FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEM

IS Functions of GLS
 General ledger systems should:
 collect transaction data promptly and accurately
 classify/code data and accounts
 validate collected transactions/ maintain accounting controls (e.g., equal debits and credits)
 process transaction data
▪ post transactions to proper accounts
▪ update general ledger accounts and transaction files
▪ record adjustments to accounts
 store transaction data
 generate timely financial reports

General Ledger System is also called the Non-Cycle. This is how it is called by some auditing firms, e.g., SGV. It is
the system that receives the summarized output coming from the different accounting information systems as
seen in the diagram. However, there can be inputs to the system that are not coming from other systems. These
inputs usually come in the form of Journal Vouchers. Only transactions that are not processed in other systems are
directly inputted to the GLS, e.g., reclassification entries, adjusting entries, closing entries, debit to equity
conversion, etc.
The Financial and Management Reporting systems get their data from the GLS.

Journal Voucher
 Source of input to the GL
 Represents summaries of similar transactions or single unique transactions
 Identifies the financial amounts and affected GL accounts

GLS Database
 General ledger master file
 principal FRS file based on chart of accounts
 General ledger history file (usually, however, previous years’ balances are captured in the fields in the GL
master file and therefore separate GL history files may not be needed to be kept online)
 used for comparative financial support
 Journal voucher file (this is a temporary file)
 all journal vouchers of the current period
 Journal voucher history file (this is usually an archived file and need not be maintained online if computer
disk storage is an issue)
 journal vouchers of past periods for audit trail
 Responsibility center file (this is a reference file)
 responsibility centers for MRS

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  Budget master file (this is a reference file which is temporary as well since it is kept online for a year only
usually)
 budget data by responsibility centers for MRS

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).
Data entered using HTML are all considered as text characters. Therefore, numbers entered cannot be calculated
on.
For XBRL, data entered are recognized as texts, numbers, date, or special characters. Numbers can therefore be
calculated on by the user.

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.
 (This is now being implemented in the Philippines by the SEC)

GLS Reports (examples only)

 General ledger analysis:
 listing of transactions
 allocation of expenses to cost centers
 comparison of account balances from prior periods
 trial balances

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  Financial statements:
 balance sheet
 income statement
 statement of cash flows
 Managerial reports:
 analysis of sales
 analysis of cash
 analysis of receivables
 Chart of accounts: coded listing of accounts

Potential Risks in the GL/FRS

 Improperly prepared journal entries (human error)
 Unposted journal entries (human error)
 Debits not equal to credits (can be prevented by validation controls in the JV input process in
computerized systems)
 Subsidiary not equal to G/L control account (this happens in nonintegrated accounting systems. In ERPs,
like SAP, this does not happen anymore since the subsidiary and GL totals are always matched
automatically. In my experience in the nineties, I have a staff whose job is devoted to reconciling SL and
GL totals since the systems were not integrated)
 Inappropriate access to the G/L (e.g., weak passwords)
 Poor audit trail (lacks accounting records)
 Lost or damaged data (can be due to calamities such as fire, floods)

GL/FRS Control Issues

 Transaction authorization - journal vouchers must be authorized by a manager at the source dept (there
must be signatures on the JVs as evidence of the control)
 Segregation of duties – G/L clerks should not:
 have recordkeeping responsibility for special journals or subsidiary ledgers
 prepare journal vouchers (this is not correct since the GL clerks must be the ones who will create
JVs for transactions that cannot be processed in the other accounting systems. Previously
mentioned examples are reclassification entries, adjusting and closing entries, etc.)
 have custody of physical assets
 Access controls:
 Unauthorized access to G/L can result in errors, fraud, and misrepresentations in financial
statements.
 Sarbanes-Oxley requires controls that limit database access to only authorized individuals.
 Accounting records - trace source documents from inception to financial statements and vice versa
 Independent verification
 G/L dept. reconciles journal vouchers and summaries.
 Two important operational reports used:
 journal voucher listing – details of each journal voucher posted to the G/L
 general ledger change report – the effects of journal voucher postings on G/L accounts

Why audit trail needs to be detailed?

 Provide the ability to answer inquiries
 Able to reconstruct files if they are completely or partially destroyed
 Provide historical data required by auditors
 Fulfill government regulations
 Provide a means for preventing, detecting and correcting errors

Internal Control Implications of XBRL

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  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.

GL/FRS Using Database Technology

 Advantages:
 immediate update and reconciliation
 timely, if not real-time, information
 Removes separation of transaction authorization and processing
 Detailed journal voucher listing and account activity reports are a compensating control
 Centralized access to accounting records
 Passwords and authorization tables as controls

Management Reporting Systems

 Produce financial and nonfinancial information needed by management to “plan, evaluate, control”
 Usually seen as discretionary reporting
 Can argue that Sarbanes-Oxley requires MRS
 MRS provide a formal means for monitoring the internal controls
Financial statements are generated by financial reporting systems while management reports are generated by
management reporting systems (MRS). MRS are based on management accounting principles.

Factors That Influence MRS Design

 Management principles
 Management function, level, and decision type
 Problem structure
 Types of management reports
 Responsibility accounting
 Behavioral considerations

Management Principles
 Formalization of tasks:
 structures the firm around the tasks performed rather than around individuals’ unique skills
 allows specification of the information needed to support the tasks
 (it is important that a company must have a formal and detailed organization chart so that
responsibilities and authorities are pinpointed)
 Responsibility and authority:
 responsibility - obligation to achieve desired results
 authority - power to make decisions within the limits of that responsibility
 delegated by managers to subordinates
 define the vertical reporting channels through which information flows
 Span of control:
 the number of subordinates directly under the manager’s control
 detailed reports for managers with narrow spans of control
 summarized information for managers with broad spans of control
WESTERN JAPANESE

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Japanese is better since any communication travels a short distance and actions are immediately taken. For
example, if a worker has a suggestion for improvement, the top executive will know of if immediately and can
approve it for implementation soonest as well.

 Management by exception:
 Managers should limit their attention to potential problem areas.
 Reports should focus on changes in key factors that are asymptomatic of potential problems.
 (this is an old concept that is not practiced in progressive companies. Continuous improvement is
implemented by management wherein they continuously evaluate processes for improvement
even if no errors or problems occur.)

Management Function, Level, and Decision Type

 Strategic planning decisions:
 firm’s goals and objectives
 scope of business activities
 organizational structure
 management philosophy
 long-term, with broad scope and impact
 non-recurring, with high degree of uncertainty
 need highly summarized information
 require external & internal information sources
 Tactical planning decisions:
 subordinate to strategic decisions
 short term
 specific objectives
 recur often
 fairly certain outcomes
 limited impact on the firm
 Management control decisions:
 using resources as productively as possible in all functional areas
 evaluating the performance of subordinates against standards
 Measuring performance is difficult because sound decisions with long-term benefits may negatively
impact the short- term bottom line.
 Operational control decisions:
 deal with routine tasks
 narrower focus, dependent on details
 highly structured
 short time frame
 Three basic elements or steps:
 set attainable standards
 evaluate performance
 take corrective action

Problem Structure
 Reflects and affects how well decision makers understand and solve problems
 Elements of problem structure:
 data
 procedures
 objectives

Management Reports
 Report objectives - reports must have value or information content
 They should…

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  reduce the level of uncertainty associated with a problem facing the decision maker
 influence the behavior of the decision maker in a positive way
 (as future accountants, your reports should be able to help management arrive at sound
decisions. The reports contain only relevant data and presented in a way that is most
understandable by the recipient)

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 – understandable format
There would be times that these two attributes conflict. You can be complete but not submit a report on time or
you can be on time but not have all the information. As an accountant, you have to decide which has more weight.

Types of Management Reports

 Programmed reports:
 scheduled reports – produced at specified intervals, e.g., weekly
 on-demand reports – triggered by events, e.g., inventory levels drop to a certain level
 Ad hoc reports:
 designed and created “as needed”
 situations arise that require new information

Data Mining
 Process of selecting, exploring, and modeling large amounts of data to uncover relationships and global
patterns that exist in large databases but are hidden among the vast amount of facts.
 This is being studied in Business Analytics which would be of an advantage if accountants likewise have
knowledge of this discipline. For example, if you have a Students information database, you can perhaps
be able to relate academic programs to gender, family income or even physical attributes of students.
From the analysis, you can market programs to students who have the identified attributes.

Approaches to Data Mining

 Verification Model
 Uses drill-down technique to either verify or reject a user’s hypothesis.
 Discovery Model
 Discover previously unknown but important information that is hidden within the data.

Responsibility Accounting
 Implies that every economic event that affects the organization is the responsibility of and can be traced
to an individual manager
 Incorporates the fundamental principle that responsibility-area managers are accountable for items that
they control

Setting Financial Goals: Budgeting

 Budgeting helps management achieve financial objectives by setting measurable goals for each
organizational segment.
 Budget information flows downward and becomes increasingly detailed at each lower level (however,
people at the lowest levels should have a participation in formulating budgets to give them a feeling of
ownership)
 The performance information flows upward as responsibility reports.

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Responsibility Centers
 Cost center – responsible for keeping costs within budgetary limits
 Profit center – responsible for both cost control and revenue generation
 Investment center – has general authority to make a wide range of decisions affecting costs, revenue, and
investments in assets

Behavioral Considerations: Goal Congruence

 MRS and compensation schemes help to appropriately assign authority and responsibility.
 If compensation measures are not carefully designed, managers may engage in actions not optimal for the
organization (especially if managers feel that they are not well compensated. Also, if compensation
schemes are not properly designed, e.g., they are performance based, managers may fraudulently find
ways to make their performance up to par).
 Short-term v. long-term measures

Behavioral Considerations: Information Overload

 Occurs when managers receive more information than they can assimilate
 Can cause managers to disregard formal information and rely on informal—probably inferior—cues when
making decisions (this is normal human behavior, i.e., if were are confronted with too much information,
we sometimes just rely on other people or sources to identify which of the information we have on hand
are relevant)

Behavioral Considerations: Inappropriate Performance Measures

 Appropriate performance measures
 Stimulate behavior consistent with firm objectives
 Managers consider all relevant aspects, not just one
 Example of inappropriate measures:
 price variance – can affect the quality of the items purchased (if management is too concerned
with getting the lowest prices for materials, quality may be compromised)
 quotas – can affect quality control, material usage efficiency, labor relations, plant maintenance
(employees may be too focused on achieving the quota at the expense of other items such as
quality)
 profit measures – can affect plant investment, employee training, inventory reserve levels,
customer satisfaction (to achieve profit, management may be too conscious of cost outlays or
expenses which may actually be beneficial to the company)