SOLUTION MANUAL for Core Concepts of Accounting Information Systems 13e Mark Simkin Carolyn Norman Jacob Rose
Chapter 1 ACCOUNTING INFORMATION SYSTEMS AND THE ACCOUNTANT Discussion Questions 1-1. The answer to this question will vary with each university’s location. However, it is likely most students will reveal that their parents are employed in non-manufacturing jobs. Instructors may wish to emphasize that the large numbers of service sector employees and knowledge workers reflect a trend. 1-2. This question is designed to encourage students to think about some of the information reporting limitations imposed by the traditional accounting general ledger architecture. Other activities that do not require journal entries include (1) obtaining a line of credit, (2) issuing purchase requisitions or purchase orders, (3) signing contracts, (4) hiring a new executive, and (5) sending financial information to investors or bank loan personnel. But instructors may wish to point out that important information about a company’s business transactions may be included in an annual report outside the financial statements. The management letters and footnotes in annual reports may reveal more about a company’s future prospects than the financial statements themselves. Managers have access to much more information than what is published in financial reports. Whether or not they would like to have access to more non-financial information, or if they would prefer that the accounting information system capture data about business events rather than accounting transactions, is debatable. It may also be a function of the accounting system in a particular company. Investors may wish to have more information available to them but the downside is that too much information can be just as problematic as too little information. 1-3. The financial accounting systems we have known for more than 500 years are changing dramatically as a result of advances in information technology and financial accounting software. For example, databases allow accountants to collect and store all the data about a transaction or other file entity in one system, allowing those needing such information to retrieve it quickly, efficiently, and specifically in any format they wish. Financial data can be more easily linked to nonfinancial data as a result of database technology as well. Thus, it is likely that financial reporting will undergo tremendous change in the next few years as we learn to use technology more effectively in the design of financial AISs. ERP systems are another example of the information age's impact on financial accounting. Now, organizations capture more data and produce more information than ever before. This allows companies to integrate more of their financial and non-financial system, better forecast everything from raw materials requirements to finished product production, and to perform more sophisticated analyses of important business functions. For instance, sales can be examined at many different levels and organized according to criteria such as geography, customer, product, or salesperson at the touch of the keyboard.
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One of the most important changes in AISs is the way these systems will gather financial information in the future. Although many of these systems will continue to capture data in traditional batch mode or at POS sites, we expect newer systems to collect more of it on mobile devices—for example, cell phones, PDAs, and digital cameras. Because more employees and working at home these days, “digital commuting” may be another trend. 1-4. The objective of a company’s financial statements is to communicate relevant financial information to such external parties as stockholders, investors, and government agencies. Issuing financial statements in XBRL formats contributes to this objective by making such financial data more searchable, comparable, informative, and therefore useful. Also, because XBRL enables companies to use standard tags to identify specific accounting values, the language itself therefore imposes a greater degree of standardization in the informational content of the reports. Finally, XBRL also helps government agencies gather financial data that are more consistent, easier to understand, self-checking, and more quickly communicated. Chapter 14 contains more about XBRL, including the idea that the language also enables its users to verify accounting relationships as assets = liabilities + net worth. 1-5. The questions asked here about suspicious activity reporting (SAR) require opinions from students. Regarding the first question, which asks if SAR activity should be a legal matter, there is little room for disagreement because so much of SAR is mandated by such federal legislation as Annunzio-Wylie Anti-Money Laundering Act of 1992, the Bank Secrecy Act of 1996, and the Patriot Act of 2001. Although statistics on the number of SAR filings, less is known about how much of what appears to be suspicious are, in fact, violations of federal statutes. 1-6. The example given in the question demonstrates one way in which computerization has refined cost estimation and thus has impacted managerial accounting. However, IT has impacted almost every area of managerial accounting (and decision making). Consider, for example, the emergence of such concepts as just-in-time systems, computer integrated manufacturing systems, manufacturing resource planning systems, target costing, and activity based costing – all of these require IT to support managerial decision making. Forecasting and budgeting are other areas of managerial accounting affected by advances in technology, as are the many applications of spreadsheet software, decision support systems, and expert systems. Universities are also impacted by the many advances in IT. You might have students type “university use of scorecards” in their favorite browser to discover the many uses this tool offers to administrators in an academic environment. The search results show a variety of uses that are reported at such universities as The Ohio State University, CSU-Stanislaus, Clemson University, Colorado State University, San Jose State University, and others. For example, the University of Denver adapted a version of the Balanced Scorecard to evaluate their Student Life Assessment Plan (SLAP) which focuses on Learning Outcomes. San Jose State University uses a Scorecard to evaluate and continuously improve their online programs. 1-7. The AICPA website lists hundreds of potential assurance services for CPAs to offer. These include productivity improvement, cost analysis, benchmarking, internal auditing quality assurance, CPA WebTrust for electronic commerce, and SysTrust. Several of the proposed SM 1.2
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assurance services are in the information technology management/security category. These include information systems security reviews, reviews of computer disks for unauthorized software, and audits of computerized controls. Classroom discussion might address the particular skills that CPAs would need for each of the proposed assurance service areas. Skepticism and integrity, for example, are two characteristics typically associated with public accountants. It is interesting to learn which of the existing or proposed assurance services recommended by the AICPA will actually be offered by a given public accounting organization. Many of the larger firms already offer at least some of these services, and the largest accounting firms today derive a large portion of their revenues from professional services other than auditing and tax consulting. But the industry shake-up in 2002 may also prompt some accounting firms to scale back services and focus on only their auditing business. The AICPA offers one-day training classes for those interested in certifying websites. Many auditors take advantage of this training but it is unclear at this point what the market for website verification services will be. So far, there have not been many adopters of WebTrust. 1-8. This question asks students to interview auditors from professional service firms and ask them whether or not the firms for which they work offer any assurance services. Hopefully, several firms do offer such services and instructors can use this as point of departure for additional discussion about such work. 1-9. Almost every traditional accounting job today requires at least some information systems skills. In addition, there are many job opportunities that require combined skills in both accounting and information systems. Consulting is one key area. Consultants with these skill sets can work at helping companies choose and install accounting software. They can also help companies with analyses of their business processes. Evaluating information systems security is another area of consulting where accounting and information systems skills are valuable. Tax planning, preparation, and consulting are yet other areas. Prior research suggests that it is easier to train an accountant in information systems than vice versa. Whether this is true or not, it is certainly clear that accounting students with information systems skills are valuable employees. Individuals who are technically skilled at computers but lack knowledge about accounting concepts are handicapped when trying to help a company to develop and enhance its information systems. Their lack of accounting skills may lead their employer to install information systems that fail to meet their needs. 1-10. Employers of both accounting and IS personnel often rank “analytical reasoning” and “writing” skills on the same priority as technical skills, and some rank them even higher. Said one recruiter at the school of one author: “I can train new employees to use our computer systems and perform the majority of the technical tasks we will require of them. What I cannot train them to do is to think analytically or logically. And what I refuse to do is to teach them to speak and write clearly and effectively—skills they should have learned in high school.” Another recruiter said it slightly differently: “Give me a technically-competent accounting or IS student who can perform AIS tasks well, and I will pay them X dollars. Give me a student who SM 1.3
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can explain to my clients how our services can solve their business problems and I will pay them 2X dollars.” There are several other attributes beyond “analytical thinking” and “writing” skills that many employers also value highly. One of them is “teamwork”—i.e., the ease and willingness of an employee to work with others instead of working alone. Another is “dedication”—i.e., the willingness and desire to get a given job done even if this means working more than 40 hours a week. A third is meticulousness—the attention to detail and the desire to get all the details correct. Finally, there is “selflessness”—the willingness to sacrifice personal goals, ego, and time in order to finish important organizational and professional projects. 1-11. This is a growing field of career opportunities for accounting majors that should not be underestimated! An article in the Wall Street Journal (January 12, 2014; D4), "Skill Sets You Might Want to Sharpen This Year", included the following: Computer, Communication, Foreign Language, Data, and Networking. The data section suggests that understanding data has become an increasingly important part of success, that everyone should understand how "big data" or data analysis applies to your career field. A July 2012 White Paper by IT@Intel (Mining Big Data in the Enterprise for Better Business Intelligence by Fania and Miller), notes that one of the biggest challenges in big data is addressing the lack of skilled experts and that by 2018 the US could face a shortage of 140K to 190K of people with deep analytical skills, and perhaps 1.5 million managers and analysts who do not have the knowledge to use big data to make effective decisions. Accounting majors who take IT, statistics, and business analytics courses should be able to take advantage of these shortages by applying their skills and abilities in this area. Predictive Analytics jobs are available literally anywhere in the US from NYC to Columbus, OH to Seattle, WA – and many international opportunities. And the firms include Walmart, Bank of America, healthcare firms, universities, insurance companies and the Big-4 public accounting firms. For more information: http://predictiveanalyticsjobs.org. Another interesting web site is: http://www.icrunchdata.com/Index.aspx. This site identifies the many different types of jobs that are available, such as client service and sales analyst, quantitative analyst, risk analyst, etc. Degrees/courses to prepare for these types of jobs are usually called an MS in Analytics or Business Analytics. (http://analytics.ncsu.edu/?page_id=4184). At this site, you can click on any university program to view the structure and content of the degree program. There are 44 universities that now offer these degree programs—the first was in 2007 and eight just started their MS program in 2014. As you can see, this is a relatively new field for accounting majors to consider. The duration of the programs is as few as 9 months, but most are 12 months or more. The curriculum is a careful mix of applied mathematics, statistics, computer science, and business disciplines. For salary information, this site is very helpful: http://analytics.ncsu.edu/?page_id=248
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Depending on the decision to be made, the employee who can analyze and make business decisions based on big data is in a position to help the firm realize a competitive advantage. A skill that is a critical shortage and sure to impress even the most discriminating supervisor.
Problems 1-12. a. AAA American Accounting Association b. ABC activity based costing c. AICPA American Institute of Certified Public Accountants d. AIS accounting information systems e. CFO chief financial officer f. CISA certified information systems auditor g. CITP certified information technology professional h. CPA certified public accountant i. CPM corporate performance measurement j. ERP enterprise resource planning k. FASB Financial Accounting Standards Board l. HIPAA Health Insurance Portability and Accountability Act m. ISACA Information Systems Audit and Control Association n. IT information technology o. KPI key performance indicator p. OSC Operation Safe Commerce q. Patriot Act Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act r. REA resources, events, and agents s. SAR suspicious activity reporting t. SEC Securities and Exchange Commission u. SOX Sarbanes-Oxley v. VAR value-added reseller w. XBRL extensible business reporting language 1-13. The number of articles in professional accounting journals that relate to information technology has grown significantly during the past several years. Almost every issue of these journals has a large number of articles on such topics as accounting software, electronic commerce, information systems security, SOX software, and new computer tools for accountants. Several now have separate “Technology” columns or sections devoted to IS topics or developments. Students completing this exercise are likely to conclude that “information technology” now influences almost every aspect of accounting. 1-14. This problem focuses on the human side of organizations—especially ways that employees might devise to “beat the system.” This problem is therefore especially useful in alerting students to the importance of designing and using systems that employees perceive as “fair,” and classroom discussions should reveal that employees can sabotage even the most cleverly-designed accounting systems. SM 1.5
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a. Organizations often use accounting measures such as return on investment (ROI) for performance evaluation. Unfortunately, managers can manipulate these measures, at least in the short run, by either artificially increasing profits (the numerator) or decreasing assets (the denominator). Some ways to accomplish this are to (1) defer expenses, (2) maximize sales, (3) postpone maintenance on assets, (4) postpone investments in assets, or (5) using historical cost-based assets, adjusted by depreciation instead of market costs (which can result in an infinite return on investment once all the organization's assets have been fully depreciated). Where net profit is used in the calculation, Shervonne's comment about including allocated overhead in deriving profit, is another argument against using return on investment. There are many different performance measures the company might use—some quantitative and some qualitative. Other accounting measures include (1) segment margins, (2) units of sales, (3) increases in the number of customers, (4) increases in new customers, (5) measures of customer satisfaction, (6) decreases in sales returns, (7) employee complaints, or (8) employee turnover. b. Accounting numbers can frequently lead to dysfunctional behavior if their limitations are not universally understood. For example, if the incentives are large enough or the penalties for underperformance are harsh enough, managers might be tempted to record “potential sales” as “actual sales” in a given time period, accelerate the depreciation of assets using alternate depreciation schedules, “forget” to subtract costs in computing returns, or sabotage the “returns” of other managers in order to improve their own performance values. Dysfunctional behavior may also surface if one number is used in isolation. For instance, return on investment discriminates against entities with larger investment bases. It also has the shortcomings mentioned above. However, ROI adjusted for overhead allocations and current asset values might be a good measure when used in conjunction with other measures. c. This part of the problem requires Internet research. However, “residual income” might be a better measure to use in this company. This measure counteracts some of the problems associated with return on investment, although it has shortcomings of its own. Profitability, as mentioned, is problematic where allocations are used. Allocations are really never quite "fair." For instance, rent in a department store might be allocated to departments based on square footage. Certainly, this would lead to complaints by the department located in back on the sixth floor if they pay more than the department just inside the front door! 1-15. The idea behind Mr. Zucker’s observation is that many companies now make less money in the digital age than they did in the analog age. This is perhaps because items like CD music, downloads, and DVD movies are now in digital formats that can easily be copied and transmitted, making copyright infringement common. a. Music company executives are having a difficult time. Music files are small and easily shared once downloaded. Protection is difficult because legitimate users often wish to SM 1.6
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copy their music from one computer to another, or from one computer to ipods, MP3 players, cell phones, and other portable devices. b. Consumers of course love it when product prices decrease. But they dislike anything that restricts their free and liberal use of digital media. After all, they paid for it and feel they should be free to copy and use it any way they wish. c. TV executives appear to both appreciate and dislike the new reality of the digital age. Digital media makes TV programming easier and cheaper, but decreases the income streams that used to come from VHS tape sales. TV executives also find that making older episodes of popular TV series available on their websites increases the visibility of their works and therefore the popularity of their websites. However, it is not clear whether the advertising revenues from such sites are able to offset the lost revenues of tape and disk sales. 1-16. This problem requires students to find out “what’s new” in the field of AIS now, and to write a report on their findings. A good starting point for this is to read the “Technology” sections of popular accounting journals, or reference the websites of some of the professional accounting associations such as the AICPA or ISACA. 1-17. Instructors might want to mention that this problem asks students to consider the accounting information needs of a subset of not-for-profit organizations, and to note that the accounting data required by them often does not differ much from for-profit organizations. a. Examples of the financial information gathered and maintained by such groups include data on dues payments, revenues from such club activities as bake sales, rummage sales and swaps, car washes, newsletter expenses, advertising expenses, office equipment expenses, professional service expenses, and disbursements for such items as gifts, student scholarships, and travel reimbursements. b. Hopefully, students will realize that they are talking about manual accounting information systems. For example, the manual system gathers the same data that would be gathered by a computerized system, stores it for future reference and further processing, and periodically outputs it in useful formats for club members and perhaps government agencies. c. Most recreational clubs have only a single “treasurer” to look after the financial matters of the organization. This is a good idea to the extent that assigning only one person for the task of treasurer limits the burden of the job to only one individual and ensures accountability and responsibility to a single person for the “money portion” of club activities. But it is also a recipe for fraud, inasmuch as there is no separation of duties and, for example, the same person who spends the money writes the checks for it, most club members do not concern themselves with the financial details of the club, and deception can be very simple. Although it is easy to dismiss the financial activities of most such organizations as immaterial because the amounts of monies involved are small, this is often not true for condo associations. SM 1.7
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d. Several advantages can accrue to computerizing club finances. Among them are (1) greater accuracy in data recording and data processing, (2) the ability to output financial information in a variety of legible and professional-looking formats, (3) added flexibility in the ways the treasurer can process and output financial information, (4) greater ease in accessing needed data or generating ad-hoc reports, and (5) the potential for more-timely reports. Where club treasurers can use an existing personal computer for club tasks and/or the services of the treasurer are free, such computerization can be cost effective. If a club has to pay for either the computer or the services of a treasurer, the costeffectiveness of computerization becomes less clear. 1-18. In this case, students are asked to look at three different sources of information to help them invest $10,000 in the common stock of a publicly-held company. In general, they will find the following: a. Financial Reports from the company’s own website: Most students will indicate that the information contained in the reports on the website is “complete,” but that it is not sufficient for making an informed investment decision. Three possible shortcomings are: (1) the information is self-promoting and therefore positive and upbeat, even if the company has been losing money year after year; (2) the information is mostly limited to the company itself, and may not discuss the industry in which it competes or possible negative factors that may affect it; (3) the information may not include substantiated predictions about the value of the company’s stock in the future. b. Information found at brokerage or investment firms: For investment purposes, the information provided by firms such as e-trade tends to be more useful than a company’s own financial statements. Among the reasons are: (1) the information tends to focus on investment decisions rather than provide general information, (2) the user can access and even customize historical charts that show stock prices, income, revenues and so forth, and (3) these websites often include links to additional news stories and analytical reports about the company, the industry in which it competes, and the firm’s future prospects, all written by independent and presumably objective reviewers. c. Information from investment services: This information typically includes dispassionate reviews of a company’s operations, its successes and failures, important management changes, the industry in which it operates, and prospects for the future. This information typically also includes an overall rating for a particular company such as “hold,” “accumulate,” or “sell.” Whether or not such ratings are “sufficient” to convince a student to buy stocks is a personal matter, but certainly the information might be considered more useful than the simple facts or historical values provided in items a and b above. d. A large number of dry facts about a company are rarely as informative as an objective analysis of it and a recommendation to “buy” or “sell” its stock. After performing this exercise, students should have a much better feel for the difference between “data” and “information.” SM 1.8
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1-19. This problem requires students to do some research on the Internet about suspicious activity reporting. Specifically, the question asks students to indicate what types of activities the various banks, casinos, and so forth, should watch for. To illustrate, dealers in gem stones should be sensitive to the possibility of money laundering—for example, when clients buy rare gemstones with cash. There are usually dollar thresholds for such activities—e.g., $50,000 in yearly transactions in the case of gemstones. Instructors might want to remind students that this is an important function of AISs—providing financial information other than annual reports to government agencies. 1-20. This story is a remarkable case of an individual trying to "whistleblow" on a fraud, over the course of many years, and no one would listen! Mr. Markopolos notified the Boston SEC in 2000 about his suspicions regarding Bernie Madoff. A full article may be accessed at this web site: http://www.americanfreepress.net/html/man_who_exposed_madoff_190.html a. What happened when Mr. Markopolos notified the SEC in 2000? In May of 2000, he submitted an 8-page report to the Boston Regional Office of the SEC, listing red flags and mathematical proof of a major fraud but got no reply. b. How many more times did Mr. Markopolos notify the SEC of his concerns? He resubmitted his evidence to the Boston and other SEC offices in 2001, 2005, 2007 and 2008, to no avail. By this time, Markopolos suspected that Madoff had been operating with protection from the inside. c. What was the result of Mr. Markopolos' efforts to notify the authorities about his suspicions regarding Madoff? Surprisingly, no one paid any attention to Markopolos. If not for the 2008 stock market crash, the crime would likely still be in progress. The federal authorities were alerted by Madoff's sons, and Madoff was arrested on December 11, 2008. On March 12, 2009, Madoff pled guilty to 11 federal crimes and admitted that he had been operating a huge Ponzi scheme—as it turned out, the largest in history.
Case Analyses 1-21.
Berry & Associates, LLP
1. It is usually easier to offer extra services to existing clients than to obtain new clients. One of the issues Berry & Associates (B&A), LLP will have to consider is the appearance of independence if the organization offers services that might impact its primary business. For instance, if B&A decides to get into the business of internal auditing where clients outsource this business, the organization will probably want to make sure that it does not perform both the internal and external audit for a client. Probably the best approach would be for the organization to poll its clients to learn what they most value and then offer only two or three new services based on the results.
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2. The firm’s expertise is currently in retailing, wholesaling, and property management. It would be a good idea to try to learn what the issues are for these industries (and look at results from the client survey suggested above), and then choose assurance services that match these issues. Retailers, in particular, may be interested in developing their business via electronic commerce. For example, website verification is an assurance service that might make sense for this set of clients. Medium-sized businesses are not likely to employ internal auditors with information systems expertise. Offering assurance services, such as Information Technology Risk Assessment, might be a good practice for B&A. Finally, the AICPA suggests some industry-specific assurance services, such as mystery shopping (for retail clients), rental property operation reviews (for property management clients), and CPA Trust (for companies engaged in electronic commerce). 3. The new hires’ expertise in information systems can be leveraged in several ways. First, the new hires can help train the older staff in computers and information systems. This is a different approach from the past and requires older staff (including partners) to become learners. However, there is no doubt that the students coming out of schools today have much to share with those who graduated even five years ago. The new hires can also work with audit teams to develop new approaches to auditing computerized AISs. For example, they may be able to suggest ways to use computer assisted audit techniques (CAATs – see Chapter 15). The new hires are likely to be able to suggest better ways of conducting audits, based on their computer expertise. For example, they may know an optimal way to download client data for auditor analysis or be more familiar with mobile computing devices that can help the company service clients. Probably the most important point here is for B&A to be willing to recognize these skills and utilize the ideas offered by the new hires. To recognize these skills, the company can hold meetings to generate ideas, and can also have an old-fashioned suggestion box for those hires who wish to contribute ideas anonymously. The company can even sponsor a yearly contest with rewards for the “best new ideas.” 1-22.
Organizational Reports to Stakeholders
1. This question asks students to do some Internet research to learn more about how the SEC involves itself in the annual financial reports that organizations make available to their stakeholders. The following website is helpful: http://www.sec.gov/about/whatwedo.shtml One of the ways that the SEC accomplishes their mission is by enforcing laws, such as: • Securities Act of 1933 • Securities Exchange Act of 1934 • Trust Indenture Act of 1939 • Investment Company Act of 1940 • Investment Advisers Act of 1940 • Sarbanes-Oxley Act of 2002 • Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
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Another way the SEC accomplishes their mission is by investigating certain actions, such as: • Misrepresentation or omission of important information about securities • Manipulating the market prices of securities • Stealing customers' funds or securities • Violating broker-dealers' responsibility to treat customers fairly • Insider trading (violating a trust relationship by trading while in possession of material, non-public information about a security) • Selling unregistered securities 2. a. An annual financial report is a one-way communication device. It emphasizes clarity and conciseness, but there is often no immediate feedback from readers about the messages they receive from it. Thus, preparers must attempt to identify the users/audience of the report, and estimate their informational needs. Only then can preparers determine the content and language of the report—i.e., the words and phrases that are most familiar and appropriate to users or readers. The preparer must also consider the length, content, and organization of the material in the annual report. For example, a report that is too long or contains too much detail can detract from the overall goal of communicating important financial information (as opposed to data) to readers. Conversely, a report that is too succinct might trigger reader suspicions that the company is hiding important information. Finally, a logical ordering and an attractive format can also help transmit ideas . At one point, some businesses (e.g., Disney Corporation) traditionally included personal messages from the company’s CEO in order to personalize the report and perhaps make it more appealing. Similarly, companies that put the basic financial information required of them in small print at the end of a yearly report might convey the message that they don’t want readers to see it. b. The different users of annual reports have differing information needs, backgrounds, and abilities. For some users, the annual report may serve as an introduction to the company and/or the only source of information about it. But other users read annual reports from cover to cover, searching for clues about the firm’s future prospects, hidden problems or strengths, and other information useful for evaluating the company’s investment potential. Because the same annual report must communicate with all its users, the problems the corporation faces include the following: •
In attempting to reach several audiences, companies try to include information for each audience. As a consequence, the annual report may grow in size and complexity to the point where it contains more information than many users want or are able to digest—a problem discussed in the chapter as information overload. In some cases, technical concepts may be reduced to simpler terms, losing precision and conciseness and thereby leading to generalizations that readers may perceive as being of little value.
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•
The report developers must exercise care in presenting the information contained in the report. Key terms or phrases that may be familiar to one user group—for example, technical terms commonly used in the company’s industry—may not be understood by general investors. Similarly, graphic displays that may be useful to some may be meaningless to others.
3. Other than the financial statements and accompanying footnotes, an annual report often contains: • A discussion and analysis of operating results • Information about organizational objectives, strategies, and long term goals • An indication of management’s outlook for the future (almost always rosy!) • A list of the Board of Directors and the officers and top management of the organization • Segment data and performance information for the firm’s major divisions • Information on new initiatives and research • Recent stock price history and stock information • In the case of retailers, perhaps a coupon entitling the holder to a discount 4. Stating well-defined corporate strategies in a company’s annual report accomplishes the following advantages: • Communicates the company’s plan for the future and resolves any disparate issues • Provides a vehicle for communicating the company’s strengths • Builds investor confidence and portrays a positive image • Reassures nervous investors that the company’s managers are working hard for owner interests • It alerts investors to potential adverse, long-term forces in the company’s industry Some of the disadvantages of including corporate strategies in an annual report are: • It commits management to fulfilling the stated objectives and strategies, a commitment that may cause inflexibility • It communicates to unintended parties who could put the company at risk (i.e., competitors) • The strategies themselves may make the company appear out-dated by the time they are in print. 5. Annual reports fulfill users’ information needs as discussed below. a. Shareholders. Annual reports meet the statutory requirement that publicly-held corporations report annually to stockholders and potential stockholders about the financial operations of the company and the stewardship of management. The annual report gives shareholders financial and operating information such as income from operations, earnings per share, the Balance Sheet, Cash Flow Statement, and related footnote disclosures, all of which potential shareholders may need in order to evaluate the risks of and potential returns from investing in the company. As noted above, however, the volume of data presented in annual reports can result in information overload that reduces the value of the reports. Confusion can also result from reducing technical SM 1.12
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concepts to common concepts or by the presentation of duplicate messages by different forms of media. b. Creditors. The annual report of public companies provides financial information that allows creditors to project a company’s financial solvency and therefore its ability to repay its loans. This can be a good thing if the company is doing well. c. Employees. The annual report gives employees such information as a description and status of the company’s pension plan and the employee stock incentive plan. This gives employees a base from which to compare their benefits program to those of other companies. Annual reports also provide employees with a year-end review of the results to which they have contributed during the year. In this sense, the annual report provides reinforcement and rewards. The annual report also informs or reminds employees of the organization’s values and objectives, and sensitizes them to the aspects of the organization with which they are not familiar. On the other hand, many employees may already know how their organization is performing so the annual report may not provide any substantive additional information to them. d. Customers. The annual report provides trend information and perhaps information on management performance. Customers can use this information to assess the popularity of selected products, the likelihood that the firm can provide the goods or services they need, or even the company’s longevity. e. Financial analysts. The set of audited comparative financial statements provides the basis for the research done by financial analysts. Notes, which are an integral part of the annual report, describe or explain various items in the statements, provide additional details, or summarize significant accounting policies. Financial analysts are the most sophisticated users of the information in annual reports. For example, they are able to ignore subjective interpretations included in the reports. However, these individuals may find that some of the data contained in the report may be too condensed and therefore need more detailed information than what the annual report provides. 6. Management may decide to omit competitive information entirely from the annual report, or to disguise it because competitors have access to annual reports. The objective of reporting should be to reveal as much as possible without giving away proprietary information or a competitive edge. 1-23.
North Gate Manufacturing
The issue of performance evaluation is one of the most controversial and interesting topics in accounting today. Computerized AISs offer the capability to produce so much more information than was available in the past, allowing for new and better performance evaluation systems. Since performance evaluation affects individuals directly (i.e., in terms of rewards), this topic is one that can create many problems for organizations.
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1. It is probably useful for budget specialists to work with management to develop a performance evaluation system. However, it is not a good idea for special staff to be charged with the entire task of performance evaluation reporting. Once a system is in place, the managers should be able to produce these reports. Scott's staff could work with managers at the various plants to derive an evaluation system. Auditors (or perhaps Scott's staff) should periodically review each manager's report to ensure that the reporting is fair and accurate. Students may differ on the matter of who best explains the variances. The managers are correct in asserting that they better understand their suppliers, contractors, and customers, and that Scott's staff is not likely to understand these matters well enough to explain the variances. On the other hand, students can argue that managers are human and have a natural conflict of interest in such reporting. In particular, although they understand their business, it is easy to blame others—including each other—for problems that are well within their own control. Allowing managers to explain variances begs the question: “are self-reported explanations of variances likely to be unbiased assessments of plant activities?” 2. Decentralizing performance evaluation is probably a good idea for this organization. Under the old system, revenues and expenses were consolidated for all plants to produce one income statement. Undoubtedly this required allocation of indirect costs. Such allocation can never please everyone since all allocations are essentially arbitrary. Striving for some consistency in performance evaluation is a good idea so that the performance of each plant can be compared against the others. Use of segment margins which show the difference between direct revenues and expenses would be a good measure. Return on investment which uses current values and the segment margins might be another. Nonfinancial evaluation measures, such as employee turnover, amount of production, customer turnover (customer satisfaction), sales returns, employee productivity, and so on, can also be part of the evaluation system. 3. The performance evaluation report Mr. Stewart receives should be short and concise. Ideally, one page per month per plant should be sufficient. The report can also compare all plants on various financial and nonfinancial measures, such as the ones mentioned above. Any significant variances can include managers’ explanations in footnotes. The point to remember is that this is an "action report." Mr. Stewart will look at it most months, note variances and explanations, and take no action. However, on occasion, the report will call for investigation. Note to Instructor: You might want to have your students design a sample report using spreadsheet software.
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Core Concepts of Accounting Information Systems, 13th Edition, by Simkin, Rose, and Norman
Chapter 2 ACCOUNTING ON THE INTERNET
Discussion Questions 2-1. An intranet is an internal network created by an organization for the benefit of its employees. Most intranets are local area networks that utilize convenient web-browsing software. Extranets are similar to intranets, except that they are also accessible by a limited number of external parties—for example, employees working from home or suppliers. Both intranets and extranets are valuable to accountants. For example, intranets enable businesses to distribute, and end users to read, information about such items as production reports, announcements, or financial activities. They also enable accountants to collaborate with each other, using group collaboration tools. These same ideas apply to extranets. Finally, these networks are important to accountants because so much commerce and financial information is transmitted over them and also because their security and efficiency are important auditing concerns. 2-2. The term “blogs” is an abbreviation for web logs, and is a groupware (collaboration) tool that allows computer users and web browsers to publish personal messages online. Blogs enable their users to create, share, and leverage knowledge in any kind of organization. Those who are currently exploring the potential of blogs are for-profit companies, government organizations, and universities. 2-3. As of June, 2014, Bitcoin was still a viable currency that was trading at $444.80 (U.S. dollars) per coin. Every other virtual currency has eventually failed, however, so checking the price daily might be important to owners. This question also asks students whether they would buy bitcoins. Their answers can create some lively class discussion. 2-4. Commentary on social media sites such as Facebook or Twitter also contains useful information to businesses. For example, an automobile manufacturer might check such sites to gauge public reaction to a recent safety recall, a fast-food chain might check them to measure public opinion about a new meal offering, or a music figure might check them to assess whether a new record album has created enough “buzz.” According to a recent survey of 2,100 companies by researchers at Harvard University, nearly 80% of survey respondents use, or plan to use, social media for business purposes, while 69% anticipate expanded use of such resources in the future. Again according to this survey, about half of all businesses plan to use it to increase public awareness of their organizations, products, or services—an application of perhaps special interest to public accounting firms. 2-5. Hypertext markup language (html) is a computer programming language that enables users to create web pages for use on the Internet. Most of the web pages that we
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Core Concepts of Accounting Information Systems, 13th Edition, by Simkin, Rose, and Norman
view on the Internet employ it. If you use Microsoft Internet Explorer, you can view the source code for a given web page by selecting “Source” from the View menu. HTML is mostly an editing language that tells a web browser how to display the contents of a web page. But HTML tags cannot be changed or customized. To solve this problem, developers have extended HTML with XML—an acronym for “extensible markup language” that allows users to create their own tags. Anyone can create such tags, but businesses need standards. For example, we don’t want one entity using <SalesRevenues> while another uses <Sales>. One XML standard is XBRL—an acronym for “extensible business reporting language.” As noted in the text, the XBRL International Consortium develops international standards for this language. 2-6. As explained in question 5 above, XBRL is a standardized subset of XML. Businesses can use the documents created and saved in XBRL format in many different ways without having to re-key the data—a very real advantage. Until recently, however, most government agencies stored the data submitted to them by individuals or businesses in either hard-copy formats or word documents. Today, however, government agencies are also storing such data in XBRL formats. One such agency is the Securities and Exchange Commission (SEC), which stores corporate financial data such as 10-k reports in a database called IDEA—an acronym for “Interactive Data and Electronic Applications.” The relationship between XBRL and IDEA is very direct, therefore: IDEA is a database containing XBRL-coded, financial information. 2-7. Electronic commerce (EC) means conducting business electronically. Examples of electronic commerce include retail sales over the Internet and EDI (the ability to electronically transmit such documents as invoices, credit memos, purchase orders, bids for jobs, and payment remittance forms). Much EC is performed over the Internet, but companies such as Wal-Mart, IGT, and some of the phone companies also transmit messages over private networks or communications channels to which the general public does not have access. EC is important because (1) there is so much of it today, (2) the uses of EC are expanding, (3) even the smallest company can create a website and compete with larger businesses, and (4) Internet retail sales are growing. As noted in the text, some businesses now rely on the Internet for over half of their annual sales revenues. For businesses such as Dell, Amazon.com, or E-trade, the percentage is much larger. EC is important to accountants because electronic documents can be more difficult to control, authenticate, or audit. Security is also a major issue because assets are less tangible, compromised systems are not obvious, and information losses are not easy to verify. The final section of the chapter discusses some major privacy and security concerns. 2-8. Electronic payments (E-payments) are payments that customers make to sellers electronically. They are similar to credit card payments except that they use third parties. It works like this: A customer buys something from a seller, using credit advanced by the third party—e.g., Paypal. The third party pays the seller and then, in turn, debits the buyer’s credit
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card or account. One advantage of using such a system is that buyers need only provide their credit card numbers or otherwise establish accounts with one company—the e-payment company—not each company with which they wish to do business. Another major justification for using E-payments is security. Credit-card information is at risk when it is transmitted over data communications lines or stored in the computer files of many vendors. 2-9. Electronic data interchange (EDI) refers to transmitting routine business documents such as shipping notices, customs forms, invoices, and purchase orders electronically. Companies use EDI because it is often a superior way of doing business. For example, because the outputs from one company (e.g., the information on a computerized purchase order) are the inputs to another company, EDI allows its users to avoid the time delays and costs of transcribing the data once the information has been received. This eliminates data-entry bottlenecks and reduces the errors such data transcription typically introduces into an AIS. Other advantages of EDI discussed in the chapter are: (1) streamlining processing tasks, (2) faster response to customer queries or vendor data transmissions, (3) reductions in paperwork, and (4) a secure processing environment that is separate from the post office or an overnight delivery system. 2-10. This question asks students how comfortable they are giving their credit card numbers to retail websites and therefore has no right or wrong answer. While some individuals are comfortable entering their credit card numbers into websites for Internet purchases, others fear for their cards’ security. There is certainly much to fear. Identity theft, in which someone steals the identity of another, is easy when the thief knows such important information as a person’s credit card number(s) and similar personal information. 2-11. A common way for the owners of one website to charge for advertising from a second party is to charge a set fee (for example, $1) each time a viewer clicks on the advertiser’s link(s). But this requires the website administrator to count the actual number of clicks, per month. Click fraud occurs when website personnel repeatedly click on that link themselves or artificially inflate their counts, thereby defrauding the advertising company. The advertiser loses out in such situations because it pays for advertising services that do not lead to sales, while the website owner benefits from the inflated billing revenues. Judging by the amount of advertising for click-fraud services and software, click fraud is either common or often feared. We also know that savvy computer programmers can write java scripts to simulate user clicks, thereby automating click-fraud activities. Wikipedia notes that it is a felony in many jurisdictions—for example, is covered by Penal code 502 in California as well as the Computer Misuse Act 1990 in the United Kingdom. Several arrests have been made relating to click fraud. Finally, it should be noted that a host’s website personnel are not the only perpetrators of click fraud. Other possibilities include competitors seeking to deplete the advertising budgets of their targets, individuals seeking to damage the reputation of the host-publishers, misguided supporters of the host company (who seek to help it by increasing its ad revenues), and private vandals, who randomly target a particular company.
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2-12. Spamming is the act of sending unsolicited emails to a large number of accounts—usually for advertising purposes. Spam is also a growing problem in instantmessaging, faxing, web-searching, and mobile-phone texting venues. One reason why spamming is of interest to accountants is because spamming is relatively costless to advertisers but relatively costly to recipients and Internet service providers who must transmit and deliver spam messages. In 2007, for example, the California legislature estimated that spamming costs the U.S. more than $13 billion in lost time and productivity. Spammers often attempt to pay ISPs for their data transmissions with stolen credit cards—an added cost. Spammers require large lists of email accounts—the types of lists often found in accounting information systems. This makes AISs natural targets for spammers, and therefore a known security risk. The purpose or intent of spammers is also of concern to AISs, as a great deal of spam advertising is to sell pornography, perform an identity theft, or commit some other kind of fraud. Who has not gotten an unsolicited email from an African country, offering to share millions of dollars in exchange for the recipient’s help in the U.S. and of course some additional small payments for “taxes” or other “transaction fees?” Finally, spammers clog the data transmission channels with their communications, adding to the total bandwidth required by the Internet. Although students may argue that all spamming should be illegal, there are several counter arguments as well. Spammers can argue that some of their communications contain legitimate advertising, information that is of use to recipients, or valuable information about political activities or pending legislation. They might also claim that spam email is easily deleted, and often automatically filtered from recipient mail boxes. Wikipedia contains an extensive (and fascinating) discussion of spam at http://en.wikipedia.org/wiki/Spam_(electronic). 2-13. A firewall is an electronic barrier that limits access to corporate intranets or local area networks to bona fide users. Some firewalls are separate hardware systems while others are simply software programs installed on web servers. These firewalls are implemented by IT professionals. The specialized software in firewalls compares the IP addresses of outside users requesting information to current access control lists. As noted in the text, firewalls are themselves limited in what they can do. For example, they cannot guard against certain forms of hacking such as spoofing—i.e., a hacker who uses a bonafide IP address to gain access to a system. A proxy server is a computer and related software that acts as a gateway between internal corporate users and the Internet. One of the primary security functions of a proxy server is to control web access (e.g., to limit employee accesses to professionally-related sites). However, proxy servers can also run the software that creates internal firewalls. 2-14. Data encryption refers to transforming original, plaintext data into scrambled, cyphertext messages that cannot be understood even if it is intercepted during data transmission. The data used to encrypt (code) the message is called the encryption key.
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Secret key encryption relies upon a shared algorithm and an encryption key that must be kept secret to be effective. Public key encryption uses two keys, a “private key” and a “public key,” both of which must be known before a message can be decoded. These methods are discussed in greater detail in the text. 2-15. The three levels of authentication are (1) what you have, (2) what you know, and (3) who you are. An example of “what you have” is a driver’s license with your picture on it. An example of “what you know” is a password. An example of “who you are” is a fingerprint or retina scan. Most business security systems depend on only one or two of these—rarely all three. High-level security in business and government environments might require all three. Instructors are encouraged to ask students about different situations in which they had to use these different types of authentication. You might also ask students to recall movies such as Mission Impossible or Entrapment, where characters used advanced technologies to prove “who they are.” 2-16. A digital signature is an electronic attachment that verifies and authenticates a business transaction (e.g., a purchase order, bidding document, or contract). The digital signature replaces a hand-written signature, which is difficult to transmit in non-graphic electronic documents. Like hand-written signatures, however, the objective of a digital signature is to assure the recipient that the document itself is legitimate and faithfully represents the intentions of an authentic sender. Thus, digital signatures are important on the Internet and value-added networks as a security tool. 2-17. Commerce is booming on the Internet, and most (but certainly not all) businesses have been able to boost both sales and profits as a result. Will all businesses do well? This is unlikely. However, the chapter notes that selling products and services on the Internet enables businesses to reach wider audiences, stay open around the clock, and maintain up-tothe-minute information on prices and products. Such selling also helps businesses reduce selling costs (because there is less sales labor and overhead-costs), inventory costs (because finished products are produced or ordered from suppliers in response to sales rather than in anticipation of sales), and processing costs (because sales and shipping documents are created by the buyer and/or the system). For businesses that sell many products, a web-based system requires a large investment in technology—both in upfront costs of development and ongoing costs of routine maintenance. Thus, most businesses must weigh the cost of building and maintaining a web presence against the additional revenues that such business generates. It is not a given that revenues will always offset costs. The Internet provides opportunities as well as challenges for businesses. Thus, for individual companies, the Internet can spell “boom” or “bust,” and students should be able to cite specific examples for both possibilities. To illustrate, the very smallest companies typically profit from a web presence because they are no longer limited to physical sales in local markets. At the same time, larger businesses feel increased pressure on prices and therefore profits due to the ease with which both retail and wholesale consumers now have access to a wealth of information and alternate sources for common goods and services.
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This chapter provides several additional reasons why businesses can increase both sales and profits using Internet-based technologies. One example is the use of intranets and extranets to better secure LAN communications and increase access to and from trusted suppliers— possibilities that might decrease costs and therefore increase profits. Another example is the use of groupware to increase employee productivity. A third example is the expanded use of XBRL, which may enable a business to better report financial information and therefore reduce its accounting expenses (see Problems 2-20 and 2-21). Similar comments apply to firms that expand sales by accepting e-payments or reducing costs by expanding their ebusiness or EDI capabilities.
Problems 2-18.
Acronyms:
a. EC b. EDI c. E-mail d. HTTP e. IDS f. IETF g. IP address h. ISP i. URL j. VANs k. VPN l. WWW m. XBRL n. XML o. IDEA p. SaaS q. ICANN r. DNS
electronic commerce electronic data interchange electronic mail hypertext markup language intrusion detection system internet engineering task force Internet Protocol address internet service provider universal resource locator value-added networks virtual private network world wide web extensible business reporting language extensible markup language interactive data and electronic applications Software as a service Internet Corporation for Assigned Names and Numbers domain name system (maintained by ICANN)
2-19. Depending on the sources of information used, the students may have a variety of different points about the advantages and disadvantages of implementing an intranet in the local company. Some of the main points that you would include in your “talking paper” are: Disadvantages: • • • •
Developing intranets requires an investment in time, money, and perhaps training Once created, an intranet must be maintained Intranets create a security hazard because shared information is potentially vulnerable to abuse Cloud computing companies may offer cheaper and better alternatives
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Advantages: • • • • •
• • •
Intranets can be an important group collaboration tool Intranets allow companies to use existing web browsers Intranets can be a valuable method of sharing documents on a secure platform within the company The data stored on an intranet can be made secure so that proprietary data and information are only accessed by authorized users Intranets offer a wide variety of administration tools within the organization such as an online calendar (to schedule appointments, group meetings, and company-wide events), a task manager (for employees to keep track of their tasks, or those of their subordinates), a contact directory of employees, a list of e-mail accounts, and templates for corporate forms such as expense reports Intranets allow an organization to make databases available to authorized employees across the entire company Intranets can be scalable (i.e., can grow with the organization and/or its informational needs) Companies can frequently justify the cost of an intranet by quantifying some savings in operating costs (publish HR manuals, employee manuals, and other company publications on the intranet rather than paper copies)
2-20. This problem requires students to create their own HTML documents, using the example in Figure 2-1. It is important that students use Notepad or a similar word processor that stores data in ASCII (txt) format. 2-21. This problem requires students to log onto EDGAR and access the information from two companies. Note: the website has changed slightly. Students should click on the link “Company or fund name, ticker symbol, CIK (Central Index Key), file number, state, country, or SIC (Standard Industrial Classification)“ instead of “Companies and other Filers.” Instructors may get best use of this question if they require each student to obtain the financial information of a different company. 2-22. This problem requires students to log onto the XBRL home page and then (a) write a one-page summary of a new development and (b) select an article from those describing XBRL benefits and write a summary of it. For example, some of the benefits listed on the XBRL website at the time this instructor’s manual was prepared include (1) improved business processes, (2) improved communications, and (3) enhanced business reporting through standardized tags. 2-23. This problem requires students to write a one page report on each of the items listed below. The answers to most of these questions may be found at: (1) www.xbrl.org, (2) http://accounting.smartpros.com (type XBRL in the search box to find many articles on XBRL), or (3) http://www.xbrleducation.com/.
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a. History of XBRL. In April 1998, Charles Hoffman, a CPA in Tacoma, WA,
investigated XML as a medium for the electronic reporting of financial information. He developed prototypes of financial statements and audit schedules using XML. Charlie contacted Wayne Harding, Chairman of the AICPA High Tech Task Force, in July 1998, about the potential of using XML in financial reporting. Charlie made a presentation to the AICPA Task Force in September of 1998. A more complete history of XBRL can be found at www.xbrl.org/history.aspx, and can be printed using the website www.xbrl.org/history-print.aspx. The AICPA was active in supporting the development of the language by funding a project to create prototype financial statements in XML. b. XBRL Specifications. An explanation of XBRL specifications can be found by
choosing “Specifications” from the main menu. “Specifications” provide the fundamental technical definition of how XBRL works. The current specification or version for XBRL is “2.1,” but new ones may become available by the time you assign this problem in class. Current needs are for new formula, functions and taxonomy requirements. c. Continuous Reporting. XBRL-tagged data enable businesses to create a steady
stream of reports based on the underlying information, hence the term “continuous reporting.” Three articles on this subject are: (1) Garbellotto, Gianluca (2009) “How to Make your Data Interactive Strategic Finance Vol. 90, No. 9 (March), pp. 56-57, (2) Chan, Slew H. and Sally Wright (2007) “Feasibility of More Frequent Reporting: A field Study Informed Survey of In-Company Accounting and IT Professionals” Journal of Information Systems Vol. 21, No. 2 (Fall, 2007), pp. 101-115, and (3) Robert Pinsker (2003) “XBRL Awareness in Auditing: A Sleeping Giant?” Managerial Auditing Journal Vol. 18, No. 9, pp. 732-736. Continuous reporting is an interesting concept. Generally speaking, the technology already exists for companies to report information more frequently than they currently do. Presumably, other reasons exist for not reporting more often (and certainly not daily or weekly!). One might be the familiar cost/benefit analysis, which suggests that companies do not believe the benefits of continuous reporting (or reporting more frequently than quarterly) outweigh their costs. A number of articles discuss the topic of continuous auditing. Some authors believe that continuous auditing is inevitable, while others suggest that this is not necessary. In any case, this question should start a lively dialog with the students regarding the future of IT auditing and the implications for corporate America. The following links provide several articles of interest: http://aaahq.org/AM2004/abstract.cfm?submissionID=1118 http://accounting.smartpros.com/x43141.xml http://accounting.smartpros.com/x34375.xml d. XBRL Required Reporting. The first conference on “Financial reporting in the 21st
century: standards, technology, and tools” took place in Macerata, Italy, in September of 2011. The SEC now requires all public companies to file their financial
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reports in XBRL format. Students who access the IDEA database will have no problem answering this question. The following websites identify industries and companies that currently produce financial statements in XBRL format: http://www.edgar-online.com/xbrl/industry.asp http://bryant2.bryant.edu/~xbrl 2-24. We ran out of Internet addresses because the number of different IP addresses available with 32 bits was insufficient to accommodate the global demand for different ones. a. The value of 232 = 4,294,967,296. Although this is a large number, the need for distinct addresses world-wide was even greater, and we ran out of them. b. The new IP standard uses 128 bits. The value of 2128 is greater than 340,282,366,920,938,000,000,000,000,000,000,000,000 –a very large number that should satisfy our need for IP addresses for some time to come. c. Several reasons probably account for why we have not run out of telephone numbers, despite their seemingly small size. These reasons include: (1) The base is “10” not “2” so the total number of combinations is 1010 = 10,000,000,000 or 10 billion. (2) These phone numbers are not free—each subscriber pays a monthly fee for them, whereas domain names (IP addresses) are virtually free. “Cost” serves to limit the demand for phone numbers. (3) Each country has a separate three-digit country code in addition to the 10 digits for the telephone number. This increases the number of phone numbers available worldwide by one thousand ( = 103). Interestingly, cell phone carriers maintain their own systems, but use the same 10-digit addressing system. Additional carriers increase the demand for phone numbers, but the supply of phone numbers available for use. 2-25. This problem requires students to encrypt a message, using a simple cyclic substitution cipher. The encrypted message is: BPWAM EPW QOVWZM PQABWZG IZM NWZKML BW ZMXMIB QB 2-26. This problem requires students to decrypt an encrypted message, using a simple cyclic substitution cipher. The decrypted message is: Message 1: “It is not what we don’t know that hurts us, it is what we do know that just ain’t so.” Message 2: Justice delayed is justice denied. Message 3: Too many cooks spoil the broth. As suggested in the problem, this task becomes much easier if you use a spreadsheet. Here’s an example for the last message: Trial key:
12
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Msg F A A
Value 6 1 1
Value minus Displacement -6 -11 -11
Add 26 if required 20 15 15
New Letter T O O
Y M Z K
25 13 26 11
13 1 14 -1
13 1 14 25
M A N Y
Etc.
Etc.
Etc.
Etc.
Etc.
2-27. This problem asks students to write a one-page summary of an article they find online. Various accounting journals are going online. Besides the AICPA’s Journal of Accountancy website, there is also the ISACA Journal (www.isaca.org), Strategic Finance (www.imanet.org) and The CPA Journal (www.cpajournal.com). An obvious advantage for readers is the ability to search the archives for articles on a specified topic online. The advantages to publishers include (1) making information more accessible to both members and non-members, (2) fulfilling organizational mandates to disseminate information, and (3) enabling users to search articles electronically for specific information or topics. To date, many journals do not charge for online access to articles, although some professional groups limit access to members. Instructors may wish to limit students to specific subjects or to articles less than one year old. 2-28. This problem involves the privacy statement of a fictitious company named Small Computers, Inc. As a general statement, online consumers have several concerns about computer security: • They want to make sure that they will receive what they order • They want their privacy protected • They want a secure method of payment • They want to be sure they will be billed only for what they purchased Small Computers, Inc. addresses some of these concerns, but not all of them. For example, the company stresses privacy but does not say it will limit the use of its customer information to legitimate business purposes. The disclosure of business practices, shipping, and billing is reassuring. It will comfort the consumer to know goods are shipped at an early date and that the consumer need only accept items ordered. The return policy appears lenient although it does not state who is responsible for paying shipping on returned items. The statement about accidental billing actually may make a consumer aware that the chance for this exists. Consumers are more likely to buy from a business online than they are off-line. They are also more likely to buy products with brand names. A business selling goods to end-
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consumers online that does not have these characteristics will need to be extremely careful in crafting statements about privacy and business policies.
Case Analyses 2-29. This case requires students to select an accounting blog from the list provided in the question and write a one-page summary of their findings. Answers will vary by student. 2-30.
Me, Inc. (The Do’s, Don’ts, and Ethics of Social Networking Sites)
This case asks students to think about what to say, and what not to say, on social networking sites such as Facebook, Twitter, or LinkedIn. For example, Part 1 asks students to list four personal strengths. Some suggested answers to the various parts of this question are as follows: 1. Possible personal strengths: education, honesty, prior relevant work experience, willingness to learn, ability to commit to corporate goals, team player, good writing skills, and high IQ. 2. Possible red flags: prison or arrest record, making derogatory statements about the company, management, or immediate supervisor, membership in an extremist group such as a white-supremacy organization, overreactions to life reversals, reports of personal dishonest behavior, indications of overspending or excessive personal debt, evidence of drug use. 3. Some of the most popular networking sites are douban, Flixster, Friendster, Facebook, Habbo, LinkedIn, MyLife, MySpace, Netlog, Orkut (India), RenRen (China), Tagged, Twitter, and Vkontakte (Russia). Each of these has more than 50 million members. The website at http://en.wikipedia.org/wiki/List_of_social_networking_websites contains a list of over 200 social networking sites. 4. This part of the case asks students whether or not they would approve a high-level manager as a friend on Facebook. It is likely that students will be torn about this, not wanting to offend this manager but also not wanting him or her to read personal statements. 5. Is it ethical for a boss to fire an employee for postings on Facebook? Again, students are likely to not be sure about this. Are statements made outside of the work environment grounds for dismissal? Does it matter that such statements are written? Suggestion: after obtaining student feedback on this matter, ask them whether they would dismiss an employee under these same circumstances if they were the boss.
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2-31.
Anderson Manufacturing (Using XBRL-Enabled Software)
This case continues the systems studies of the cases in Chapter 8. At a minimum, instructors should require students to read Hammaker Manufacturing III to become familiar with the names of the individuals in this case. 1. XBRL-enabled software means that the software has the ability to create financial reports in XBRL format. It usually also means the ability to extract information from XBRLformatted data. In this latter mode, you simply key in your request for information and quickly receive the data, the analysis, or graph(s) you desire. Finally, it means that software applications can import XBRL-coded data for analysis, further data processing, and archiving purposes. Today, most accounting packages provide XBRL formatting capabilities. 2. Figure 2-3 identifies a number of advantages that Lloyd might wish to discuss with Dick. The following articles are also available for additional benefits: http://www.cato.org/pubs/regulation/regv26n3/v26n3-13.pdf http://www.icaew.co.uk/library/index.cfm?AUB=TB2I_53335,MNXI_53335 http://www.xbrl.org/faq.aspx 3. Each student’s memo will be unique. 4. Several examples of XBRL PowerPoint presentations may be found on the Internet. Some examples can be found at: http://www.icgfm.org/XBRLPresentations.htm, http://www.xbrl.org/us/us/SanJose200601/Huh.pdf, and http://www.uhu.es/ijdar/documentos/Present04/Eric.pdf. 2-32.
Barra Concrete (XOR Encryption)
This case requires students to use XOR operations to both encrypt and decrypt a message. 1. Applying the XOR cipher to the cipher message, we have: Cyphertext: Key: XOR Result:
0 1 1
1 1 0
0 1 1
0 0 0
1 1 0
0 1 1
1 1 0
1 0 1
This brings us back to the plaintext message of 1010 0101. 2: Applying the XOR cipher to each letter, we have the results shown below. The encrypted letters are shown in the XOR Result lines:
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G Key: XOR Result:
Digit Digit Digit Digit 1 2 3 4 0 1 0 0 1 1 0 0 1 0 0 0
Digit Digit Digit Digit 5 6 7 8 0 1 1 1 0 0 1 1 0 1 0 0
O Key: XOR Result:
0 1 1
1 1 0
0 0 0
0 0 0
1 0 1
1 0 1
1 1 0
1 1 0
, Key: XOR Result:
0 1 1
0 1 1
1 0 1
0 0 0
1 0 1
1 0 1
0 1 1
0 1 1
T Key: XOR Result:
0 1 1
1 1 0
0 0 0
1 0 1
0 0 0
1 0 1
0 1 1
0 1 1
E Key: XOR Result:
0 1 1
1 1 0
0 0 0
0 0 0
0 0 0
1 0 1
0 1 1
1 1 0
A Key: XOR Result:
0 1 1
1 1 0
0 0 0
0 0 0
0 0 0
0 0 0
0 1 1
1 1 0
M Key: XOR Result:
0 1 1
1 1 0
0 0 0
0 0 0
1 0 1
1 0 1
0 1 1
1 1 0
SM 2.13
Core Concepts of Accounting Information Systems, 13th Edition, by Simkin, Rose, and Norman
Chapter 3 COMPUTER CRIME, ETHICS, AND PRIVACY
Discussion Questions 3-1. Most experts agree with the claim that the known cases of cybercrime are just the tip of the iceberg, and most students are likely to agree with them. Of course, it is not known what percent of all cybercrime is caught because we do not have any measure for the denominator of such a computation. However, if we only detect most cybercrime by luck, chance, or accident, it is reasonable to ask, "What are the really clever computer criminals doing?" Thus, there is every indication that what we have observed about cybercrime in recent years is much less than the total of all cybercrime. 3-2. Among the reasons why more cybercrime is not reported are the following: 1. It is not detected. 2. There are no legal requirements to report cybercrime, especially if the "crime" is detected in private industry. 3. Managers feel that the computer abuses detected within their organizations are embarrassments. Thus, private businesses are reluctant to report them. 4. Some experts fear that certain types of cybercrime are susceptible to the "sky-jack" syndrome—i.e., that reporting a particular cybercrime will lead to a rash of similar ones. 5. Some people consider certain practices unethical but not illegal. Thus, for example, several organizations in the past have chosen not to press charges against students stealing computer time from university computers or employees for using the company resources for privately-contracted programming efforts. These activities are rarely reported. 6. A definition of cybercrime is elusive. Thus, some cybercrime is never reported because it falls into a gray area. 7. For some “small” crimes involving little money, the trouble of reporting it might be greater than the gains from such reporting. 8. Many IT personnel are not fully aware of the laws governing computer usage, and therefore fail to report it because they don’t realize it violates federal or state statutes. The matter of whether or not these reasons are valid is subjective. Currently, there is a debate in the literature over how much cybercrime should be reported and what should be revealed if it is reported. Among the arguments in favor of reporting cybercrime are: 1. Disclosure will alert other organizations about the dangers of computer crime and may result in better protection against it. 2. Disclosure will lead to better controls and a more informed, security-conscious society. 3. Disclosure will strengthen the case for cybercrime legislation and/or a stricter enforcement of the laws. 4. Ultimately, cybercrime injures the public at large. Therefore, the public has a right to know about it.
SM 3.1