Financial Reporting and Management Reporting Systems: Accounting Information Systems 9e James A. Hall

Chapter 8
Financial Reporting and

Management Reporting
Systems
Accounting Information
Systems 9e
James A. Hall
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in
whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Objectives for Chapter 8
• Understand the operational features of the General Ledger
System(GLS), financial reporting system(FRS), and
management reporting system(MRS).
• Be able to identify the principle operational controls
governing the GLS and FRS.
• Understand the factors that influence the design of the MRS.
• Understand the elements of a responsibility accounting
system.
• Be familiar with the financial reporting issues surrounding
XBRL.
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
• The journal voucher is the source of input to
the GL with the manager offering a degree of
control against unauthorized GL entries.
GLS Database
• General ledger master file is the principal file in the GLS
database and is based on the chart of accounts.
– FRS draws upon the GL master to produce financial statements.
GLS Database
• General ledger history file has the same format as the GL
master.
– Provides historical financial data for comparative reports..
• Journal voucher file provides a record of all GL transactions
and replaces the traditional general journal.
• Journal voucher history file contains journal vouchers of
past periods for the audit trail.
• Responsibility center file contains financial data by
responsibility centers for MRS reporting.
• Budget master file contains budget data by responsibility
center.
Financial Reporting Procedures
• Capture the transaction.
• Record in special journal and post to subsidiary ledger.
• Post to GL periodically.
• Prepare unadjusted trial balance.
• Make, journalize and post adjusting entries.
• Prepare the adjusted trial balance.
• Prepare the financial statements.
• Journalize and post closing entries.
• Prepare the post-closing trial balance.
XBRL: Reengineering Financial Reporting
• Many companies post financial statements on their websites
using HTML (Hyper Text Markup Language).
– Cannot be conveniently processed through IT automation.
– Performing analysis on data requires them to be manually entered
into the user’s information system.
• The solution to the problems is XBRL (extensible Business
Reporting Language).
– Internet standard designed for business reporting and information
exchange.
– Objective is to facilitate the publication, exchange, and processing
of financial and business information.
– Derivative of XML (extensible Markup Language).
XML
• XML is a meta-language for describing markup languages.
• Extensible means that any markup language can be created
using XML.
– Includes the creation of markup languages capable of storing
data in relational form, where tags (formatting commands) are
mapped to data values.
– Can be used to model the data structure of an organization’s
internal database.
XBRL
• XML-based language for standardizing methods for preparing,
publishing, and exchanging financial information.
• First step is to select an XBRL taxonomy.
– Classification schemes that specify the data to be included in an
exchange or report.
• Next step is to cross-reference each GL account to an
appropriate XBRL taxonomy element (tag).
– Mapping organization’s internal data to XBRL taxonomy elements.
– Tags are used whenever data is disseminated to outsiders.
• Computer programs that recognize and interpret tags general
XBRL instance documents (financial reports) that can be
published and made available to users.
Current State of XBRL Reporting
• Likely to be the primary vehicle for delivering business
reports to investors and regulators in the near future.
• Developments in XBRL Reporting:
– Required for US banking quarterly “Call Reports”.
– SEC ruling requires large publicly held companies to adopt SBRL
by December 2015 to meet financial reporting requirements.
– Comparable developments to encourage or require SBRL in
Tokyo, Canada, China, Spain, the Netherlands and the UK.
• Use of XBRL facilitates fulfillment of legal requirements
specified in SOX.
Controlling the GL/FRS
• Potential risks to the FRS include:
– A defective audit trail.
– Unauthorized GL access.
– GL accounts that are out of balance with subsidiary accounts.
– Incorrect GL account balances due to unauthorized or incorrect
journal vouchers.
• Six categories of physical controls under the COSO
framework.
• Transaction authorization - Journal vouchers must be
authorized by a manager at the source department.
• Segregation of duties – GL clerks should not:
– have record-keeping responsibility for special journals or
subsidiary ledgers.
– prepare journal vouchers or have custody of physical assets.
• Access controls - Unauthorized GL access can cause errors,

fraud, and misrepresentations in financial statements.
– SOX requires controls that limit database access.
• Accounting records – Audit trail ensures transactions can
be accurately traced from initiation to final disposition.
– Files should be detailed enough to: (1) answer inquiries, (2)
reconstruct data if destroyed, (3) provide historical data, (4)
meet government requirements and (5) prevent, detect and
correct errors.
• Independent verification - GL department provides this step
within the accounting information system.
– Journal voucher listing provides relevant details of each journal
voucher posted to the GL.
– General ledger change report presents the effects of journal voucher
postings on GL accounts.
• IT application controls apply to the GL/FRS too.
– Edits and check digits ensure error free data in the GL.
– Process and output controls serve the same objectives.
– Real-time transaction processing bypasses human reconciliation and
review which provides both benefits and risks.
• Eliminating human element reduces the possibility of some error and increases
efficiency.
• Risk of applicable logic errors that could have widespread and devastating
implications for the FRS.
Internal Control Implications of XBRL
• Taxonomy creation: Incorrect generation results in
incorrect mapping between data and elements that could
result in material misrepresentation of financial data.
• Taxonomy mapping errors: Correctly generated XBRL
tags may be incorrectly assigned to internal database
accounts, results in material misrepresentations of
financial data.
• Validation of instance documents: Independent
verification procedures need to be established to ensure
that appropriate taxonomy and tags have been applied
before posting to a web server.
Management Reporting Systems
• Usually seen as discretionary reporting, but can argue that
Sarbanes-Oxley requires an effective MRS.
– Critical element of organization’s internal control structure.
– Directs attention to problems on a timely basis which promotes
effective management and supports business objectives.
• Formalization of tasks principle divides organizational areas
into tasks with clearly defined limits of responsibility.
– Purpose is to avoid an organizational structure that depends on
specific individuals.
– Organizational chart shows typical job positions in a firm.
– Allows formal specification of information needed to support tasks,
regardless of the individual performing them.
Management Reporting Systems
• Responsibility and authority refer to an individual’s
obligation to achieve desired results and the right to make
decisions within the limits of that obligation.
– Define the vertical reporting channels through which information
flows.
• Span of control refers to the number of subordinates directly
under the manager’s control.
– Managers with narrow spans of control need detailed reports with
summarized information for managers with broad spans of control.
• Management by exception suggests managers should limit
their attention to potential problem areas.
– Reports should focus on changes in key factors that are
symptomatic of potential problems and avoid unnecessary details.
Management Function, Level, and Decision Type
• Short-term planning involves the implementation of specific
plans that are needed to achieve long-range objectives.
• Control function ensures firm’s activities conform to the plan.
• Strategic planning decisions include:
– Setting firm’s goals and determining scope of business activities.
– Determining organizational structure and management philosophy.
• Strategic planning decision are long-term, require highly
summarized information, tend to be nonrecurring, have a high
degree of uncertainty and require both internal and external
sources of information.
• Strategic decisions are broad in scope and have a profound
impact on all levels of the organization.
Management Function, Level, and Decision Type
• Tactical planning decisions subordinate to strategic
decisions.
– Shorter term, more specific, recurring, have fairly certain outcomes,
and a lesser impact on the firm.
• Management control decisions involve motivating all
managers to use resources as productively as possible.
– Difficult to separate manager’s performance from that of the
operational unit.
• Operational control decisions deal with routine tasks.
– Structured, narrow focus, dependent on details, short time frame.
– Three basic elements: (1)Attainable standards; (2) Performance
evaluation with differences from standard noted as variances; and
(3) Taking corrective action.
Problem Structure
• Reflects how well decision makers understand problems.
• Three elements:
– Data: values used to represent relevant factors.
– Procedures: sequence of steps used in solving the problem.
– Objectives: results decision maker desires to attain.
• When all three elements are known with certainty, it is a
structured problem.
– Not unique, well suited for traditional data processing techniques.
• Unstructured problems exist when any characteristic is not
known with certainty.
– Normally complex and unique making traditional data processing
techniques ineffective.
Management Reports
• May be in paper or digital form and express information
verbally, numerically and/or graphically.
• Report objectives: To be useful, must have information
content with two general objectives:
– Reduce the level of uncertainty associated with a problem facing
the decision maker.
– Influence the behavior of the decision maker in a positive way.
• Programmed reporting provides information to solve

anticipated problems:
– Scheduled reports are produced at specified intervals.
– On-demand reports are triggered by events, not time.
Management Report Attributes
• Relevance – useful to decision making.
• Summarization – appropriate level of detail.
• Exception orientation – identify risks.
• Accuracy – free of material errors.
• Completeness – essential information.
• Timeliness – in time for decisions.
• Conciseness – presented with coding schemes and
calculations as appropriate to be understandable.
Management Reports
• Managers cannot always anticipate information needs.
• Database technology provides direct inquiry and report
generation capabilities that allow the generation of ad hoc
reports without assistance.
• Data mining is the process of selecting, exploring and
modeling data to uncover relationships and patterns.
– The verification model uses a drill-down technique to either verify
or reject a user’s hypothesis.
– The discovery model uses data mining to discover previously
unknown but important information hidden in the data.
• Successful data mining requires a data warehouse of
archived operational data.
Responsibility Accounting
• Every economic event that affects the organization is the
responsibility of and can be traced to an individual manager.
• The budget process helps achieve objectives by establishing
measureable financial goals for each organizational segment.
• Performance measurement and reporting take place at each
operational segment.
– Information flows upward as responsibility reports.
• Operations organized into responsibility centers:
– A cost center has responsibility for cost management within budget.
– A profit center has responsibility for cost control and revenues.
– An investment center manager has general authority to make
decisions that affect the organization including product development
and other investment decisions.
Behavioral Considerations
• Properly applied principles of authority, responsibility and

task formalization promote goal congruence.
– Carefully structured MRS plays important role in promoting goal
congruence while a badly designed MRS can cause actions in
opposition to organizational objectives.
• Information overload occurs when managers receive more
information than they can assimilate.
• Inappropriate performance measures can lead to behavior
that is inconsistent with firm’s objectives.
– Performance measures should consider all relevant aspects of a
manager’s responsibility – both financial and nonfinancial.

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Chapter 8

Financial Reporting and

• Access controls - Unauthorized GL access can cause errors,

• Programmed reporting provides information to solve

• Properly applied principles of authority, responsibility and

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