A LAN can improve your small client's accounting system.

Rapid change and continuous improvement in advanced information technologies (IT), such as local area, wide area, and client/server networks; integrated enterprise resource planning (ERP) software; financial data warehouses; and electronic business (e-business) systems, place pressure on firms to implement the latest IT. However, most of these new technologies are prohibitively expensive, especially for small- and mid-size firms. Most firms cannot afford in-house information systems professionals or outside consulting firms capable of optimally developing and implementing the complex ITs. Finally, many firms that do implement advanced IT receive fewer benefits than expected because they are over budget, unreliable, unsuitable, and improperly utilized by employees.

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Public accountants can assist their smaller clients to enhance the efficiency and productivity of their workforce by recommending the use of a relatively uncomplicated and powerful IT--the local area network (LAN). A LAN is a low-cost alternative to the costly and complex ITs, and a LAN can provide smaller firms with significant competitive advantages.

This article shows how a small "hypothetical" firm can employ a LAN to automate the purchasing/accounts payable components of its expenditure cycle using an up-to-date accounting software package.

LOCAL AREA NETWORKS

Networks are divided into two basic categories--wide area and local area--which are differentiated on the basis of the areas that they span. A wide-area network (WAN) is formed among computers and interconnected devices that are geographically distant from one another. A local-area network, or LAN, is created when the linked computers are grouped within a limited geographical area. This local area may be a single building, a cluster of buildings, or a department within a firm. A LAN can be connected to other LANs and/or to WANs via hardware devices known as gateways, bridges and routers. Although all sizes of computers may be embodied in a LAN, most tend to be PCs.

LAN Topologies

Computers within a network can be linked in varied arrangements, called topologies. The three basic distributed LAN topologies are the star, ring, and bus. In addition, these three configurations can be combined to form many possible hybrid configurations.

In a star configuration, all workstations are linked to a centralized network server workstation, which is usually a microcomputer or minicomputer dedicated to performing only server duties. Each workstation in a star network routes all messages through the server computer. This LAN configuration is simple and flexible, although it does not allow direct communication among the individual microcomputers.

The ring configuration consists of a closed loop of linked workstations. The ring network does not use a network server, since it is a peer network. Each workstation in a ring configuration is connected to two other microcomputers; however, it cannot easily communicate with the other workstations in the LAN.

A third configuration, the bus, is a peer network with a break in the ring. All network workstations are connected to a common cable or telephone line (the "bus") that stretches from end to end. Each workstation in a bus configuration is independent, so failure of a single microcomputer does not disrupt the remainder of the network. By contrast, an inoperable workstation in a ring configuration causes the entire LAN to be inoperable. It should be noted that many combinations of these three basic topologies may be found in practice.

Peer-to-Peer and Server LANs

Currently, most LANs found in larger firms are server networks, which may interconnect hundreds of workstations. Compared to peer-to-peer networks, discussed below, server networks are more difficult to implement and manage, but provide users with a greater degree of security. Such networks require that at least one workstation be dedicated to performing specific server tasks. These dedicated, centralized servers can only perform specific tasks and cannot act as client workstations.

In smaller LANs, every workstation functions as both a client (e.g., a workstation that requests services from a server) and a server (e.g., a workstation that provides requested services to the client). Thus, all users in the firm can share data and files on all workstations in the LAN. This type of LAN is called a peer-to-peer network because no workstations are dedicated to performing only server functions. Compared to a server network, a peer-to-peer network is less costly, easier to install, and performs about as well as a server network of the same size. As a result, the number of these smaller networks is expected to significantly increase in future years.

INFOAGE, INC.

Infoage, Inc. (1) is a Seattle corporation with two revenue activities. Its principal activity is selling microcomputers and accessories to small businesses and individuals. It also provides services related to the selection and installation of microcomputer systems. The key management personnel in the firm are: George Freeman, president; Diane Varney, treasurer and controller; Mike Barker, marketing manager; Jack Dyson, inventory manager; Jane Thompson, systems services manager; and Ralph Cannon, office manager.

Roughly 60 employees support these managers at the main office. In addition, Infoage has a warehouse and two retail sales outlets in the area. An outlet manager who supervises eight employees heads each outlet. Sales are made on credit or for cash. Services are billed at the end of an engagement or periodically during extensive engagements. Each of the managers in the corporation has assigned responsibilities that involve planning, control, and directing operations.

The AIS maintained by Infoage is automated in the main office, the warehouse, and the outlets. Ralph Cannon is responsible for its development and operation. While the computer in the main office is a minimainframe, the computers in the warehouse and the outlets are standalone microcomputers. Daily operations, such as purchasing merchandise for resale, are performed according to prescribed procedures. Most of the records and files are stored in the minimainframe computer system, although historical records and correspondence are kept in file cabinets. The AIS generates a variety of computer outputs, including sales, receivables, payables, purchasing, inventory, and payroll reports.

Limitations of Infoage's Traditional Computerized AIS

Most modern-day firms employ computers in their AISs. The advantages are so overwhelming that automation cannot be ignored, especially when the computer technology is up-to-date. However, systems in many firms, including Infoage's, still incorporate outdated technology and are not effective in many respects. Currently, Infoage has a traditional AIS that is still found in many firms. Its AIS was built around a centralized minimainframe computer. The basic transaction processing systems, called legacy systems, were designed using an outdated third generation programming language. Systems personnel are required to spend much of their time on systems maintenance, and very little time is left for value-added services, such as improving old systems or developing new ones. In addition, needed data cannot be easily and directly accessed by end-users. When new reports are required, computer programmers must write new programs to extract the requested information.

A typical small firm, such as Infoage, can obtain significant improvements by replacing its current, centralized system with a LAN. For instance, it can replace its old legacy accounting software with up-to-date accounting software and place it on one or more LAN servers. Also, LAN users can share printers, data files, and other resources.

LAN Applications at Infoage, Inc. (2)

Currently, LANs can be used for a number of accounting and business related applications, including email, sharing data, sharing devices such as printers, and sharing network versions of applications software such as spreadsheets, data base management systems, and accounting software packages.

Infoage's public accountant, Steve Steinberg, has recently completed training in the use of LANs and their applications. Subsequently, Infoage's president, George Freeman, asked him to develop and implement a bus peer-to-peer, coaxial cable LAN network. Steve prepared a diagram of the configuration illustrating the proposed LAN applications (Figure 1). As shown, the clerical staff, the warehouse stores clerk, the secretary, the president, and his five managers will be connected to the LAN. (3) Steve recommends using the LAN version of the BusinessWorks Gold accounting software package for performing the accounting applications. Each BusinessWorks standalone module--purchasing/accounts payable, cash disbursements, sales/accounts receivable, billing and invoicing, and cash receipts--will be installed (distributed) on the PC of the clerk responsible for the procedure.

The president, his five managers, and the secretary will also use the LAN for non-accounting applications, including email, spreadsheets, graphics, desktop publishing, word processing, and groupware applications, such as electronic calendaring and scheduling. The warehouse, adjacent to the main office building, can be included in the LAN. To keep the example simple, only part of Infoage's expenditure cycle application is discussed.

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As portrayed in Figure 1, the partial expenditure cycle applications include the purchasing, accounts payable, cash disbursements, warehousing, and receiving systems. Software accounting modules for purchases, accounts payable, cash disbursements, and inventory reside on the hard disks of four microcomputers. Each module integrates with the general ledger package, which will be maintained on the hard disk of the treasurer/controller's (Diane Varney) PC.

Accounting Applications. The proposed LAN accounting application (see Figure 1) begins when Jack Dyson, inventory manager, approves manually completed purchase requisitions received from employees, including the two outlet branch managers. The approved purchase requisitions are given to one of the firm's secretaries. She uses the information in each purchase requisition to enter information in a preformatted purchase order (PO) displayed on her computer screen. The computer program then automatically fills in the price on each PO by scanning an up-to-date master supplier price list disk file. Because the PCs are now linked, Jack can employ an email package to electronically send the POs to the appropriate suppliers. (4)

Via intrafirm mail or email, Jack sends a copy of the PO to the employee initiating the purchase requisition. (5) A copy of each PO is also transmitted over the network to the purchasing and accounts payable (AP) microcomputers and to the warehouse stores clerk.

Some suppliers send acknowledgements to Jack via regular mail and others via fax and email. He sends these to the receiving clerk to inform her of when to expect shipment. When the goods are received, the receiving clerk counts the goods and uses her PC to enter the shipment information into a preformatted receiving report. Immediately on data entry, the software program compares the quantity on the PO with the quantity listed on the receiving report. Assuming that the quantities match, the transaction is automatically posted to all inventory records. Copies of the receiving report are electronically transmitted to the AP bookkeeper.

The payment process begins when the AP bookkeeper receives a supplier's invoice. She scans each invoice into her computer and the invoice is automatically matched with the correct purchase order and receiving report. She notes on the invoice the amount that is authorized to be paid and electronically transmits each invoice to the cash disbursements (CD) clerk. On the appropriate date, the CD bookkeeper enters into her PC the authorized amount to be paid each supplier and a check is automatically prepared by the BusinessWorks package. Simultaneously, the cash disbursements are automatically posted to the CD journal. She sends the checks via regular mail to the suppliers in payment of the goods. Finally, she electronically transmits a batch of check vouchers to the AP clerk. The AP clerk uses this batch of check vouchers, which represent cash payments to suppliers, to update the AP subsidiary ledger.

When the three clerks post the transactions to their respective electronic journals, the accounts on the general ledger module installed on Diane Varney's PC are immediately updated. As a result, financial reports and financial statements can be prepared on a regular basis.

Diane shares the one strategically located laser printer attached to a secretary's PC to print out these reports, which will be delivered to the president and other managers. (6) Alternatively, whenever desired, managers can enter their password to access Diane Varney's PC to display the reports on their computer monitor. They can also use the email package to send a message to Diane asking her to elaborate on items requiring further explanation and she can email her responses.

Other Applications. A LAN version of a spreadsheet package is installed on Diane's computer and is shared by other authorized users needing to analyze key financial information. To illustrate, if one of her staff is using the spreadsheet to prepare a cash forecast, Diane can access the forecast file, copy it to her computer, and analyze it. Diane can email a memo to the preparer suggesting changes to the cash forecast. The staff member can load the cash forecast on his/her computer, make the recommended modifications, and print out the forecast using the laser printer attached to a secretary's workstation.

George Freeman, the president, can email a message to Mike Barker, marketing manager, to determine the status of Mike's pending graphics presentation to one of the firm's important microcomputer suppliers. Mike can reply by email message to George, stating that the presentation, prepared using a desktop publishing package, is complete and transmit the presentation file over the network to George, who can edit it and make suggestions for improvement.

George can email a memo to Jane Thompson, the systems services manager, to draft a letter to one of the firm's consulting clients. Jane can draft the letter using her word processing package and transmit the draft to George, who can review and edit it. Because the letter is important in soliciting potential new business, George emails a request to meet with Jane.

LAN

The secretary can use electronic calendaring and scheduling software to determine the meeting time. Both George and Jane can access the calendaring software and post the times they are free to meet with one another. The secretary can access both George's and Jane's calendars, finalize the meeting time, and post it on each calendar.

Major duties of Mike Cannon, the office manager, include supervising the office staff, hiring new employees, training the staff, and so on. He can use the LAN to review reports pertaining to the staff's performance and email messages scheduling training sessions and other meetings. He can also review online resumes of applicants for positions and electronically send to the other managers resumes of promising applicants and receive their comments via email.

CONCLUSIONS

Many large firms have implemented advanced information technologies, such as client/server computing, enterprise resource planning software, e-business applications, and data warehouses, to improve the quality of managerial reports, generate real-time financial reporting applications, increase productivity, and share resources. However, for a variety of reasons, these advanced ITs may not be suited to smaller firms.

Nevertheless, smaller firms can significantly improve their outdated automated applications by implementing local-area networks--workstations, servers, network controllers, and other familiar hardware. LANs can significantly enhance the performance of smaller firms' automated accounting and non-accounting related applications.

Frequently, smaller firms lack the human resources to design the LAN applications discussed in this paper. Thus, public accountants should understand the essentials of local area networks so that they can market this important IT to clients.

A properly employed LAN, using up-to-date accounting software, can provide users with significant advantages. It is an effective means of enabling a variety of users to share information technology resources as well as information. It tends to be less costly than standalone systems. A well-designed LAN normally improves the productivity of employees; the LAN not only provides easier access to the needed services but also allows the employees and managers to communicate more easily and quickly with each other. Finally, a LAN is quite flexible, since workstations can easily be added or removed.

Endnotes

(1) This case adapted from Joseph W. Wilkinson, Michael J. Cerullo, Vasant Raval, and Bernie-Wing-On-Wong. Accounting Information Systems: Essential Concepts and Applications (New York: John Wiley and Sons, Inc., 2000), Chapter 1.

(2) This section adopted from Ibid.

(3) To keep the illustration simple, the two retail outlets are ignored.

(4) Any authorized employee can share the fax/modem on the secretary's computer. Thus, Infoage can save hundreds of dollars since each LAN user does not need this device.

(5) Infoage could implement a groupware system by installing an email and electronic calendaring and scheduling package. This package could be installed on part of the secretary's hard disk. Space on her hard disk is also reserved to store and retrieve messages.

(6) If Infoage's microcomputers were standalone units, one or two additional laser printers may be needed to adequately meet the firm's high-quality printing needs.

Michael J. Cerullo, PhD, CPA, CITP, CFE 

Virginia Cerullo, PhD, CPA, CIA, CFE

Michael J. Cerullo, PhD, CPA, CITP, CFE, and Virginia Cerullo, PhD, CPA, CIA, CFE, are both Professors of Accounting at Southwest Missouri State University in Springfield, MO.