Getting the evasive PEARL

By Rizwan Suleman
Illustration: Susanna Denti

Engineering is usually required to create cultured pearls; similarly intervention is needed to achieve a PEARL system

Have you wondered how a costly accounting information system (AIS) can become a productive and indispensable tool? How can AIS support operations and be an integral part of the business to the extent that senior management encourages the pervasive use of it throughout the organization? The answer lies in turning the traditional AIS into a process enabling accounting and reporting linked (PEARL) system. Large enterprises have undertaken this transformation using enterprise resource planning (ERP) systems. For small and medium-sized enterprises (SME) this may be an opportune time to pursue a PEARL system because of the availability and affordability of configurable ERPs. Most, if not all, SMEs have AIS that meet their internal and external stakeholders’ needs; however, not all SMEs have put their AIS under the microscope with the intent of moving it along a continuum from the traditional AIS to a PEARL system. The evasive PEARL system represents an ideal achievement. This move along the continuum is a difficult journey and not always successful; however, by paying attention to the top five critical success factors outlined in this article, there is a greater probability of success.

Traditional AIS shortcomings
Traditional AIS is set up to capture legally binding commitments and completed transactions with a typical workflow in the procure-to-pay cycle illustrated in "Traditional accounting information system" on page 37. Such systems do not capture information on processes and do not assist in the coordination of these processes resulting in the following shortfalls:

resources are required to create, maintain and retrieve documentation on processes;
processes that cross departments have to be coordinated and completed by administrative departments (e.g., purchasing or accounting), resulting in additional transaction processing costs; and
access to information on process performance is not readily available for management decision-making and accountability.

Ideal PEARL system
An ideal PEARL system on the other hand, in addition to capturing the necessary accounting information, will capture information on process activities from the start of the process, allow for the electronic flow and capture of subsequent activities with minimal manual effort and provide reporting on all of the captured data elements. Typical procure-to-pay cycle workflow in a PEARL system is illustrated on page 37, with the functionality details as follows:

Process-enabling functionality should:

allow for the capture of information on process activities in the system, by the area that is performing the activity, from the very first task in the process;
enforce organizational policy by both sequencing process steps (i.e., workflow) and only allowing the process to proceed after the organizational requirements are met;
increase productivity by: offloading as many administrative tasks as possible to external entities; facilitating the sharing of information between different departments within the organization and with external entities; and allowing for the electronic completion of administrative tasks such as approvals, communication and process status reporting.

In a scenario where an employee requires goods or services that have not been presourced and the business policy requires competitive bids, a process enabling purchasing system will require authorized employees to create online requests for goods or services. Before any action is taken on an online request, a predefined workflow in the system will enforce the business’ procurement authorization policy and obtain the necessary online approval. Approved request is electronically forwarded to the purchasing area for adding purchasing information and posting a request for quote or request for proposal on the business’ extranet site (approval requirements for posting, if any, are enforced by the system). Purchasing may specify potential vendors that should receive alerts (faxes or e-mails) about the posting. Interested vendors are required to submit their quotes or proposals online with the system enforcing both submission requirements and deadlines. Online evaluation matrices are filled out by purchasing and, if required, by other internal stakeholders with the system combining and summarizing the evaluations. After the selection of a successful vendor, if required, a draft contract is created on the system using the bid terms and conditions. Contract negotiation, review and approval processes are facilitated by an integrated contracts module. Purchasing would create a purchase order from the approved contract or bid submissions. Purchase order is electronically routed for internal approval(s) and electronically transmitted to the vendor. The capture of information on requisitioning, sourcing, contracting, and purchase order issuance activities in the system automates and supports purchasing department’s processes while enforcing organizational policies, provides online status/progress information, creates an audit trail, and provides reporting for decision-making as described below in the reporting functionality section.

Accounting functionality will capture legally binding commitments, completed economic transactions, and support internal controls by both enforcing segregation of duties and providing an online audit trail. In procurement systems there is a complete online audit trail of the requisition and its approval, sourcing activities undertaken to obtain best value, and the purchasing commitment with its approvals. Completed economic transaction is recorded in the system upon the online receipt of goods or services. A PEARL system will automatically accrue a liability based on purchase order unit price and the receiving that is done in the system. Vendors’ invoices are imported electronically and approved by the system for payment based on the match to purchase orders and receiving.

Alternatively, vendors are requested not to send invoices, as payment will be processed in accordance with the payment terms on the purchase order after receiving is done in the system on the premise that invoice processing costs exceed the additional benefits from invoice matching. Vendors are paid through electronic fund transfer (EFT) and advised of their payments electronically (fax, e-mail, or portal). Internal controls are evident through online authorizations and segregation of the requisition, purchasing, receiving, and payment duties.

Reporting functionality A PEARL system will have the following types of reporting functionality on the process information in the system along with the associated system information such as user, date and time of activity:

key indicator reporting may include items such as average time it takes to convert an approved requisition to an approved purchase order categorized by the sourcing type (noncompetitive, quotes and proposal) or percentage of competitively sourced versus noncompetitively sourced purchases over specified reporting periods;
standard reporting may provide information reports such as outstanding approved requisitions by departments or provide exception reports such as approved requisitions out-standing for more than an acceptable period of time by requisition approver and/or creator; and• ad hoc reporting may include not only activities with successful vendors, but also unsuccessful bidders such as bidders that have less than 50% success rate over specified reporting periods.

Linked functionality refers to the interfaces be-tween the different accounting modules, with internal operational systems, and with external entities. See diagram on page 38 for typical linkages in AIS and PEARL systems for the procure-to-pay cycle. In addition to the standard AIS linkages between the purchasing, payables, inventory and general ledger modules, a PEARL system will have linkages with:

payroll module to provide the current organization hierarchy and employee information for process workflow and approval. In addition, the payroll module linkage allows for procurements from employees and for processing employee travel expenses in accounts payable with minimal effort to set up employees as also having a vendor relationship with the business;
sales module linkage to provide purchase requirements based on sales orders and to provide current or projected cost information for sales quotes or sales order pricing. In addition, for the strategic partnership model of doing business, it is essential that each external legal entity is set up once and given the relationship of customer and/or vendor to provide comprehensive reporting of sales and purchases with each entity; and
contracts module to facilitate contracting processes and to provide information on contract terms including rebates or volume discount entitlements, if any.

Linkages with internal operational systems such as a customer relationship management (CRM) system can automatically flag inventory items with unacceptable return rates or customer issues. Alternatively, linkages can allow purchasing to view customer issues and the amount of after-sale support required for vendor products to assist in sourcing and/or negotiations, and production scheduling system to automatically initiate purchase requisitions or purchase orders to pre-approved vendors for the required goods and services.

Linkages with external entities will allow for two-way electronic transfer of information such as purchase requirements, quotes/proposals, purchase orders, shipment information and invoices. Also, in a PEARL system, vendors are provided secured online self-serve access to their information (address, bids, orders, shipments and invoices) to minimize inquiries from vendors and the need for administrative support to vendors.

Success factors in achieving PEARL
The majority of information systems projects do not achieve their original objectives; however, the risk of failure can be mitigated by identifying and focusing on the success factors. In a project to transform the existing AIS or to implement a PEARL system, the top five of the critical success factors are:

clear vision of the PEARL system and its objectives with senior management buy-in and funding (including a 10% to 20% contingency budget);
before undertaking a PEARL system implementation or transformation, review current procedures and processes with the intent of standardizing and documenting them. This will ensure readiness for a PEARL system, which requires adherence to well-defined processes. Also, documenting current processes will help define systems requirements;
detailed documentation of technical requirements and functional requirements with scenarios. Documentation should have sufficient depth and detail to evaluate and rank sales presentations that generally promise the world;
strong project management with clearly defined project roles and responsibilities, including a project sponsor (usually from senior management) who has a direct stake in the success of the PEARL system, steering committee that represents major stakeholders, project manager with extensive change management experience, and adequate internal staff on the project team who are free to concentrate on the project;
conscious management of change including timely decisions by steering committee, frequent general and targeted communications to internal and external stakeholders, use of champions to get buy-in from resistant employees, and documented processes that are well communicated and used in training employees.

Conclusion
In nature, naturally created pearls are rare; human intervention or engineering is required to create cultured pearls. Similarly, in systems, senior management needs to engineer or intervene to achieve a PEARL system. AIS can turn into a PEARL system with vision, design and support. Implementation or transformation of systems is a difficult and risky journey with obstacles such as technology/software limitations, unique business processes that cannot be easily adapted to a PEARL system, gaps between organizational capability and technological feasibility and resistance to change. However, with diligent undertaking of the top five critical success factors, the chances of success increase. With the current economic downturn, where all expenditures need to be justified and competitive advantage is essential for survival, businesses can't afford not to seek the evasive PEARL system.

Rizwan Suleman, CMA, CA•IT, is an instructor at NAIT Institute of Technology, in Edmonton. He can be reached at rizwans@nait.ca

Technical editor: Yves Godbout, CA•IT, CA•CISA, Director of IT Services, Office of the Auditor General of Canada. He can be reached at godbout@computrad.com