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Accounting Department
Final year thesis
On
Impact of Accounting Information System on
Organizational effectiveness
By Melat Adugna
ID NO: Acc/426/10/A
ACKNOWLEDGEMENT
I would like to take this opportunity to thank Almighty God for His guidance, care and providence
which enabled me to undertake this project. My sincere thanks also go to my family for both
financial and moral support they provided. I am also indebted to my friends. They were a source
of encouragement and their thoughts contributed greatly to my success.
ABSTRACT
The study examined the effect of accounting information system on organizational effectiveness.
Specifically, the study examined the effects of accounting information on quality of financial
reports and decision making. The study also found that accounting information system leads to
good financial reports and also leading to better decision making. The study noted that AIS is an
important mechanism for efficient management, making decisions and monitoring activities of the
organization.
The study found that good accounting information enhance administrative effectiveness. After
reviewing a huge deal of research papers, this research outlines the success of any organization
largely depends on the ability and efficiency of the administrative leadership to make rational
decisions. At present, the process of taking or rationalizing decisions is no longer an easy process
that can be carried out without accurate and timely information. The issue of rationalizing
decisions has become of great importance, especially those relating to human resources. This can
only be easy by effectively using accounting information system at all levels in the organizations.
Table of Contents
Contents page
ACKNOWLEDGEMENT .............................................................................................................. 2
ABSTRACT.................................................................................................................................... 3
1. INTRODUCTION .................................................................................................................. 6
3. METHODOLOGY ............................................................................................................... 21
3.1. Research design .............................................................................................................. 21
REFERENCES ............................................................................................................................. 31
CHAPTER ONE
1. INTRODUCTION
1.1. Background
Accounting Information System (AIS) is a system that collects and processes data measured in
terms of money. AIS processes accounting transactions and supplies information for the interested
users to be used to take effective decision-making process, to help management for performing
business activities properly and finally to measure the performance of a given company. It is vital
to all organizations (either profit or nonprofit-oriented)[1]. It results in financial reports and
statements that enhance its effective role in managerial policymaking and figuring out future plans.
AIS can be defined as the integration of accounting with technology, information and managerial
approach. AIS is considered as an important organizational mechanism that is critical for
effectiveness of decision management and control in organizations.
In managing an organization and implementing an internal control system the impact of accounting
information system (AIS) is crucial. Benefits of accounting information system can be evaluated
by its impacts on improvement of decision-making process, quality of accounting information,
performance evaluation, internal controls and facilitating company’s transactions. The appropriate
design of AIS supports business strategies in ways that increasing the organizational performance.
Organizational effectiveness, the degree to which an organization realized its goals, is the concept
of how effective an organization is in achieving its goals. Every employee in a company
contributes to organizational effectiveness[2].
There are many ways to measure the effectiveness of an organization, which include different
criteria such as productivity, profits, growth, turnover, stability and cohesion. Rational
perspectives focus on the achievement of previously set goals and on output variables such as
quality, productivity and efficiency. Natural system perspectives focus on the support goals of the
organization such as employee satisfaction, morale and interpersonal skills. Open system
perspectives focus on the exchanges with the environment; this includes information processing,
profitability, flexibility and adaptability[3]. AIS provides tools to financial department to enhance
organizational effectiveness since there exists a strong relationship between AIS and
organizational effectiveness. It is concerned with measurement or quantification of business events
in monetary forms (by recording in accounts) and accounting data processing in addition to
preparation of financial statements. It can be seen as the most important source of financial data
for internal and external users[4]. Human resources represent the spine of the organization, without
which the organization will not be able to progress or move. Human resources are a complex part
of work and provide support across the entire life cycle of employees from "attracting" to "going
out". If human resources represent the spine of the organization, the accounting system is the
lifeblood of the organization. It is impossible to imagine working without such a system.
Therefore, all enterprises and industries whether profit or nonprofit need such a system.
Accounting system aims at providing financial and accounting information on the economic unit
for decision makers, whether internal or external parties. The information provided by the
accounting system is characterized by certain characteristics that are governed by recognized
accounting principles and rules. The importance of accounting information lies in the great need
for it because it helps the economic unit to take the right decisions that achieve the desired goals.
It also enables managers and decision-makers to perform their duties and responsibilities properly
and accurately. Accounting information system is a system which provides the vital information
for planning, organizing, directing, leading and control on the activities of the organization. It helps
the administrators to take strategic decisions in the organization. It is an integrated set of physical
and human elements that work together in order to facilitate the completion of the operational
functions. It is the process of collecting, analyzing and converting data into action. Every
organization either small, medium or large organization, profit-making or a social service setup, a
public or a private sector undertaking, a manufacturing or a service organization, a local or a global
corporation has an accounting information system. The effectiveness of an organization depends
upon how well the accounting information system performs its functions.
1.2. Objectives
1.2.1. Main objectives
The main aim of this study is to investigate the impact of AIS on the organizational performance
(improving quality, cost reduction, and improved decision making).
Despite the importance of the subject of accounting information systems and its impact in
organizational effectiveness, there was a lack of researches and studies in Ethiopia dealing with
this subject. Generally, information system is developed using information technology to aid an
individual in performing their job. Therefore, most organizations focus on developing information
system in order to support decision system, communication, knowledge management, as well as
many others. The key part of information system needed for decision making in organization is
accounting information system.
1.4. Significance of the study
The study is of key importance to firms in all sectors in terms of determining the benefits accruing
due to the integration of accounting information systems in their operations. This enabled the firms
in gauging the process in terms of enhancing organizational effectiveness. The study is useful to
other researchers interested in the problem under investigation as the study has laid a platform on
which further studies related to the subject can be undertaken.
The study would provide a theoretical basis about accounting information system successful
adoption dimension to firms. It would provide practical guidance for accounting information
systems implementation in small and medium business and it would also provide empirical and
practical contributions for organization in effectively applying accounting information system in
their operations. Accounting information systems provide information about the financial
resources, obligations, and activities of an enterprise that is intended for use primarily by external
decision makers, investors and creditors. This study provides useful information in making
investment and credit decisions
CHAPTER TWO
2. LITERATURE REVIEW
2.1. Accounting Information System
Accounting information system is a computer-based system that increases the control of
information and enhances the corporation in an organization. Accounting Information Systems
(AIS) are a tool which, when incorporated into the field of Information and Technology systems,
are designed to help in the management and control of topics related to organization’ economic-
financial area. Its main function is to assign quantitative value of the past, present, and future
economics events by producing the financial statement namely, income statement, the balance
sheet, and cash flow statement through its computerized accounting system. In managing an
organization and implementing an internal control system, the role of accounting information
system is very decisive. The qualitative characteristic of any Accounting Information System can
be maintained if there is a sound internal control system[5].
In any AIS environment, the qualities of internal controls adaptation affect operations and
management and in turn influence internal control system. AIS can be used by a variety of users
to process the data and transform them into accounting information during input, processing and
output stages. Therefore, if companies are able to adjust their computerized techniques of internal
control mechanism according to AIS, they will be able to ensure the reliability of financial
information processing and boost the control measures of effectiveness of the financial information
reliability. When the controls are used properly there will be better operating effectiveness and
efficiency which will result in better financial information reliability. That is why managers at
various levels need AIS to make decisions in internal controls[6].
AIS is not just a simple tool but it is the whole of the related components that are put together to
collect information, raw data or ordinary data and transform them into financial data for the
purpose of reporting them to decision makers The main reason for which accounting information
is generated is to facilitate decision making. However, for financial reporting to be effective,
among other requirements, it is relevant, complete and reliable[6]–[9]. Accounting information
systems is the information sub system within an organization. It accumulates information from the
entity’s various subsystems and communicates it to the organization’s information processing
subsystem. The accounting information system has traditionally focused on collecting, processing,
analyzing and communicating financial information to external parties such as investors, creditors,
bankers and tax agencies and internal parties such as management and owner. Today, the
accounting information system is concerned with financial as well as non-financial information.
To be effective and efficient, accounting information system has to possess the following
characteristics[11]
• Accurate
• Timely
• Provide administration by necessary information to achieve control and evaluation of the
economic activities
• Provide administration by necessary information that helps them in planning
• Provide administration by feedback
• Flexible to suit the environmental changes
Accounting information should give a decision maker the capacity to predict future actions. It
should also increase the knowledge of the users to identify similarities and differences in two type
of information. Therefore, reliable accounting information can be described as an essential pre-
requisite for stock market growth. Based on the “engine of economic growth” potential of the stock
market, developed nations do not toy with their Stock Markets and relevance of financial
reporting[12].
Process: represents the technical side of the system and is a collection of calculations, logical
comparison, classification and sorting performed on entered data with the view to converting it
into information provided to the final beneficiary. The processing activities include various doings
where the data is managed through the following functions[8]
• Storage: system memory is the place where data information is stored for use in achieving
the goals for which they were created, the data are saved and stored in files or on a format
Database.
• Update: it is to modify the data that is stored and updated to reflect the evolution of events
and processes and the impact of decisions made after data is entered into the system and
stored.
• Call back: it means extracting and reordering stored data for further operation or
submission to interested users in the form of financial reports.
• Control: it includes all the processes that are taken to maintain the system entity and its
continuity to achieve its objectives include all procedures necessary to protect data and
prevent its loss and manipulation and control of all phases and functions of the system.
Outputs: represents system works results that assess and the information is communicated to the
beneficiaries according to different formats such as according to different formats such as reports,
tables, lists and diagrams[3]
Control: request accurate information and the ability to have a control over the input processes
and output to ensure that the system produces and delivers information according to the assumed
standards. Its design, it is the set of procedures and rules designed to verify that the operation
system is done as planned when it is designed and the system contains all the control procedures
to ensure that the correctness of inputs, processes and outputs.
Feedback: the process of measuring the response of the beneficiaries of accounting information
system to make sure that the system performs its functions as it is supposed to be done. But some
information may not suit the need of the users then the users request to re-exchange of the system
to what they want. It aims to provide a guiding tool for the activities of the system. It evaluates the
results of the system’s work and corrects the objectives if there are flaws in the system’s objectives.
Flexibility: the degree of consistent with its environment and organizational structure or how it
carries out the financial operations without any complications during the work. Therefore, the
accounting information system should have the ability to adapt and change in the company
depending on its needs, operations and management
Simplicity of use: appropriate design of AIS that securely supports business strategies in ways
that increasing the company’s profitability and improve performance, the design should be
described with the easiest input of data and the easiest way to understand the outputs.
Reliability: the complete ness of the information, so the accounting information system should be
described comprehensively and the numbers exactly represent what actually happened. In other
words, any employee should arrive to the same result with the same inputs.
The system resource approach assesses effectiveness by observing the beginning of the process
and evaluating whether the organization effectively obtains resources necessary for high
performance. The system resource approach is valuable when other indicators of performance are
difficult to obtain. In many not-for-profit and social welfare organizations, for example, it is hard
to measure output goals or internal efficiency Although the system resource approach is valuable
when other measures of effectiveness are not available, it does have shortcomings. Often the ability
to acquire resources seems less important than the utilization of those resources[2].
The internal process approach looks at internal activities and assesses effectiveness by indicators
of internal health and efficiency. The internal process approach is important because the efficient
use of resources and harmonious internal functioning are ways to measure effectiveness. A
significant recent trend in management is the empowerment of human resources as a source of
competitive advantage. Most managers believe participative management approaches and positive
corporate culture are important components of effectiveness. The internal process approach does
have shortcomings. Total output and the organization’s relationship with the external environment
are not evaluated. Also, evaluations of internal health and functioning are often subjective, because
many aspects of inputs and internal processes are not quantifiable. Leaders should be aware that
efficiency alone represents a limited view of organizational effectiveness[13].
c) Goal Approach
The goal approach to organizational effectiveness is concerned with the output side and whether
the organization achieves its goals in terms of desired levels of output. The goal approach is mostly
used in business organizations because output goals can be readily measured. Business firms
typically evaluate performance in terms of profitability, growth, market share, and return on
investment. However, identifying operative goals and measuring performance of an organization
are not always easy. Two problems that must be resolved are the issues of multiple goals and
subjective indicators of goal attainment. The three approaches, system resource, internal process,
and goal approach, described here all have something to offer to organizational effectiveness, but
each one tells only one part of the story[14].
There are also many other ways to measure the effectiveness of an organization, which include
different criteria such as productivity, profits, growth, turnover, stability and cohesion. Rational
perspectives focus on the achievement of previously set goals and on output variables such as
quality, productivity and efficiency. Natural system perspectives focus on the support goals of the
organization such as employee satisfaction, morale and interpersonal skills. Open system
perspectives focus on the exchanges with the environment; this includes information processing,
profitability, flexibility and adaptability[15].
The AIS design can be defined in terms of the information characteristics that it provides. AIS can
be described according to the perceived usefulness of four information attributes, namely scope,
timeliness, level of aggregation, and integration. Scope refers to the measures being used and to
the extension of AIS in time and space. Then information could focus on future vs. historical events
or external vs. internal events. Also, the information could be quantified in monetary or non-
monetary terms. Timeliness refers to the frequency, speed of reporting and the orientation of the
information (e.g. short or long run). Aggregation refers to the way data is aggregated in time
periods, functions or in accordance with decision models. Finally, integration refers to the need of
providing information to reflect the interaction and coordination effects of several functions in the
organization. These four attributes have been analyzed for comparing AIS and organizational
strategies and performance[1].
Preventive controls: which deter problems before they arise. Examples include hiring qualified
personnel, segregating employee duties, and controlling physical access to assets and information.
Detective control: which discovers problems that are not prevented. Example, duplicate checking
of calculations and preparing bank reconciliation s and monthly trial balances.
Corrective control: which identifies and correct problems as well as correct and recover from the
resulting errors. Examples include maintaining backup’s copies of files, correcting data entry
errors and resubmitting transactions for subsequent processing.
General control: controls designed to make sure an organization’s information system is stable
and well managed. Example, includes security infrastructure, software acquisition, development
and maintenance control.
Application controls: Controls that prevent, detect, and correct transaction error and fraud in
application programs. They are concern with accuracy and authorization of data captured, entered,
processed, stored, transmitted to other system and reported.
Accounting Information System (AIS) as one of the most critical systems in the organization has
also changed its way of capturing, processing, storing and distributing information[9]. The main
function of Accounting Information System is to assign quantitative value of the past, present and
future business events. AIS with the help of computerized accounting system, shows the financial
statements namely profit statements, cash flow statement and Balance sheet. The system will
process the data and transform them into accounting information. During input stages, processing
and output stages it will be used by a wide variety of users such as internal and external users. An
effective Accounting Information System performs several key functions such as data collection,
maintenance, data Accounting Information Systems, and data control and information
generation[10].
CHAPTER THREE
3. METHODOLOGY
3.1. Research design
A research design is a blue print for conducting a study with maximum control over factors that
may interfere with the validity of the findings. It can also be defined as a plan that describes how,
when and where data are to be collected and analyzed. It is the researchers overall for answering
the research question or testing the research hypothesis. This research design facilitates a better
understanding of the impact of accounting information systems towards organizational
performance. Both qualitative and quantitative methods can be applied in data collection and
analysis for evaluating the impact of accounting information system on organizational
effectiveness. In the preparation, the researchers adopted a descriptive and analytical approach in
the collection and analysis of the study data, testing the hypothesis, the formulation of an
intellectual framework, and previous studies on the subject of accounting systems should be
carried out. A research design encompasses the methodology and procedures employed to conduct
scientific research. The design of a study defines the study type. On the whole, the research design
should facilitate a better understanding of the impact of accounting information systems towards
organizational effectiveness[9].
The validity of the data collection instruments was done with the help of an Expert to edit the
questionnaire and the interview guide. The researcher forwarded the structured questionnaire and
the interview guide to supervisor who is an expert in the area covered by the research for editing
and reviewing. Internal consistency of the questionnaire should be calculated through the
correlation coefficients between each item of the questionnaire and the total score of the same
item[18].
Factor Analysis: Factor analysis is a type of data reduction technique used to reduce the variables
to smaller number factors. Before performing the factor analysis, the assumptions of normality,
homoscedasticity, and linearity should be checked. In line with that, a measure of sampling
adequacy, which indicates the inter-correlation among the variables and the validity of the
variables to enter factor analysis[3].
After running factor analysis, it is necessary to rerun reliability test again to check for the reliability
of the survey instrument. The perfect measure of a concept needs more than one item. To assess
the reliability of the survey instrument, the inter-item analysis can be used to test the scale's internal
consistency. Hence, Cronbach's alpha is considered an adequate indicator of the internal
consistency and the reliability of the survey instrument. The test shows that the Cronbach's alphas
range from 0.808 to 0.759, which exceed the minimum value of 0.7 to be acceptable. This means
that the instruments used to measure the variable were acceptable and the data were later used for
further analysis[15].
𝑌 = 𝑓(𝑥1 )
Accounting information system is measured by data accuracy, providing timely data and
information which is necessary to achieve evaluation and control, suiting environmental changes,
improving decision making whereas organizational Performance is measured by improvement in
distribution (service), market share, asset management and decision making[13].
𝑌 = 𝑎 + 𝛽1 𝑥1 + 𝜀𝑡
α = a constant
The statistical significance of the relationships between the dependent and the independent
variables was measured at a confidence interval of 95%. Analysis of variance between the
independent variables and dependent variables was measured at a significant level of 0.05. If the
P value of the model is less than the level of significance (0.05) then the independent variables
would be taken as having an impact of the dependent variable. If the efficiency of accounting
information systems increases, then organizational performance would increase. The study would
conclude that accounting information systems have a significant impact on organizational
performance. If the p – value is greater than 0.05 then the model is insignificant and therefore the
study cannot conclude that the independent variables have got a significant impact on the
dependent variable[22].
CHAPTER FOUR
On the basis of the findings of different research papers, it could be concluded that accounting
information systems has a significant effect on organizational effectiveness among the companies
selected. The studies found that good accounting information enhance administrative
effectiveness. In an increasingly information-focused world, commercial, social and even personal
decisions require more reliable, timely and relevant information
4.2. Hypotheses Testing
After the assumptions of multiple regression were met, this study proceeds to test the relationship
between Accounting information system as dependent variable and human resources competency,
software and hardware efficiency, and databases efficiency as independent variables. Results of
all the reviewed papers shows that companies with well qualified human resources will have more
efficient accounting information system. Additionally, companies with efficient software and
hardware will have efficient accounting information system. Similarly, companies with efficient
databases will have efficient accounting information systems. Accounting information systems
that combined from qualified human resources, software and hardware and data bases will be
efficient information system.
There is also a correlation between the environmental, legal, technological and cultural factors and
AIS efficiency. The studies indicated that there is a significant role for accounting information
system (AIS) in rationalizing HR related decisions. This system assists in the formulation of HR
policies and the rationalization of decisions on training, development, and employee performance
evaluation. Furthermore, it provides information on the HR cycle that helps in the planning of
recruiting new staff. The study also found that there are no obstacles to the use of AIS in
rationalizing HR decisions.
The study revealed that accounting information performs a crucial role on management decisions
and organization performance which has been shown to be major force in decision making. This
is achieved by implementing the best fundamental concept of accounting suitable for each
company. The analysis of the study proves that there is significant relationship between accounting
information and decisions making. In addition of the research findings indicated that
implementation of accounting information systems could lead to better decision-making by
managers, more effective internal control systems, improvement of the quality of financial reports
and facilitating financial transaction processes. But there are many challenges to produce quality
accounting information when the external as well as internal uses are desired.
The results of this study indicate that the higher knowledge management applied in the company
will cause the higher performance of the company through the integration information system
performed and user’s satisfaction is perceived.
The result shows that knowledge management have significant and positive impact on the
integration information system and user’s satisfaction. Furthermore, management control systems
have positive relationship with integration information system and user’s satisfaction. Finally,
Integration information system and user’s satisfaction are significant and have positive impact on
organizational performance. Companies that use information integration systems are believed to
have a high level of understanding of how knowledge management helps companies to improve
performance. Furthermore, companies that use information system integration is believed to have
a high level of understanding of how to control the accounting system to help companies improve
performance. Moreover, accounting information system integration is a variable that directly affect
the performance of the company, so the influence to the accounting information system integration
with the company’s performance proved the need for mediating variables so that the integration
information systems affect the performance of the company. Finally, the companies success in
implementing an integrated information system that can help improve companies’ performance.
CHAPTER FIVE
This study showed that there is strong relationship between accounting information system and
organizational performance, which means access to accounting information, will lead to better
organizational performance. Therefore, it can be concluded that accounting information system
has an impact on organizational performance. The study concludes that more concern should be
directed towards AIS as an enhancement tool for better organizational performance. In a highly
competitive and attractive organizational setting, this seems critical to achieve a competitive
advantage. However, considering the changing technological environment, AIS should be seen as
a moving target where continuous improvement is important to adapt to the changing nature of
such systems. Management willingness and awareness seem important and their continuous
support is needed to push up the investment figures in AIS.
5.2. Recommendations
Based upon the results, this study recommends companies to use Accounting Information System
for better inventory management, financial statement, customer welfare and for increasing
organizational performance. The government should create enabling environment which will
allow workers to acquire training in computer usage. In light of the results, the study recommends
activating training and development programs of the accounting information system. Furthermore,
senior management should support and participate in the implementation of AIS.
Throughout working on this study, some suggestions concerning the expansion of the present study
have arisen. First, I would suggest similar studies to be done in more companies in order to
compare the findings with the findings of this study. A survey would shed more light than just a
case of selected company. Finally, a similar study could also be carried out focusing on factors
influencing implementation of accounting information systems or even challenges faced during
implementation of accounting information systems in the organization.
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