6 Components of an Accounting Information System (AIS)

An accounting information system (AIS) is a system that a business uses to collect, store, manage, process, retrieve, and report its financial data. This data can then be used by accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors, regulators, and tax agencies.

Specially trained accountants work in-depth with an AIS to ensure the highest level of accuracy in a company's financial transactions and record-keeping. They make financial information easily available to those who legitimately need access to it while keeping that data intact and secure.

Understanding Accounting Information Systems (AIS)

An accounting information system tracks all accounting and business activity for a company. It generally consist of six primary components: people, procedures and instructions, data, software, information technology infrastructure, and internal controls. Below is a breakdown of each component.

1. People

The people involved with an AIS are the system users. An AIS helps the different departments within a company work together. Professionals who may need to use an organization's AIS include:

• Accountants
• Consultants
• Business analysts
• Managers
• Chief financial officers
• Auditors

Management can establish sales goals for which staff can then order the appropriate amount of inventory. The inventory order notifies the accounting department of a new payable.

For sales, the ways an AIS is used could include the following:

1. Salespeople enter the customer orders into the AIS.
2. Accounting bills or sends an invoice to the customer.
3. The warehouse assembles the order.
4. The shipping department sends the order out to the customer.
5. The accounting department gets notified of a new accounts receivable, which typically is paid within 30, 60, or 90 days. 
6. The customer service department tracks the order and customer shipments.
7. Management creates sales reports and performs cost analysis, which can include inventory, shipping, and manufacturing costs.

With a well-designed AIS, everyone within an organization can access the same system and retrieve the same information. An AIS also simplifies the process of reporting information to people outside of the organization, when necessary.

For example, consultants might use the information in an AIS to analyze the effectiveness of the company's pricing structure. They'd retrieve and look at cost data, sales data, and revenue. Also, auditors can use the data to assess a company's internal controls, financial condition, and compliance with regulations such as the Sarbanes-Oxley Act (SOX).

The AIS should be designed to meet the needs of the people who will use it. The system should also be easy to use and should improve, not hinder, efficiency.

2. Procedures and Instructions

The procedures and instructions for an AIS relate to the methods it uses to collect, store, retrieve, process, and report data. These methods are both manual and automated. The data can come from internal sources (e.g., employees) and external sources (e.g., customers' online orders).

Procedures and instructions will be coded into the AIS software. However, the procedures and instructions should also be "coded" into employees through documentation and training. The procedures and instructions must be followed consistently in order for the AIS to be effective.

3. Data

An AIS must have a database structure to store information. Structured query language (SQL) is a computer language commonly used for databases. SQL allows the data that's in the AIS to be manipulated and retrieved for reporting purposes.

The AIS also needs various input screens for the different types of system users and data entry, as well as different output formats to meet the needs of different users and various types of information.

The data contained in an AIS is all of the financial information pertinent to the organization's business practices. In addition, any business data that impacts the company's finances should go into an AIS.

Types of Data

The type of data included in an AIS depends on the nature of the business, but it may consist of the following:

• Sales orders
• Customer billing statements
• Sales analysis reports
• Purchase requisitions
• Vendor invoices
• Check registers
• General ledger
• Inventory data
• Payroll information
• Timekeeping
• Tax information

Examples of data that would not go into an AIS include memos, correspondence, presentations, and manuals. These documents might have a tangential relationship to the company's finances, but, excluding the standard footnotes, they are not really part of the company's financial record-keeping.

Use of Data

The data can be used to prepare accounting statements and financial reports, including accounts receivable aging, depreciation or amortization schedules, a trial balance, and a profit and loss statement.

Having all of this data in one place—in the AIS—facilitates a business' record-keeping, reporting, analysis, and auditing. It informs better decision making. For the data to be useful, it must be complete, accurate, and relevant.

4. Software

The software for an AIS relates to the computer programs used to store, retrieve, process, and analyze the company's financial data. Before there were computers, an AIS was a manual, paper-based system. Today, most companies use computer software as the basis of their AIS.

Here are just some of the software packages that a business might choose to use for an AIS:

Small to Mid-Sized Businesses

• Intuit's Quickbooks
• Sage's Sage 50 Accounting
• SAP's Business One

Mid-Sized to Large Businesses

• Microsoft's Dynamics GP
• Sage Group's MAS 90 or MAS 200
• Oracle's PeopleSoft
• Epicor Financial Management

Quality, reliability, and security are key aspects of effective AIS software. Managers rely on the information it outputs to be of high quality in order to make sound decisions.

Customization

AIS software programs can be customized to meet the unique needs of different types of businesses. If an existing program does not meet a company's needs, the necessary software can be developed in-house with substantial input from end-users. Or it can be outsourced to a company that specializes in developing accounting information systems.

For publicly-traded companies, no matter what the software program and customization options, Sarbanes-Oxley regulations dictate the structure of the AIS to some extent. This is because these regulations established internal controls and auditing procedures with which public companies must comply.

5. IT Infrastructure

Information technology infrastructure is just a fancy name for the hardware used to operate the accounting information system. It can include the following:

• Computers
• Mobile devices
• Servers
• Printers
• Surge protectors
• Routers
• Storage media
• A back-up power supply

In addition to cost, factors to consider in selecting hardware include speed, storage capacity and capability, and whether a device can be expanded and upgraded.

Compatibility With Software

Perhaps most importantly, the hardware selected for an AIS must be compatible with the intended software. Ideally, strive for an optimal match—a slow, clunky system will be much less helpful than a speedy one.

One way businesses can easily meet hardware and software compatibility requirements is by purchasing a turnkey system that includes both the hardware and the software that the business needs. A turnkey system means, theoretically, that the business will get the optimal combination of hardware and software for its AIS.

A good AIS should also include a plan for maintaining, servicing, replacing, and upgrading components of the hardware system, as well as a plan for the disposal of broken and outdated hardware, so that sensitive data is completely and securely destroyed.

6. Internal Controls

The internal controls of an AIS are the security measures it maintains to protect sensitive data. These can be as simple as passwords or as complex as biometric identification. Biometric security protocols might include storing human characteristics that don't change over time, such as fingerprints, voice, and facial characteristics.

An AIS must have internal controls to limit access to authorized users and to protect against unauthorized access. Authorized users will include individuals inside and outside the company. Internal controls must also prevent unauthorized file access by individuals who are allowed to access certain select parts of the system.

An AIS contains confidential information belonging not just to the company but also to its employees and customers. This data may include:

• Social Security numbers
• Salary and personnel information
• Credit card numbers
• Customer information
• Company financial data
• Financial information of suppliers and vendors

All of the data in an AIS should be encrypted, and access to the system should be logged and surveilled. System activity should be traceable, as well.

An AIS also needs internal controls that protect it from computer viruses, hackers, and other internal and external threats to network security. It must also be protected from natural disasters and power surges that can cause data loss.

Examples

A well-designed AIS allows a business to run smoothly on a day-to-day basis while a poorly designed AIS can hinder its operation. When a business is in trouble, the data in its AIS can reveal the story of what went wrong. The noteworthy cases of WorldCom and Lehman Brothers provide two examples.

WorldCom

Telecom company WorldCom's internal auditors Eugene Morse and Cynthia Cooper used the company's AIS to uncover nearly $4 billion in fraudulent expense allocations and other accounting entries.

Their investigation led to the termination of CFO Scott Sullivan, as well as new legislation—section 404 of the Sarbanes-Oxley Act. Section 404 regulates companies' internal financial controls and procedures.

Lehman Brothers

When investigating the collapse of the venerable global financial services firm Lehman Brothers, an examination of its AIS and other data systems was essential, along with document collection and review, plus witness interviews.

The search for the causes of the company's failure "required an extensive investigation and review of Lehman's operating, trading, valuation, financial, accounting, and other data systems," according to the 2,200-page, nine-volume examiner's report.

Lehman's systems provided an example of how an AIS should not be structured. Examiner Anton R. Valukas' report states, "At the time of its bankruptcy filing, Lehman maintained a patchwork of over 2,600 software systems and applications. . . . Many of Lehman's systems were arcane, outdated or non-standard."

The examiner decided to focus their efforts on the 96 systems that appeared most relevant. This examination required training, study, and trial and error just to learn how to use those systems.

Valukas' report also noted, "Lehman's systems were highly interdependent, but their relationships were difficult to decipher and not well-documented. It took extraordinary effort to untangle these systems to obtain the necessary information."

The Bottom Line

The six components of an AIS all work together to help key employees collect, store, manage, process, retrieve, and report financial data. Having a well-developed and maintained accounting information system that is efficient and accurate is an indispensable component of a successful business.