costing budgeting performance measurement bonuses resource spending forecasting budgeting production etc. can beimproved in terms of efficiency and effectiveness. An ERP system will allow the company to obtain cost and performance information more frequently even daily rather than waiting a month (Kaplan and Cooper 1998 p. 279). Kaplan and Cooper (1998 pp. 301-306) state that the integration with ERP systems allow all managerial processes including budgeting what-if analysis and transfer pricing to be also based on activities rather than only dollars.  Activity-based budgeting gives companies the opportunity to authorize and control resources based on accurate demand information. Accuracy increases because activity-based budgeting is based on facts and less upon power influence and negotiating ability. Furthermore the activity-level focus of budgeting leads to more accuracy in forecasting the demands for all direct and especially indirect activities.    At the same time as Kaplan and Cooper’s (1998) important book Davenport (1998 p. 122) wrote “the business world’s embrace of enterprise systems may in fact be the most important development in the corporate use of information technology in the 1990s.” Davenport (1998 p. 127) expected companies to change with the implementation of ERP systems: In addition to having important strategic implications enterprise systems also have a direct and often paradoxical impact  on a company’s organization and culture. On the one hand by providing universal real-time access to operating and financial data the systems 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 control over information and the standardization of processes which are qualities more consistent with hierarchical command-and-control organizations with uniform cultures.   The paradox with ERP systems – streamlined flatter and more flexible and democratic (i.e. more control at the frontline) and centralization of control over information and the standardization of processes (i.e. more control at the centre) -- makes Davenport (1998 p. 131) ask how will ERP systems affect companies? Another equally relevant question would be how will ERP systems affect management accounting? Taken together Kaplan and Cooper (1998) and Davenport (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 will impact on management accounting. Nevertheless it is possible to infer that changes will occur to management accounting from the integration among cost management financial reporting performance measurement and all other systems. Thus it is not surprising that there has been some exploratory research prompted by Kaplan and Cooper (1998) and Davenport (1998) on the impact of ERP systems on management accounting.  2.2  The practical application of ERP systems – capital budgeting.   As previously outlined a field study conducted by Cook et al. (2000) described the operation of activity-based capital budgeting as a division of a US telecommunications company. In their study Cook  et al. found that the activity information was linked to the financial accounting system thus behaving like an ERP system for the purpose of capital budgeting. This approach went beyond the traditional capital budgeting by linking the traditional incremental monetary revenues and costs with underlying activities. The authors concluded that by separately identifying the level of revenues and costs associated with process activities the uncertainty with such activities and related revenues and costs can be closely examined. They added that this activity-level capital budgeting gives managers far more information and understanding than possible from the traditional financial simulation of aggregated income-statement approach. Their arguments were convincing but could not be verified.  Hope and Fraser (2001; 2003) disclosed that some companies have ceased traditional budgeting processes. Four reasons have been put forward by Hope and Fraser (2001) as to why existing budgeting processes are failing:   -  few companies are satisfied with their budgeting processes -  far too much time is spent on budgeting and too little time is spent on strategy -  Financial capital is now a small part of market value -  Budgeting is expensive and adds little value either to the company 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 can be accomplished by other means (Hope and Fraser 2003 p. 108). ERP systems which they label enterprise-wide information systems are important for eliminating budgeting particularly when accompanied by the balanced scorecard shareholder value models such as EVA activity-based costing and management rolling forecasts and benchmarking (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 for those companies ERP systems would not have been essential for effectiveness without budgeting. Perhaps ERP systems will allow contemporary companies with ERP system to be effective without budgeting. The impact of ERP systems on budgeting is still an empirical question.    It was noted from the findings of Cook et al. (2000) and Hope and Fraser (2001 2003) that there was a lack of empirical studies on the impact of information technology on capital budgeting. Additional empirical testing was provided by Granlund and Malmi (2002). Following from Kaplan and Cooper (1998) they noted the “lack of studies examining the organizational and behavioural aspects of these systems” (p.300). Their purpose was “to examine the effects of integrated enterprise-wide information systems on management accounting and management accountants’ work.” As they concluded there was “no scientific evidence on the research topic” they decided to use an exploratory field study to provide “insights” for subsequent research. Sixteen persons were interviewed at 10 large almost exclusively SAP R/3 adopters. They found no major direct or indirect impacts of ERP on management accounting systems (p. 309). The changes that did occur did not lead to changes in the logic of management accounting systems.   2.3 ERP and its impact on the work of management accountants    Although none of the recent studies on the impact of ERP systems have indicated changes to management accounting systems there have been some studies that indicated effects on the work of management accountants. For example Burns and Baldvinsdottir(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 management accounting systems. Each of these studies will be discussed briefly below. In a field study of a single company Burns and Baldvinsdottir (1999) observed that SAP centralized the accounting function and decentralized control to many people in the company who became “hybrid accountants”. The traditional core activity of management accountants posting the books was delegated to others in the company. They cite the director of finance saying: “They may post the odd correctional entry. In fact some analysts aren’t allowed to post. They generally are analytical people rather than analytical accountants.” Management accountants have become analysts.    Caglio (2003) studied an Italian company to understand how the implementation of an ERP system challenges the definition of the expertise and roles of accountants. Caglio (pp. 140-141) found three structurational characteristics that jointly materialized during the project:  -  a higher degree of standardization of accounting activities and practices; -  a stronger need for integration and interfunctional collaboration; and -  a more prominent role for the accounting department in the management of the new IT system. Quattrone and Hopper (2001 p. 403) undertook two case studies of ERP implementations to obtain insights into how new systems give rise to multiple spaces and times within [companies].”  The case studies were conducted over 12 months at multi national companies that were implementing SAP systems (pp. 410-411). One study included various hierarchical levels and locations in a large American multinational company. Twenty managers were interviewed. The other study was the sales and distribution function of the European headquarters of a Japanese multinational company. Twelve managers were interviewed in this second study.    Quattrone and Hopper (2001 pp. 420-426) found that with the implementation of the ERP system control went from a single point or “totalitarian” view of control with the controller during periodic reporting to a multiplicity of loci of control available at anytime. Anyone with access to an ERP system can “exert control as 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 best for each business area and accountants analyze how this can be obtained.” They conclude that if the centres of control are changed as with ERP implementations it is necessary to re-conceptualize accounting and control (p. 430).     In a later paper dealing with the same two subject organizations Quattrone and Hopper (2005 p. 760-761)) concluded each organization adopted different strategies which resulted in different configurations implementations and usages of the ERP system. Granlund and Malmi (2002) mentioned earlier also studied the effects of ERP systems on management accountants’ work with preliminary and brief field studies at 10 companies. The working hypothesis that ERP systems would allow management accountants to devote more time to business analysis was supported by five of the 10 companies (p. 311).    Baxendale and Jama (2003) from an assessment of ERP system functionality conclude that management accounting data integrity and reliability will increase. The use of relational databases allows information to be shared rather than re-entered. Formal processes exist in ERP systems to ensure reliability by automatic counts and reconciliations. These conclusions were not empirically tested. Meall (2003) studied the transition of budgeting at the UK company Southern  Water from spreadsheet application to ERP based budgeting. Anecdotally Meall reported that the ERP-based budgeting system reduced budget preparation time allowed more time for analyses and increased collaboration. This case study did not suggest that the ERP system could make budgeting redundant as did Hope and Fraser (2003) but instead suggested that ERP systems can improve the efficiency and effectiveness of budgeting.   Scapens and Jazayeri (2003 p. 203) reviewed the literature to find that “ERP systems are having relatively limited impacts on management accounting and management accountants.”  In view of the literature the purpose of Scapens and Jazayeri study (2003 p. 204) was “to explore the processes of change and to examine in more depth the nature of the changes in management accounting which have accompanied the implementation of an ERP system … within a specific organization.” The field study was conducted from 1996 to 1999 at the European division of a US company. The process focus to study management accounting was crucial according to these authors as ERP systems are process systems. The latter lead to more information sharing and teamwork on one hand and greater centralization of information processing activities (pp. 216-218).     Scapens and Jazayeri (2003 pp. 224-229) judged the ERP system to have led to a number of changes to management accounting i.e. the elimination of routine jobs the development of accounting knowledge in line managers the production of more forward looking information and a wider role for management accountants.  More specifically Scapens and Jazayeri (2003 p. 224) state that the move from record-keeper to internal consultant requires management accountants to acquire new skills. Rather than information reporters management accountants need to be sales persons and change agents. In their view management accountants need to sell ideas for accomplishing strategy with information. Scapens and Jazayeri (2003 p. 226) were not convinced that ERP systems drive the change in management accounting. Overall their findings were unclear in suggesting causes of the changes to management accounting.     Dechow and Mouritsen (2005) studied two Danish organizations to understand the impact of ERP systems on integration and control. They found that ERP systems “are highly involved in transforming and establishing management control agendas through concerns for integration.” (pp. 724-725).  In particular Dechow and Mouritsen concluded that integration is not a solution but rather a means by which to problematize through the process. They noted that this represented a way of transporting information across localities in such a way that suited the needs and requirements of different parties and different times. 2.4 Summary of findings from prior literature    Overall the findings from prior literature on the impact of ERP systems on management accountants do not completely agree that ERP systems will change the work of management accountants in particular ways. Nevertheless the prior literature suggests that management accountants will be less likely to do routine tasks and more likely to be involved with analysis. Similarly the prior studies suggest that the output of managementaccountants will likely be more precise more accurate and produced more frequently. However there is no conclusive evidence to support these expectations from the research on how ERP systems impact capital budgeting budgeting and other components of a management accounting process. In summary there is confusion in the literature as to the potential for ERP systems to change management accounting and a lack of clear identification of the changes that have actually occurred. Burns and Scapens (2000) suggest that perhaps management accounting will take longer to reflect changes because 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 ERP systems on management accounting. Although the focus of this study relates to the process of management accounting special attention is devoted to the impact of ERP systems on capital budgeting as a specific and important management accounting technique.   In committing to investments with returns that come later capital budgeting has the inherent challenge of dealing with uncertain future events. In addition the economic effects of capital projects are difficult to track to future revenues expenses and costs because the spreadsheets that have been used for analysis are not typically connected to the company’s accounting and operating systems past present or future.  This has resulted in the sometime approval of the wrong projects and more importantly the inability to ascertain what the implemented projects will accomplish in terms of revenues costs expenses and resulting profits. According to Cook et al. (2000) these shortcomings in capital budgeting techniques can potentially be reduced or eliminated with the increasingly prevalent ERP systems.    3.1.1 Traditional approaches to capital budgeting Capital budgeting can be changed by ERP systems. As noted it has been done separately from the firm’s accounting and operating systems past present or future. In a traditional non-ERP setting capital budgeting may be completed separately with a spreadsheet. For example given a project for outlays for replacement equipment where the time frame for the internal rate of return or net present value calculation could be 10 years. The project could include an improved production process to reduce material waste as well as labour costs. Also the new process could reduce the time for set ups for different product runs and thus enable the capture of special orders where quick response is necessary.  As IRR/NPV analysis is incremental the spreadsheet would show the incremental cash flows for capital outlays reduced material costs reduced labour costs and the contribution from the additional sales. However the data items on the spreadsheet of pre-ERP capital budgeting are not explicitly linked with what activities happened what activities are happening or what activities will happen in the future. This separateness can be resolved by ERP systems integrating capital budgeting with companies’ accounting and other systems. 3.2 Benefits of ERP for capital budgeting decisions Potentially capital budgeting can be done significantly differently with a functioning ERP system because of the integration of accounting and other systems. The common unified data warehouse is able to integrate for example financial transactions activities in activity-based costing (ABC) and activity-based management (ABM) sub-systems budgets and plans and performance measures such as customer satisfaction or an entire balanced scorecard. Of course for these expectations to be realized 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 three stages (1) preparation and approval (2) operational and (3) post audit. During the first stage the ERP system will allow the revenue and cost items to be linked to actual activities. For example with new equipment if some of the costs are labour the actual model for labour use in manufacturing will be assessed and improvements in labour productivity due to the new asset will be modelled. Modelling allows alternative approaches or variants to be tested and understood. Similarly if there is a change in material usage this will be modelled and the impact considered in the capital project evaluation. In effect ERP systems allow capital projects to be modelled as mini independent businesses or investment centres.    For the second operational stage the models used in the first stage preparation and approval can be compared to the actual model in use regarding labour material and asset input and the actual outputs. In effect the modelled assumptions can be explicitly validated with experience. Similarly for the third stage at or near the end of the project the models can be assessed to do a post audit to determine the life-time success of the project and to provide feedback on the capital budgeting process.    As with capital budgeting the impact of ERP systems could be deductively specified or more precisely conjectured for other management accounting practices such as budgeting operational statements forecasting performance measurement and costing. The above capital budgeting example indicates that ERP systems have the potential to lead to greater integration accuracy speed and effectiveness. As management accounting techniques involve company information it would be reasonable to expect from the implementation of ERP systems improvements at least in integration accuracy speed and effectiveness if not a major change such as the elimination of budgeting. 3.2 Research Design Most of the earlier research on the impact of ERP systems on management accounting have been field studies. Additionally given the lack of conclusive findings in the literature about the impact of ERP this research will employ a survey of large corporations incorporating open-ended questions about changes in capital budgeting and other management accounting practices. However it is proposed that this will be an exploratory study given that there is uncertainty as to whether there have been any significant changes to management accounting with greater use of ERP systems.