Impact Of Accounting Information Systems On Organizational Effectiveness Of Automobile Companies In Kenya (msc Project)

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ABSTRACT

Currently, most organizations continue to increase spending on information system and their budgets continue to rise. Moreover, economic conditions and competition create pressures about costs of information. Generally, information system is developed using information technology to aid an individual in performing their job. Therefore, most organizations focus on developing information system in order to support decision system, communication, knowledge management, as well as many others. The key part of information system needed for decision making in organization is accounting information system.

Management in the automobile organizations in Kenya relies heavily on information generated from the AIS employed by the company. Quality reports are very key to arrive at an ideal investment. Traditional way of recording, summarizing and reporting company financial reports led to less optimal decisions. Investment in good and reliable accounting systems has become a major concern for all managers as it leads to better management and analysis of firm’s performance. This has led the researcher to investigate on the application and use of accounting systems by automakers and thus, its impact on the organizational effectiveness.

The study is of key importance to the selected automobile companies as well as other firms in the same sector in terms of determining the benefits accruing due to the integration of accounting information systems in their operations. This enabled automotive firms in gauging the model in terms of enhancing organizational effectiveness. The study is useful to other researchers interested in the problem under investigation as the study has laid a platform on which further studies related to the subject can be undertaken.

The design of the study is descriptive research method. In addition both qualitative and quantitative methods were applied in data collection and analysis. The descriptive design is found to be suitable because it addresses major objectives and research questions proposed in the study adequately. The study gathered both primary and secondary data. Primary data was obtained through interviews and questionnaires to randomly selected employees from the selected companies. The use of interviews was ideal since it guaranteed confidentiality to the respondents thus they acted without any fear or embarrassment. Primary data was collected using interviews conducted one on one with the researcher and questionnaires were circulated and filled by the respondents. Secondary data included censuses, organizational records and data collected through qualitative methodologies or qualitative research.

The findings of this study indicate that Accounting Information Systems are an important mechanism for organizations’ effective management, decision-making and controlling activities. The results are consistent with empirical reviews which indicated that there exist a relationship between AIS and organizational performance. AIS are an effective decision-making tool for controlling and coordinating the activities of an organization. The study concluded that AIS are critical to the production of quality accounting information on a timely basis and the communication of that information to the decision makers. In other words, empirical findings indicated that accounting information systems have a greater impact on the organizational effectiveness of automobile companies in Kenya.


        TABLE OF CONTENTS    
Declaration......................................................................................................................................
i

Acknowledgement .........................................................................................................................
ii

Dedication .....................................................................................................................................
iii

Abstract
.........................................................................................................................................
iv

List of Abbreviations ...................................................................................................................
vi

Table of Contents ........................................................................................................................
vii

List of Tables ....................................................................................................
xi

CHAPTER ONE : INTRODUCTION    
1.1
Background of the Study ..................................................................................
1

1.1.1
Accounting Information Systems .........................................................
2

1.1.2
Organizational Effectiveness ........................................................................................
3

1.1.3
Relationship between Accounting Information Systems and Organizational

        Effectiveness .................................................................................................................
4

1.2
Research Problem .................................................................................................................
5

1.3
Objective of the Study ..........................................................................................................
7

1.4
Importance of the Study ........................................................................................................
7

CHAPTER TWO: LITERATURE REVIEW    
2.0
Introduction ...........................................................................................................................
8

2.1
Theoretical Literature............................................................................................................
8

2.1.1
Contingency Theory .....................................................................................................
8

2.1.2
Agency Theory .............................................................................................................
9

2.1.3
Behavioral Theory ......................................................................................................
10

2.2
Determining Criteria of Effectiveness ................................................................................
10

2.3
Empirical Literature ............................................................................................................
11

2.3.1
AIS and Organizational Effectiveness ........................................................................
11

2.3.2
Internal Controls .........................................................................................................
12

2.3.3
Human Resources .......................................................................................................
14

2.4
Review of Local Studies .....................................................................................................
16

2.5
Summary .............................................................................................................................
17


vii
 
CHAPTER THREE: RESEARCH METHODOLOGY

3.1
Introduction .........................................................................................................................
19

3.2
Research Design..................................................................................................................
19

3.3
Population and Sample .......................................................................................................
19

3.4
Data Collection ...................................................................................................................
20

3.4.1
Reliability and Validity of Data .......................................................................................
20

3.5
Data Analysis ......................................................................................................................
20

3.5.1
Conceptual Model ............................................................................................................
21

3.5.2
Analytical Model .............................................................................................................
22

CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION    
4.1
Introduction .........................................................................................................................
23

4.2
Summary Statistics..............................................................................................................
23

4.2.1
    Response Rate.............................................................................................................
23

4.2.2
    Trading name of the respondent’s company ...............................................................
23

4.2.3
    The legal status of the respondent’s firm....................................................................
24

4.2.4
    The respondent’s years of service ..............................................................................
24

4.2.5
    The gender of the respondents ....................................................................................
25

4.2.6
    The respondent’s department ......................................................................................
26

4.2.7
    The leadership team has a clear vision and mission ...................................................
26

4.2.8
    The vision is known to all...........................................................................................
27

4.2.9
    Staff are involved in achieving the vision and mission ..............................................
28

4.2.10
Each department has measures of their quality of service ..........................................
28

4.2.11
Organizational performance is measured regularly ....................................................
29

4.2.12
Performance measures are shared regularly with staff ...............................................
30

4.2.13
Financial reports are published regularly ...................................................................
30

4.2.14
Managers set personal and business objectives ..........................................................
31

4.2.15
People are committed to the organization ..................................................................
32

4.2.16
The morale of staff is positive ....................................................................................
32

4.2.17
The market is relatively stable ....................................................................................
33

4.2.18
Employees know what is expected of them................................................................
33

4.2.19
Employees have the materials and equipments needed to do their job ......................
34

            viii    
 
4.2.20    Employees are encouraged to develop their knowledge and skills    35

4.2.21    Employees are committed to doing quality work    35

4.2.22    The company has been reporting increased profits    36

4.2.23    The company has been reporting increased revenue    37

4.2.24    The company has been reporting increased market share    37

4.2.25    Does your firm use any AIS for its financial and economic management    38

4.2.26    Does AIS play an important role in planning the firm’s strategies    38

4.2.27    Shortcomings of using AIS    39

4.2.28    Do you use the same computerized accounting program for financial, cost and

management accounting    39

4.2.29    How long have you been doing your accounting with a computer program    40

4.2.30    Does computerized AIS allow you to manage your cash position with banks    41

4.2.31    Does AIS allow you to manage your fiscal affairs with government bodies    42

4.2.32    Does AIS improve your firm’s organization and administration    42

4.2.33    Are you familiar with new technologies such as ERP, CRM and XML    43

4.2.34    Rating of your AIS towards organizational effectiveness    44

4.2.35    The System is reliable    44

4.2.36    The System is easy to learn and understand its features    45

4.2.37    The response time for the system is fast    46

4.2.38    The System is flexible    46

4.2.39    Management reports are reliable    47

4.2.40    Web pages are accurate and updated    48

4.2.41    System outputs are clear    48

4.2.42    IT team provide support for the system    49

4.2.43    IT team has the technical competence    49

4.2.44    ICT team is responsive, timely and reliable    50

4.2.45    Staff utilize the capabilities of an information system    51

4.2.46    Customers utilize the capabilities of an information system    51

4.2.47    The system is appropriately used    52

4.2.48    The system is extensively used    53

4.2.49    Users are satisfied with the system reports    53
 
4.2.50 Users are satisfied with the IT team support ...........................................................54

4.2.51 AIS improves decision making ...............................................................................54

4.2.52 AIS improves firm sales, profits and market efficiency ............................................55

4.2.53 AIS reduces operating costs ...................................................................................56

4.2.54 AIS improves consumer welfare ............................................................................56

4.2.55 AIS leads to creation of jobs and economic development.........................................57

4.3 Empirical Model ........................................................................................................58

4.4 Discussion ................................................................................................................59

4.5 Summary ..................................................................................................................59

CHAPTER FIVE: SUMMARY,CONCLUSION AND RECOMMENDATIONS    
5.1 Introduction ................................................................................................................60

5.2 Summary of the Study ...................................................................................................60

5.3 Conclusion .....................................................................................................................61

5.4 Limitation of the Study ...................................................................................................62

5.5 Recommendations for Further Study ...............................................................................62

References ..........................................................................................................................63

Appendix I:Questionnaire ....................................................................................................68

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The Automotive industry in Kenya is primarily involved in the retail and distribution of motor vehicles. There are a number of motor vehicle dealers operating in the country, with the most established being Toyota (East Africa), Cooper Motor Corporation, General Motors, Simba Colt and DT Dobie. There are also three vehicle assembly plants in the country, which concentrate on the assembly of pick-ups and heavy commercial vehicles.

The established dealers face intense competition from imported second-hand vehicles, mainly from Japan and United Arab Emirates. These imports now account for about 70% of the market. The last decade witnessed a significant decline in the number of new vehicles sold in the country. There has been a steady recovery in the last four years, but the numbers achieved still fall far short of the numbers recorded a decade ago. In 2004, the leading motor vehicle companies recorded sales of 9,979 units. Although 27% better than the previous year, this is still well below the levels achieved in the early 1990’s.The slump in the volume of new cars sold is attributable the increased competition from second hand vehicles and the depressed economy.

The Kenya Motor Industry Association (KMI), the representative body of the corporate participants in the motor industry, has been lobbying hard to reverse this trend. Some of these measures have helped the industry recover from its lowest point in 2000, when only 5,869 units were sold. On their part, the companies themselves have become more innovative in responding to customer needs. Some of the measures that KMI has been advocating include: Implementation of strict criteria on importation of second hand vehicles, Incentives to promote local assembling of commercial vehicles & Export incentives aimed at encouraging car manufacturers to expand operations in the region.

Pressures in the highly competitive automotive manufacturing sector increase and over-capacity, particularly in vehicle assembly, mean that most suppliers face unrelenting price pressure. The rapid development of the low-cost labor economies in Eastern Europe, South East Asia, China

and India is putting enormous pressures on labor intensive suppliers. The drive for lower costs and a technical edge are therefore vital for survival.

1.1.1 Accounting Information Systems

Accounting Information Systems (AIS) are a tool which, when incorporated into the field of Information and Technology systems, are designed to help in the management and control of topics related to organization’ economic-financial area. But the stunning advance in technology has opened up the possibility of generating and using accounting information from a strategic viewpoint (El Louadi, 1998). Accounting Information System (AIS) is vital to all organizations (Borthick and Clark, 1990; Curtis, 1995; Rahman et al., 1988; Wilkinson, 1993; Wilkinson et al., 2000) and perhaps, each organization either profit or non profit-oriented need to maintain the AISs (Wilkinson, 2000: 3-4). On the other hand, an AIS is the whole of the related components that are put together to collect information, raw data or ordinary data and transform them into financial data for the purpose of reporting them to decision makers (LI, M., YE, L.R. 1999).To better understand the term ‘Accounting Information System’, the three words constitute AIS would be elaborated separately. Firstly, literature documented that accounting could be identified into three components, namely information system, “language of business” and source of financial information (Wilkinson, 1993: 6-7). Secondly, information is a valuable data processing that provides a basis for making decisions, taking action and fulfilling legal obligation. Finally, system is an integrated entity, where the framework is focused on a set of objectives (Watts, 1999).

Accounting literature argues that strategic success is considered an outcome of Accounting Information Systems (AIS) design (Langfield-Smith, 1997). Several, studies have analyzed the impact of AIS in strategic management, examining the attributes of AIS under different strategic priorities (Ittner and Larcker, 1997; Bouwens and Abernethy, 2000). It has also been analyzing the effect on performance of the interaction between certain types of strategies and different design of AIS (e.g. different techniques and information). The appropriate design of AIS supports business strategies in ways that increasing the organizational performance (Chenhall, 2003). Increasing AIS investment will be the leverage for achieving a stronger, more flexible corporate culture to face persistent changes in the environment. Innovation is the incentive with which a virtuous circle will be put in place, leading to better firm performance and a reduction in the financial and organizational obstacles, while making it possible to access capital markets. AIS are systems used to record the financial transactions of a business or organization. AIS combines the methodologies, controls and accounting techniques with the technology of the IT industry to track transactions, provide internal reporting data, external reporting data, financial statements, and trend analysis capabilities to affect on organizational performance (GUL, F.A. 1991).

In managing an organization and implementing an internal control system the impact of accounting information system (AIS) is crucial. An important question in the field of accounting and management decision-making concerns the fit of AIS with organizational requirements for information communication and control (Nicolaou, 2000). Benefits of accounting information system can be evaluated by its impacts on improvement of decision-making process, quality of accounting information, performance evaluation, internal controls and facilitating company’s transactions (Bolon, 1998).

1.1.2 Organizational Effectiveness

Organizational effectiveness is the concept of how effective an organization is in achieving its goals. Every employee in a company contributes to organizational effectiveness. Taking into account skills, experience, motivation and rank, some employees play a bigger role than others. These are the people who contribute to the development of organization mainly with their knowledge (Scott, 1977).

Organizational effectiveness was succinctly defined by Daft (1983) as “the degree to which an organization realized its goals”. However, Mondy, (1990) defined it aptly as “the degree to which an organization produce the intended output” As Daft rightly argued. Organizations pursue multiple goals, and such goals must be achieved in the face of competition limited resources, and disagreement among interest groups. Oguntimehin (2001) submitted that organizational effectiveness is the ability to produce desire results.

There are many ways to measure the effectiveness of an organization, which include different criteria such as productivity, profits, growth, turnover, stability and cohesion. Rational perspectives focus on the achievement of previously set goals and on output variables such as quality, productivity and efficiency. Natural system perspectives focus on the support goals of the organization such as employee satisfaction, morale and interpersonal skills. Open system perspectives focus on the exchanges with the environment; this includes information processing, profitability, flexibility and adaptability (Campbell, 1977).

1.1.3 Relationship between Accounting Information Systems and Organizational Effectiveness

Ponemon and Nagida (1990) assert that the main reason for which accounting information is generated is to facilitate decision making. However, for financial reporting to be effective, among other requirements, it is relevant, complete and reliable. These qualitative characteristics require that the information must not be unfair nor has predisposition of favoring one party over the others. Accounting information should give a decision maker the capacity to predict future actions. It should also increase the knowledge of the users to identify similarities and differences in two type of information (Bolon, 1998). Therefore, reliable accounting information can be described as an essential pre-requisite for stock market growth. Based on the “engine of economic growth” potential of the stock market, developed nations do not toy with their Stock Markets and relevance of financial reporting.

Hunton, (2002) study, which investigated the relationship between automated accounting information system and organizational effectiveness; showed that there was strong relationship between accounting information system and organizational effectiveness, which means access to accounting information will lead to organizational effectiveness. Several recent studies on value of accounting information for equity valuation, share price and earnings prediction have queried current financial reporting model in the developed world. The same issue can be raised in Nigeria about the value relevance of accounting numbers to investors. This assists the researcher to determine whether the result agrees or digresses from the previous studies.

In managing an organization and implementing an internal control system the role of accounting information system (AIS) is crucial. An important question in the field of accounting and management decision-making concerns the fit of AIS with organizational requirements for information communication and control. Although the information generated from an accounting information system can be effective in decision-making process, purchase, installation and usage of such a system are beneficial when the benefits exceed its costs. Huber, (1990) agrees that automated accounting information system aids decision making for management of organizations. Benefits of accounting information system can be evaluated by its impacts on improvement of decision- making process, quality of accounting information, performance evaluation, internal controls and facilitating company’s transactions. Regarding the above five characteristics, the effectiveness of AIS is highly important for all the firms.

1.2 Research Problem

Currently, most organizations continue to increase spending on information system and their budgets continue to rise. Moreover, economic conditions and competition create pressures about costs of information. Generally, information system is developed using information technology to aid an individual in performing their job. Therefore, most organizations focus on developing information system in order to support decision system, communication, knowledge management, as well as many others. The key part of information system needed for decision making in organization is accounting information system.

Today, information technology and an increasingly transparent financial sector have become key driving forces in business operations, strategies, structures, ownership, and performance. These forces cut across many industries to force changes that, in turn, have had significant economic and social impacts on the organizational effectiveness (Doms, Jarmin and Klimek, 2004). Structurally, the emerging information technology industry is uncharacteristic of typical traditional processes which has gradually grown out of the need to increase efficiency and cut on operations costs in the industry. The ability of automobile firms to achieve competitive advantage is predicated, in part, on their capacity to develop efficient, internalized accounting information systems to provide market coordination and linkages between their operations and global commodity and financial markets (Curtis, 1995).

Accounting Information Systems (AIS) is an important topic for managers and researchers alike. However, there is evidence of a gap between FIS research and practice. Huber (1990) on accounting information systems and management decision- making opines that in managing an organization and implementing an internal control system the role of accounting information system (AIS) is crucial. He questioned the fit of AIS with organizational requirements for information communication and control and concluded that although the information generated from an accounting information system can be effective in decision-making process, purchase and installation, the usage of such a system are beneficial when the benefits exceed its costs.

Hunton, (2002) investigated the relationship between automated accounting information system and organizational effectiveness. He showed that there was strong relationship between accounting information system and organizational effectiveness. To compare Accounting Information System Chang, Y. W. (2001) studied the nexus between organizational strategies and performance. They found out that organizations systematically vary the AIS design to support their chosen strategy, recognizing that AIS have the potential to facilitate strategy management and enhance organizational performance (Chang, 2001).

Management in the automobile organizations in Kenya relies heavily on information generated from the AIS employed by the company. Quality reports are very key to arrive at an ideal investment. Traditional way of recording, summarizing and reporting company financial reports led to less optimal decisions. Investment in good and reliable accounting systems has become a major concern for all managers as it leads to better management and analysis of firm’s performance. This has led the researcher to investigate on the application and use of accounting systems by automakers and thus, its impact on the organizational effectiveness (Author, 2013).

This current study examines in detail two possible explanations for the gap. First, is the deficiency in transfer of academic knowledge on accounting information systems to practice and secondly, the insufficient use of the accounting information systems. It will examine the use and logic of transformation of AIS in the automotive industry. This study departs somewhat from the above practice of focusing on the ways in which specific information technologies affect the operation of organizations but specifically focus on the impact of Accounting Information Systems on the effectiveness of the Kenyan Automobile Industry. How does accounting information system contribute to the effectiveness of the automobile industry in Kenya?

1.3 Objective of the Study

The objective of this study is to determine the impact of accounting information systems on the effectiveness of automobile companies in Kenya.

1.4 Importance of the Study

The study is of key importance to the selected automobile companies as well as other firms in the same sector in terms of determining the benefits accruing due to the integration of accounting information systems in their operations. This enabled automotive firms in gauging the model in terms of enhancing organizational effectiveness. The study is useful to other researchers interested in the problem under investigation as the study has laid a platform on which further studies related to the subject can be undertaken.

The study would provide a theoretical basis about accounting information system successful adoption dimension to firms. It would provide practical guidance for accounting information systems implementation in small and medium business and it would also provide empirical and practical contributions for organization in effectively applying accounting information system in their operations.

Accounting information systems provide information about the financial resources, obligations, and activities of an enterprise that is intended for use primarily by external decision makers – investors and creditors. This study provides useful information in making investment and credit decisions.

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