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    The Effect of Enterprise Systems Implementation on the Firm...
    research summary posted July 29, 2015 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control 
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    Title:
    The Effect of Enterprise Systems Implementation on the Firm Information Environment.
    Practical Implications:

    Enterprise systems (ES) require a substantial investment and are fraught with technical and business risks. However, the authors find a positive association between enterprise system implementations and subsequent increases in the likelihood of management forecast issuance and the accuracy of the forecasts. Systems provide management with information to make day-to-day operational decisions.

    Citation:

    Dorantes, C., Li, C., Peters, G. F., & Richardson, V. J. 2013. The Effect of Enterprise Systems Implementation on the Firm Information Environment. Contemporary Accounting Research 30 (4): 1427-1461.

    Keywords:
    information technology, knowledge management, earnings forecasting, financial disclosure
    Purpose of the Study:

    The authors examine the relation between the implementation of enterprise systems (ES) and improvements in the firm’s information environment. ES are commercialized information systems that integrate and automate business processes across an entity’s value chain located within and across organizations. ES are purported to improve a firm’s internal information environment by enhancing the transparency of operations across business units with related improvements in managerial decision making. The authors test whether ES implementations improve the manager’s information environment by examining a product of management’s access to internal information, namely the quality of management forecasts. ES represent an increasingly popular technology investment in many worldwide organizations. However, as one of companies’ largest IT investments, ES implementation involves dramatic costs (e.g., time, money, and internal resources) and extraordinary technical and business risks. These conditions raise the importance of documenting the benefits of information technology investments.

    The authors study a distinct management decision-making outcome, namely management earnings forecast. Management forecast represents a key voluntary disclosure mechanism that managers use to mitigate information asymmetry problems and to improve a firm’s reputation for transparent and credible reporting. Management generally bases the forecasts on accounting and nonaccounting information provided by the firm’s internal systems. Thus, the issuance and quality of management forecasts have direct links to the firm’s internal information quality, which provides the authors a distinct measurable outcome of the firm’s information system.

    Design/Method/ Approach:

    The authors collected ES implementation media announcements between 1995 and 2008 from Lexis-Nexis Academic’s Wire Service Reports. Among the 781 ES implementation observations, COMPUSTAT covered 587 firms. The final test sample consists of 353 unique firm ES implementations. Enterprise Resource Planning systems (ERP) and other types of ES, such as Supply Chain Management systems (SCM), and Customer Relationship Management systems (CRM) are included in the sample.

    Findings:
    • After ES implementation, ES firms are more likely to issue management forecasts and issue more accurate forecasts than the matched control sample.
    • ES implementers have 1.24 times the odds of issuing forecasts than the matched-control sample after the ES implementation period.
    • ES implementers also have 36 percent smaller forecasts errors (as deflated by stock price) after the implementation period compared to the matched-control sample.
    • The authors find no difference in forecast issuance and accuracy between the two groups prior to the ES implementation periods.
    • Improvements in management forecasts are due to improvements in the firm's internal information environment rather than to enhancements in management's ability to manage earnings.
    • ES improves the internal information environment for management decision making, it is not clear how the presence of ES changes the procedural logic of managerial decisions such as those related to production scheduling.
    • The results provide no support for the contention that ES enhance the ability of managers to manage earnings. In fact, for several earnings management proxies, the tests are consistent with a decrease in earnings management after the ES implementation.
    Category:
    Internal Control