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Financial Reporting and Management Reporting Systems"} ```json {data: {id:1, type: 'PDFnotes' PDFnotesAttrs: pages: [1,2,3,4,5,6,7,8,9,10,11,12,13,14,15,16,17,18,19,20,21,22,23,24] content: ""# Chapter 8: Financial Reporting and Management Reporting System\n\n## Learning Objectives\n\n* Understand operational features of the General Ledger System (GLS), Financial Reporting System (FRS), and Management Reporting System (MRS).\n* Understand the factors influencing the design of the MRS.\n* Understand the elements of a responsibility accounting system.\n* Be familiar with financial reporting issues surrounding XBRL.\n* Be familiar with data analytics concepts and techniques.\n\n## General Ledger System (GLS)\n\n* The GLS acts as a hub connected to other systems through information flow.\n* Transaction cycles process individual events, recorded in special journals and subsidiary accounts.\n* Summaries flow into the GLS, becoming input for the MRS and FRS.\n* Most flows into the GLS come from transaction processing subsystems, with feedback from the FRS.\n\n### Journal Voucher\n\n* The source of input to the general ledger is the journal voucher.\n* It represents summaries of similar transactions or a single unique transaction.\n* It identifies financial amounts and affected general ledger (GL) accounts.\n\n### GLS Database\n\n* The GLS database includes various files, which may vary from firm to firm.\n* General ledger master file: The principal file, based on the organization’s published chart of accounts.\n* General ledger history file: Same format as the GL master; provides historical financial data for comparative reports.\n* Journal voucher file: The total collection of journal vouchers processed in the current period; replaces the traditional general journal.\n* Journal voucher history file: Contains journal vouchers for past periods; supports management’s stewardship responsibility.\n* Both current and historical journal voucher files are important links in the firm’s audit trail.\n* Responsibility center file: Contains revenues, expenditures, and other resource utilization data for each responsibility center.\n* The MRS draws upon these data for input in preparing responsibility reports.\n* Budget master file: Contains budgeted amounts for revenues, expenditures, and other resources for responsibility centers.\n* These data, along with the responsibility center file, are the basis for responsibility accounting.\n\n## Financial Reporting System (FRS)\n\n* The law dictates management’s responsibility for providing stewardship information to external parties.\n* Primary recipients are external users like stockholders, creditors, and government agencies.\n* Outside users are interested in the organization's performance as a whole.\n* They require information allowing them to observe trends and make comparisons between organizations.\n* Financial reporting information must be prepared and presented uniformly.\n* Financial statements are targeted at sophisticated users with relatively homogeneous information needs.\n* Sophisticated users understand the conventions and accounting principles and recognize the statements' useful information content.\n\n### Financial Reporting Procedures\n\n1. Capture the transaction. Transactions are recorded in the appropriate transaction file.\n2. Record in special journal. Each transaction is entered into the journal. Frequently occurring transactions are captured in special journals, while infrequent ones are recorded in the general journal or directly on a journal voucher.\n3. Post to subsidiary ledger. Details of each transaction are posted to the affected subsidiary accounts.\n4. Post to general ledger. Periodically, journal vouchers summarizing entries are prepared and posted to the GL accounts. The frequency depends on system integration.\n5. Prepare the unadjusted trial balance. The ending balance of each GL account is placed in a worksheet and evaluated for debit-credit equality.\n6. Make adjusting entries. Adjusting entries correct errors and reflect unrecorded transactions, such as depreciation.\n7. Journalize and post adjusting entries. Journal vouchers for adjusting entries are prepared and posted to the GL.\n8. Prepare the adjusted trial balance. A trial balance is prepared from adjusted balances, containing all entries for the financial statements.\n9. Prepare the financial statements. The balance sheet, income statement, and statement of cash flows are prepared using the adjusted trial balance.\n10. Journalize and post the closing entries. Journal vouchers close out income statement accounts and transfer income/loss to retained earnings. These entries are posted to the GL.\n11. Prepare the post-closing trial balance. A trial balance worksheet with only balance sheet accounts shows balances carried forward.\n\n### Real-Time General Ledger and Financial Reporting System\n\n* TPS applications post in real time directly to the general ledger and concurrently create a journal voucher for each posting.\n* Integrated transaction processing systems (purchases, payroll, etc) all feed into the GL/Financial Reporting System.\n\n## XBRL - Reengineering Financial Reporting\n\n* XBRL (Extensible Business Reporting Language): An Internet standard for business reporting and information exchange.\n* Facilitates the publication, exchange, and processing of financial and business information.\n* Derived from XML (Extensible Markup Language), a metalanguage for describing markup languages.\n* “Extensible” means any markup language can be created using XML.\n* Used to model the data structure of an organization's internal database.\n\n### Brief History of XBRL Reporting\n\n* XBRL is an important information exchange technology.\n* October 2005: U.S. banking regulators required quarterly \"Call Reports\" to be filed in XBRL. This requirement impacts more than 8,000 banks.\n* April 2005: The SEC began a voluntary financial reporting program that allows registrants to supplement their required filings with exhibits using XBRL.\n* September 2006: SEC announced its new electronic reporting system to receive XBRL filings. The new system is called IDEA (Interactive Data Electronic Application).\n* May 2008: SEC issued rules requiring large publicly held companies to adopt XBRL by Dec 15 to meet financial reporting requirements.\n* Comparable developments to encourage or require XBRL have taken place internationally.\n* Since early 2003, Tokyo Stock Exchange has accepted XBRL information.\n* In 2007, the Canadian Securities Administrators established a voluntary program to help the Canadian marketplace gain practical knowledge in preparing, filing, and using XBRL information.\n* Regulators in China, Spain, the Netherlands, and the United Kingdom are requiring certain companies to use XBRL.\n\n## Controlling the GL/FRS\n\n* SOX legislation requires that management design and implement controls over the financial reporting process, including the transaction processing systems that feed data into the FRS.\n* Potential risks to the FRS include: 1. A defective audit trail. 2. Unauthorized access to the general ledger. 3. GL accounts that are out of balance with subsidiary accounts. 4. Incorrect GL account balances because of unauthorized or incorrect journal vouchers. * If not controlled, these risks may result in misstated financial statements and other reports, thus misleading users of this information. * The potential consequences are litigation, significant financial loss for the firm, and sanctions specified by SOX legislation. \n## COSO Control Issues\n\n* Discussion of GL/FRS control activities follows the COSO framework. \n### Transaction Authority\n\n* Journal Voucher is the document that authorizes an entry to the general ledger. * It must be authorized by a responsible manager at the source department. \n### Segregation of Duties\n\n* Updating of the general ledger must be separate from all accounting and asset custody responsibilities within the organization. * Individuals with access authority to general ledger accounts should not: 1. Have recordkeeping responsibility for special journals or subsidiary ledgers. 2. Prepare journal vouchers, and\n 3. Have custody of physical assets.\n\n### Access Controls\n\n* Unauthorized access to the general ledger accounts can result in errors, fraud, and misrepresentation in financial statements. * SOX requires controls that limit database access to only authorized individuals. \n### Accounting Records\n\n* The audit trail is a record of the path that a transaction takes through the input, processing, and output phases of transaction processing. * It involves a network of documents, journals, and ledgers designed to ensure that a transaction can be accurately traced through the system from initiation to final disposition. * Audit trail facilitates error prevention and correction when the data files are logically organized. * General ledger and other files that constitute the audit trail should be detailed and rich enough to: 1. Provide the ability to answer inquiries (e.g. from customers or vendors) 2. Be able to reconstruct files if they are completely or partially destroyed 3. Provide historical data required by auditors 4. Fulfill government regulations. 5. Provide a means for preventing, detecting, and correcting errors.\n\n### Independent Verification\n\n* The journal voucher listing - provides relevant details about each journal voucher posted to the general ledger. * The general ledger change report - presents the effect of journal voucher postings to the general ledger accounts. * IT Applications Controls this also applies the GL/FRS. * Inputs controls in the form of edits and check digits ensure that data (journal voucher) entering general ledger are free from data entry errors that can corrupt GL accounts.\n\n### Internal Control Implications of XBRL\n\n* Although the potential benefits of XBRL and associated web technologies have been extensively researched, less attention has been given to the potential control implications of using XBRL.\n\n#### Taxonomy Creation\n\n* Incorrect taxonomy results in invalid mapping that may cause material misrepresentation of financial data. \n#### Taxonomy Mapping Error\n\n* The process of mapping the internal database accounts to the taxonomy tags needs to be controlled. \n#### Validation of Instance Documents\n\n* Once the mapping is complete and tags have been stored in the internal database, XBRL instance documents (reports) can be generated. * Independent verification procedures need to be established to validate the instance documents to ensure that appropriate taxonomy and tags have been applied before posting to a web server. \n## Management Reporting System (MRS)\n\n* Discretionary reporting\n* MRS is mandated by SOX legislation\n* Management reporting has long been recognized as a critical element of an organization’s internal control structure.\n* MRS that directs management’s attention to problems on a timely basis promotes effective management and thus supports the organization’s business objectives.\n\n### Factors That Influence The MRS\n\n* Management Principles * The principles that most directly influence the MRS: * Formalization of tasks - organizational areas are subdivided into tasks that represent full-time job positions. The purpose of this is to avoid an organizational structure in which the organization's performance, stability, and continued existence depend on specific individuals.\n * Responsibility and authority, - principle of responsibility refers to an individual’s obligation to achieve desired results; authority to make decisions within the limits of that responsibility.\n * Span of control - number of subordinates directly under his or her control.\n * Management by exception - suggests that managers should limit their attention to potential problem areas rather than being involved with every activity or decision.\n\nSpan of Control Figure 8-15. Management, Function, Level, Decision Type\n* The management functions of planning and control have a profound effect on the MRS. * Planning function - concerned with making decisions about the future activities of the organization \n ○ Long-range planning - a period between one and five years (may varies among industries)\n ○ Short-term planning - involves the implementation of specific plans that are needed to achieve the objectives of the long-range plan.\n * Control function - ensures that the activities of the firm conform to the plan.\n * Planning and control decisions are classified into four categories: 1. Strategic planning Decision\n * Setting the goal and objectives of the firm\n * Determining the scope of business activities, such as desired market share, markets the firm wishes to enter or abandon, the addition of new product lines and the termination of old ones, and merger and acquisition decisions.\n * Determining or modifying the organization’s structure.\n * Setting the management philosophy.\n 2. Tactic Planning decisions\n * Subordinate to strategic decisions and made by middle management\n * These decisions are of shorter term, are more specific, are recurring, have more certain outcomes, and have a lesser impact on the firm than strategic decisions. Strategic planning decisions have the following characteristics: * They have long-term time frames. Because they deal with the future, managers making strategic decisions require information that supports forecasting.\n * They require highly summarized information. Strategic decisions focus on general trends rather than detail-specific activities.\n * They tend to be nonrecurring. Strategic decisions are usually one-time events. As a result, there is little historical information available to support the specific decision.\n * Strategic decisions are associated with a high degree of uncertainty. The decision maker must rely on insight and intuition. Judgment is often central to the success of the decision.\n * They are broad in scope and have a profound impact on the firm. Once made, strategic decisions permanently affect the organization at all levels.\n * Strategic decisions require external as well as internal sources of information.\n 3. Management Control decisions\n * Involves motivating managers in all functional areas to use resources, including: materials, personnel and financial assets as productively as possible.\n * Supervising manager compares the performance of his/her subordinate manager to pre established standards. If a subordinate does not meet the standard, the supervisor takes corrective action\n 4. Operational Control decision\n * Ensures that the firm operates in accordance with pre-established criteria.\n * They’re narrower and more focused than tactical decisions because they’re concerned with the routine task of operations. Standards\n * Pre-established levels of performance that managers believe are attainable. Performance Evaluation\n * The decision maker compares the performance of the operation in question against the standard.\n * Taking Corrective Action\n * After comparing the performance to the standard, the manager takes action to remedy any out-of-control condition. (Recall from chap. 3)\n * An appropriate response to performance measures may have undesirable results. Table 8-1 STRUCTURED/UNSTRUCTURED PROBLEMS * The structure of the problem reflects how well the decision maker understands the problem. The problem is structured if these 3 elements are known with certainty: 1. Data —the values used to represent factors that are relevant to the problem. 2. Procedures —the sequence of steps or decision rules used in solving the problem. 3. Objectives —the results the decision maker desires to attain by solving the problem.\n * On the other hand, problems are unstructured when any of the three characteristics identified previously are not known with certainty. * It is one for which we have no precise solution techniques. Either the data requirements are uncertain, the procedures are not specified, or the solution objectives have not been fully developed. * In these case, the systems analyst cannot fully anticipate user information needs, rendering traditional data processing techniques ineffective. Types of Management Reports\n * Reports are the formal vehicles for conveying information to managers. Reports imply a written message presented on sheets of paper.\n * Management Report may be a hardcopy document or a digital image displayed on a computer terminal. May express information in verbal, numeric, or graphic form, or in any combination REPORT OBJECTIVES\n * Reports must have information content (1) To reduce the level of uncertainty associated with a problem facing the decision maker and (2) To influence the decision maker’s behavior positively. * Reports that fail to accomplish these objectives lack information content and are without value. Reliance on such reports may lead to dysfunctional behavior.\n * Programmed Reports - provide information to solve problems that users have anticipated. * Two Subclasses of Programmed Reports:\n * Scheduled reports - Could be daily, weekly, quarterly, and so on. Examples: Daily listing of sales, weekly payroll action report, and annual financial statements\n * On-demand reports - triggered by events, not by the passage of time. Examples: When inventories fall to their pre-established reorder points, the system sends an inventory reorder report to the purchasing agent. Table 8-2.\n * REPORT ATTRIBUTES\n * Relevance - Each element of information in a report must support the manager’s decision.\n * Summarization - Reports should be summarized according to the level of the manager within the organizational hierarchy.\n * In general, the degree of summarization becomes greater as information flows from lower management upward to top management. * Exception Orientation - Control reports should identify activities that are at risk of going out of control and should ignore activities that are under control.\n * Accuracy - Information in reports must be free of material errors.\n * Completeness - Information must be as complete as possible.\n * Ideally, no piece of information that is essential to the decision should be missing from the report. * Timeliness - Timely information that is sufficiently complete and accurate is more valuable than perfect information that comes too late to use.\n * Conciseness - Information in the report should be presented as concisely as possible. * In addition, information should be clearly presented with titles for all values. * Responsibility Accounting - Every economic event that affects the organization is the responsibility of and can be traced to an individual manager.\n * The fundamental principle is that responsibility area managers are accountable only for items (costs, revenues, and investments) that they control.\n * The flow of information in a responsibility system is both downward and upward through the information channels Figure 8 - 18.\n * Two (2) phases of responsibility accounting\n * (1) Creating a set of financial performance goals (budgets) pertinent to the manager’s responsibilities\n * (2) Reporting and measuring actual performance as compared to these goals.\n * SETTING FINANCIAL GOALS: THE BUDGET PROCESS\n * The budget process helps management achieve their financial objectives by establishing measurable goals for each organizational segment.\n * Budget information flows downward and becomes increasingly detailed as it moves to lower levels of management. Figure 8 - 19.\n * MEASURING AND REPORTING PERFORMANCE\n * Performance measurement and reporting take place at each operational segment in the firm. Its information flows upward as responsibility reports to senior levels of management.\n* RESPONSIBILITY CENTERS\n * To achieve accountability, business entities frequently organize their operations into units called responsibility centers. Common forms of responsibility centers: 1. Cost Centers\n * An organizational unit with responsibility for cost management within budgetary limits. (e.g., a production department ensures it meets production obligations while keeping labor, material, and overhead costs within the budget). * The performance report for the cost center manager reflects its controllable cost behavior by focusing on budgeted costs, actual costs, and variances from budget. Figure 8 - 21. 2. Profit Centers\n * The manager has responsibility for both cost control and revenue generation. (e.g., the local manager of a national department store chain may decide on): * The items of merchandise to stock in the store.\n * The prices to charge.\n * The kind of promotional activities for products.\n * The level of advertising\n * The size of the staff and the hiring of employees.\n * Building maintenance and limited capital improvements.\n * The performance report for the profit center manager is different from that for the cost center manager. Nevertheless, the reporting emphasis for both should be on controllable items.\n 3. Investment Centers\n * The manager of an investment center has the general authority to make decisions that profoundly affect the organization. * The division manager’s range of responsibilities includes: * Cost management.\n * Product development.\n * Marketing.\n * Distribution.\n * Capital disposition through investments of funds in projects and ventures that earth a desired rate of return. Figure 8 - 23.\n * Behavioral Considerations\n * GOAL CONGRUENCE\n * It occurs when lower-level managers pursue their own objectives in ways that positively contribute to the goals of their superiors.\n * MRS plays an important role in promoting and preserving goal congruence.\n * A badly designed MRS can cause dysfunctional actions that are in opposition to the organization’s objectives. Two pitfalls that cause managers to act dysfunctionally are: * (1) Information overload\n * (2) Inappropriate performance measures\n * INFORMATION OVERLOAD\n * It occurs when a manager receives more information than he or she can assimilate. It happens when the designers of the reporting system do not properly consider the manager’s organizational level and span of control. (Refer to Figure 8-18)\n * Information overload causes managers to disregard their information and rely on informal cues to help them make decisions. * The formal information system is replaced by heuristics (rules of thumb), tips, hunches, and guesses. * Resulting decisions run a high risk of being suboptimal and dysfunctional. * INAPPROPRIATE PERFORMANCE MEASURES * One purpose of a report is to stimulate behavior consistent with the objectives of the firm * The ROI figure will then begin to reflect the economic reality. * The use of any single-criterion performance measure can impose personal goals on managers that conflict with organizational goals and result in dysfunctional behavior.\nConsider the following example:\n1. The use of price variance to evaluate a purchasing agent can affect the quality of the item purchased.\n2. The use of quotas (e.g., units produced) to evaluate a supervisor can affect quality control, material usage efficiency, labor relations, and plant maintenance.\n3. The use of profit measures such as ROI, net income, and contribution margin can affect plan investment, employee training, inventory reserve levels, customer satisfaction, and labor relations.\nDATA ANALYSIS AND AD HOC REPORTING\nSMALL DATA ANALYTICS\nProduces information directed at solving a specific problem or answering a specific question.\n* Data Warehouse - contains copies of operational data about current transactions as well as events that have transpired over many years.\n* Data Mining - the process of selecting, exploring, and modeling data to uncover relationships and global patterns. Data Mining techniques follow two general models:\n * Verification model - uses a drill-down technique to either verify or reject a user’s hypothesis.\n * Discovery model - uses data mining to discover previously unknown but important information that is hidden within the data. Employes inductive learning to infer information from detailed data by searching for recurring patterns, trends, and generalizations.\nBIG DATA ANALYTICS\nBig data was introduced in 1941. Its current rendition is characterized and defined by three Vs:\nVolume- Extreme volume of data\nVelocity-The rapid velocity at which the data must be processed\nVariety- The wide variety of structured and unstructured data types.\nVolume is the\"V\" most associated with big data, which often involves terabytes, petabytes, and even exabytes of data. These voluminous data come from sources such as customer sales records. voice and text log files, stored images, and speech-to-text data from call center recordings.\nExamples of industry uses of big data analytics are:\n* Healthcare: Predicting expected patient readmittance to hospital, predicting expected visits to emergency rooms, and patient monitoring\n* Insurance: Predicting future claim rates to price insurance risk\n* Financial services: Fraud monitoring and fraud pattern recognition\n* Energy: Real-time analytical processing of oil well data\n* Horizontal: Market basket analysis, segmenting, customers, predicting equipment failure\n* Forecasting world events\nVelocity refers to the speed at which big data must be analyzed. The vast volumes of data and the growing needs for rapid analysis, particularly as big data analytics expands into the machine learning and artificial intelligence fields, have created unique computing infrastructure requirements. The volume and velocity requirements of big data analytics can overwhelm traditional data mining and storage infrastructures.\nVariety\nAlthough volume is the \"V\" most associated with big data, variety is the primary driver of volume. Conventional wisdom estimates that 80 percent of big data are unstructured and are derived from audio, video, time series data, real-time streaming data, external web data, external social media, and a wide variety of data supplied by the vast and growing array of IoT (Internet of things) devices. IoT refers to the network of physical objects that feature an IP address for Internet connectivity. These devices extend Internet connectivity beyond traditional laptops, desktops and tablets.\nBig Data Reporting Systems\nBig data management reporting systems draw from multiple sources of unstructured and structured transactions to uncover hidden patterns and relationships, it delivers high-quality business intelligence that provides rich insight to the nature of the business.\nFour Sources of Business Intelligence\n1. Prescriptive analytics-tells what action should be taken in response to specific questions.\n2. Predictive analytics-encompasses a variety of statistical techniques that draw upon current and past data to calculate the statistical likelihood of future scenarios occurring.\n3. Descriptive analytics-is a mathematical process that describes real-world events and the relationships between factors responsible for them. Useful in allowing management to learn from data about historic activities and events, and understand how they might influence future outcomes.\n4. Diagnostic analytics- techniques vies past performance to determine why something happened the way it did.\nBig Data Analytics Risks and Controls\nOrganizations invest considerable time and resources in data analytics because the resulting information is of strategic value to them. Information is also of value to business competitors and cyber criminals. Big data needs to be controlled to mitigate risks from misappropriation, theft, and corruption.\nData Security\n* Big data provides a big target for hackers. Companies need to ensure that data are protected from both external and internal threats.\n* Security is an extensive body of material involving a combination of technologies and procedures.\n * FIREWALLS\n * Electronic Firewall: A firewall protects the internal network and data from external hackers by filtering and blocking unauthorized access from the internet.\n * Access Control: Ensures only authorize user or data traffic can pass between the organization and external sources.\n * Internal Threats: Security risks can also come from within the organization, so additional tools and controls are needed to manage insider threats.\n * ACCESS PRIVILEGES\n * Organizations should implement formal procedures for assigning access privileges and should periodically review existing employee privileges.\n * PASSWORD CONTROL\n * Reusable Password System: Most organization use reusable passwords, but if guessed or observed, they can exploited by criminals to access the system.\n * Password Control Best Practices: Effective password control relies on common sense and enforcing procedures, including periodic password changes to reduce risk.\n * One-Time password System: Some organizations implement a system where a new, randomly generated password is created every 60 seconds and used only once-an effective access control method.\n * System Audit Trails\n * System Activity Logs: Logs record activity at the system, application, and users levels.\n * Audit log Monitoring: Audit Logs can track user IDs, session times, executed programs, and accessed resources for high-level monitoring.\n * Detailed Forensics: Audit Logs can capture keystroke-level data and serve as forensic tools or real-time controls to detect or prevent unauthorized intrusions.\n * Outsourcing Controls\n * Big data outsourcing involve risk, as client organization entrust their data to third-party providers who may also pass it on to additional sub-service providers for analysis.

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Annotated Hard Tick Species of New Jersey – Comprehensive Study Notes