James A.

Hall
Accounting Information Systems, 4th. Ed.

Chapter
ERP Systems

11

CHAPTER 11

ENTERPRISE RESOURCE PLANNING SYSTEMS

This chapter introduces an approach to information system development that represents the
next step on a continuum that began with stand-alone applications, progressed to the
development of shared database systems, and now involves highly integrated systems that
serve the entire organization. Enterprise Resource Planning (ERP) systems are much more
than database systems. Typically these are not developed in house. The chapter examines the
key features of generic ERP systems, their various configurations, and implementation issues.
Of particular note is the discussion of data warehousing. The Chapter Appendix discusses
some of the leading products available today.
The objectives of this chapter are:
!

to understand the general functionality and key elements of ERP systems;

to understand the various aspects of ERP configuration;

to understand the purpose of data warehousing;

to understand the risks associated with ERP implementation;

to be aware of the key considerations related to ERP implementation;

to understand the internal control and auditing implications associated with ERPs; and

to be able to identify the leading ERP products and be familiar with their
distinguishing features.

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 11-1

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
ERP Systems

11
Notes

I.

What is an ERP?
Enterprise resource planning systems are modular software
packages designed to integrate the key processes in an
organization so that a single system can serve the information
needs of all functional areas. This is a big change from the
early days of automation when individual functional areas
develop ed free-standing systems for their own use. In those
days, there was no data sharing and the individual areas owned
their data. In addition to not sharing data, these systems
usually did not communicate with each o ther. Contrast Fig.
11-1 on page 565 with Fig. 11-2 on page 567.
A.

ERP Core App lications

ERP systems typically include two groups of
app lications: core applications and business a nalysis
applications. Core ap plications are those
applications that support the day-to-day activities of
the business. They include such functions as sales,
distribution production p lanning, shop floor contro l,
and logistics. Recall what you learned in your
Management Fundamentals course.

B.

On-Line Analytical Processing

Besides providing extensive transaction processing
capability, an E RP also provid es management with
extensive support for management decisio n mak ing.
On-line Analytical Processing (OLAP) includes
decision support, modeling, information retrieval, adhoc repo rting/analysis, and what-if capabilities.
Some of the commercial packages provide all of
these, an d others can be m odified with third p arty
add-ons, often called bolt-on packages.
A key element necessary for the ERP to provide
business analysis is the data w areho use. This is a
datab ase designed for q uick sea rch, retrieval, query,
etc. Typically, an ERP implementation includ es bo th
operational and da ta warehouse databa ses.

II.

ERP System Configuration

A.

Server Configuration
This section discusses the structure o f an ER P in
terms of the network topology that is typically used
the client-server model in two variants: a two-tier
model [see Fig. 11-3 on page 569.] and a three-tier

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 11-2

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
ERP Systems

11
Notes

model [see Fig. 11-4 on page 570. Note the

differences.
B.

OLT P versus OLAP Servers

Two types of data are of value to an organization
current and historical. Current data relates to ongoing business events that are changing (are not yet
history!). H istorical data can be volum inous. On-line
Transaction Processing (OLTP) events relate to
current activities of the business. OLAP involves online transa ctions that includ e large amo unts of data
used for extensive analysis. OLT P applications
support mission-critical tasks. OLAP ap plications
support management-critical tasks through analysis of
data in the data warehouses. See Fig. 11-5 on page
571.
OLP A servers sup port three types o f analysis:
consolidation, drill-down, and slicing and dicing.
Read the d iscussion carefully.

C.

Database Configuration
The task of selecting the database tables for use in the
ER P is a very comple x one. Often comp anies find it
best to reengineer the com panys proc esses to
acco mmoda te the ERP rather than mo dify the E RP to
match the co mpa ny.

D.

Bolt-On Software
The term bolt-on software refers to add-on
components provided by third-party vendors to add a
function that is not provided by the ERP software.
One type o f bolt-on software that is of p articular note
is supp ly chain m anagement (SC M) software.
Management of the supply chain is being recognized
as crucial to the success of businesses. The
integration of S CM software into E RP systems is
increasing.

III.

Data Warehousing
A data w areho use is a relational or multi-dimensional
database that is huge! The text distinguishes briefly between
a data w areho use and a data m art. The key differe nce is size .
The other issues are the same.
Data warehousing involves extracting, converting, and
standardizing an o rganizations o perational data from both
ER P and legacy systems and loading it into a central archive.

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 11-3

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
ERP Systems

11
Notes

Once available, data can be queried, analyzed , and m ined!

Recall that data mining was introduced in Chapter 8.
This section of the chapter describes in great detail the step s in
the data warehousing pro cess:
1.
2.
3.
4.
5.

Mod eling data for the data warehouse;

Extracting data from op erational datab ases;
Cleansing extracted data;
Transforming data into the d ata wareho use
model; and
Loading the data into the data warehouse.

Follo w the discussion carefully. A well-structured data

warehouse is an invaluable asset for an organization.
A.

Decisions Supported by the D ata W arehouse

Although many op tions made availab le by a d ata
warehouse are similar to those with any database,
there are some significant additional capabilities. In
addition to standard reports planned in advance, there
is also the ability to conduct multi-dimensional
analysis and information visualization.
The most useful data analysis technique associated
with data mining is drill-down analysis which focuses
on increasing levels of detail. Table 11-1, on page
581, summ arizes some applications of data mining in
decision sup port.

B.

Supporting Sup ply Chain Decision s from the Data

W arehouse
In the past, data was protected and held internally.
Many organiza tions tod ay feel that the reason to hold
data, even in a data warehouse, is to improve, even
optimize, business performance. An important focus
is the firms supply chain. The examples bring home
the po int.

IV.

Risks Associated with ERP Implementation

As you might expect, ERP is not a priceless gift from
computer heaven. There are po ssible problems, and there have
been ER P installation failure s. Read carefully!
A.

Big-Bang versus Phased-In Implementation

There are two basic approaches to implementing an
ERP system: all at once (big-bang) or in pieces
(phased-in). Because implementation of an ERP
system typically involves extensive cultural changes

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 11-4

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
ERP Systems

11
Notes

for the organization, the choice of method must be

carefully considered.
The big-bang appro ach is risky because the entire
organization must change at once from older legacy
systems with which everyone is familiar to a new
strange one that requires significant training and
slows things do wn initially.
The pha sed-in approach is popular, especially in
organizations that have very distinct units that did not
share the older systems.
B.

Opp osition to Changes to the Business Culture

Resistance to change is natural. Resistance to system
change can be fatal.

C.

Choosing the Wrong ERP

Different ERP systems are prefabricated and have
different characteristics. Choosing the right one for
an organization is crucial to its success. Of particular
importance is choosing a system that supports the
firms business processes. In addition, it must be
determined if the organization can reengineer its
busine ss processes around the software.
An additional issue relates to system scalability its
ability to grow with the organization. Four
dimensions of scalability are discussed: size, speed,
workload, and transactio n cost.

D.

Choosing the W rong Consultant

Usually an organization d oes not have the skills in
house to implement an ERP system. Outside
consultants are usually hired to coordinate the
conversion pro ject. T he cho ice of a consultant is
critical to the success of the project.

E.

High Cost and Co st Overruns

To tal cost o f ownership for ER P varies greatly and is
very great! This total cost includes hardware,
software, consulting, internal personnel costs,
installation, upgrades, and maintenance. This total
cost can easily be underestimated. Some examples
are discussed. Read them and learn.

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 11-5

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
ERP Systems

11
Notes

F.

Disruption of Operations
As mentioned above, reengineering of business
processes is often required to gain the benefits from
conversion to ER P. These changes are the mo st
common cause of problems. Recall the shortage of
Hershey chocolate at Halloween 1999? Read how
conversion to SAPs R/3 system contributed.

V.

Implications for Internal Control and

Auditing
A.

Following SAS 78:

1.

Transaction authorization continues to be

very important. In an ERP, the mod ules are
highly linked. Hence contro ls must be in
place to validate transaction s before the d ata
is shared with other modules.

2.

Segregation of duties is often bypassed by

the structure of the ERP. N ew sec urity,
audit, and control tools are needed.

3.

Supervision can be a problem. ERP s are

designed to empower employees. Hence,
supervisors need high levels of
unde rstanding of the new system to m aintain
oversight.

4.

Accounting records are produced b y the

system from OLTP data without traditional
batch totals and audit trails. Data entry
controls mu st be tight.

5.

Access control, sec urity, is intended to

provide confidentiality, integrity, and
availab ility of necessary informatio n.
Security limitations should be imposed
based on risk assessment. Control of acce ss
to the data warehouse is extremely important
even though access is often shared with
customers and suppliers. An additional
access issue relates to the potential for
disaster. Contingency planning must occur.

6.

Independent verification in the traditional

sense is meaningless. However, it must be
focuse d on the overall system . This p uts
significant demand s on internal auditors.

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 11-6

James A. Hall
Accounting Information Systems, 4th. Ed.

Chapter
ERP Systems

11
Notes

B.

Auditing the D ata W arehouse

The data available in a data warehouse can be viewed
as a gold mine for auditors. However, the auditor
must understand the procedures use d to fill the data
warehouse.

Review Questions for Chapter 11: 1-24

Discussion Questions for Chapter 11: 1-18

APPENDIX:

The chapter appendix reviews the key features of

ERP s available from some of the industrys leading
vend ors: SA P, J. D . Edward s, Oracle, Peop leSoft,
and B AAN . Although these are evolving packages,
use the appendix to become familiar with the key
features of ER P pro ducts.

Study Notes Prepared by H. M. Savage

South-Western Publishing Co., 2004

Page 11-7