Effect of Accounting Information System on Financial Performance of Firms: A Review of Literature

Effect of Accounting Information System on Financial Performance of Firms:

A Review of Related Literatures
GOFWAN, Hassan
Department of Accounting,
Bingham University,
Karu, Nasarawa State
E – Mail: hgofwan@gmail.com, Phone No: +234 7067248890
Abstract
In today’s world, Accounting information system is an absolute tool in the hands of managers striving to remain in a competitive advantage
amidst the rapid technological advancement, increased awareness and challenging demands from customers and business owners. This
study seeks to evaluate the effect of Accounting Information System on Financial Performance of Firms, using a review of empirical
literature approach. By means of an exploratory research design, the study concludes that the biggest impact Information technology has
made on accounting is the ability of companies to develop and use computerized systems to track and record financial transactions in
facilitating management decision making, internal controls, and quality of the financial report. The study therefore recommends that the
utilization of Accounting Information system, in other to continue to drive effective performance that can sustain productivity, must remain
a focal point in every organization.

Keywords: Accounting Information System, Performance, ICT Infrastructure

INTRODUCTION
Accounting information system is an absolute tool in the hands of managers striving to remain in a competitive advantage amidst the
rapid technological advancement, increased awareness and challenging demands from customers and business owners. This review
examines the effect of accounting information system on financial performance of firms. The main objective is to review conceptual
and theoretical foundations as well as empirical literature relating to accounting information system. Accounting information
system according to Manchilot (2019) may be a computer-based electronic system used for collecting, storing,
processing and communicating financial and accounting data through financial statements with the aim of supporting and
guiding organizational decision making process. Computers are the hub of accounting information as they provide a
platform for the workability of all information systems. For an accounting information system to be operational, its
appropriate software application must be on the computer system intending to be used. Financial performance is a critical
turning point for prosperity of any financial institution. Many AIS have been adopted and used to ensure effectiveness of AIS on
financial performance. 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, government institutions and parastatals in performing their job Wilson
Ayabei (2020). However, reviewing related literature for appraisal purposes form part of this study objective is to look at
effect of accounting function information system on financial performance of firms
LITERATURE REVIEW
Accounting Information System
Amos I. Ganyam, John A. Ivungu (2019) conducted a study on the Effect of Accounting Information System on
Financial Performance. The study is a literary review, the review views accounting information system as an absolute
tool in the hands of managers striving to remain in a competitive advantage amidst the rapid technological advancement,
increased awareness and challenging demands from customers and business owners.
Financial Performance
Existing literature offers scant evidence of the relationship between these AIS and financial performance Oguntimehin,
(2001); though it is important to highlight the study made by Elena Urquia Grande, Raquel Perez Estebanez and Clara
Munoz Colomina (2010) which discovered a positive association between AIS design and organizational strategy and
performance. Pandey (2004). defines financial performance as a subjective measure of how well a firm uses assets from
its primary mode of business to generate revenues. He further says that the term can also be used as a general measure of

DEPARTMENT OF ACCOUNTING – 2nd Departmental Seminar Series with the Theme – History of Accounting Thoughts: A Methodological Approach Page 57
Effect of Accounting Information System on Financial Performance of Firms: A Review of Literature

a firm's overall financial health position over a given period of time, and can be used to compare similar firms across the
same industry or to compare industries or sectors in aggregation.
Timeliness and Financial Reporting
Timeliness of financial reporting is an essential part in determining the relevance of accounting information. With
reference to timeliness, the International Accounting Standards Board (IASB) considers timeliness as a crucial part in
financial reporting. The timeliness of financial statements is an essential qualitative characteristic of financial reports as
identified by Imam (2001). According to Ismail and Chandler (2004), information that is disclosed on time provides
more valuable information to users of financial reporting. The need for timely information to the users of financial
reporting will enable them to make prompt review as to further contribute their financial performance.
Transparency
Transparency is one of the virtuous elements in corporate governance (OECD, 1998) which includes timeliness of
financial reporting Kulzick and Raymond, (2004). According to Dezoort and Salterio (2001), timely institutional
financial reporting is an important qualitative element and an essential component of financial performance. This is
because it determines relevancy of the information and influences the decisions made by the users of the financial report.
The level of financial voluntary disclosure may be able to affect institution’s financial performance Hassan (2008). In
addition, it facilitates ease of auditing by both internal auditors and external auditors leading completion of audited
financial report in advance.
Empirical Review
Augustine et al. (2014) examine the impact of accounting information systems on profitability level of small scale
businesses in Kampala city, Uganda, East Africa. The Major problem identified was that, most small scale businesses do
not have accounting information systems which result into continuous low performance levels. Descriptive method was
used where qualitative data was collected. Secondary data was collected to analyze the impact of accounting information
systems on profitability level of small scale businesses. Research findings revealed that most small scale businesses do
not apply accounting information systems which result into low profits. In addition to that, the findings show that there is
a positive relationship between accounting information systems and profitability level of small scale businesses.
Accounting plays an important role in our economic and social systems especially in its management and great work it
does in facilitating management decision making process. This study therefore recommends that small scale businesses
should adopt these systems in their business management. The Government and policy makers should come up with
policies and guidelines that will facilitate the implementation of these systems in the business environment. Such policies
could include tax waivers or tax reductions on equipment to be used in these systems.
Theoritical Discussion
Contingency Theory
This suggests that AIS should be designed in a flexible manner so as to consider the environment and organizational
structure confronting an organization. AIS also need to be adapting to the specific decisions being considered. In other
words, accounting information systems need to be designed within an adaptive framework. The first paper to specifically
focus on the contingency view of AIS in the accounting literature was "A Contingency Framework for the Design of
AIS,Gordon and Miller, (1976). This paper laid out the basic framework for considering AIS from a contingency
perspective. Gordon and Narayanan (1984) concluded that environmental uncertainty is a fundamental driver for
designing management accounting systems among successful organizations. A key finding in this study was that, as
decision makers perceive greater environmental uncertainty, they tend to seek more external, non-financial and ex ante
information in addition to internal, financial and ex post information. The basic contingency framework consists of
environment factors and institution-specific factors that affect to competitive strategy. The competitive strategy is
effectiveness of AIS affected by scope, timeliness, level of aggregation and integration. Finally, effectiveness of AIS
affects effectiveness of financial performance

Activity Theory

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Effect of Accounting Information System on Financial Performance of Firms: A Review of Literature

Activity theory is an approach to understanding human work and technology which emphasizes the long-term well-being
of workers or users. Eschewing “one best way” task design for user- determined task procedures, action theorists seek to
design work practices that are enriching and that lead to development of skills and knowledge. Activity theorists argue
that acceptance of technology is contingent on the extent to which it meets these goals in the context of the user’s own
work. Activity theory largely aligns itself with the broad humanistic aims and the methods of the socio-technical
approach. It is at least partially distinguishable by its emphasis on the product of the organizational process which
characterizes socio-technical systems thinking Martin and Leben (1989).
METHODOLOGY
By means of an exploratory research design, using a literature review approach, this study examines the effect of
Accounting Information System on Financial Performance of Firms.
RESULT AND DISCUSSION
This study being an exploratory approach, with emphasis on empirical review, draws its discussion from further
empirical review. Such review includes those of Hla and Teru (2015) who examined the efficiency of accounting
information system on performance measures. The study employed an exploratory approach solely relying on secondary
data. Findings revealed that the biggest impact Information technology has made on accounting is the ability of
companies to develop and use computerized systems to track and record financial transactions in facilitating management
decision making, internal controls, and quality of the financial report.
Patel (2015) investigates the impact of AIS on the profitability of an organization. The study employed an exploratory
research method making use of solely secondary data. Findings from the review of literature revealed that there is a
positive significant relationship between the accounting information systems used by the enterprises and its profitability.
The study concluded that the effectiveness of accounting information systems helps in better decision making by
managers, more effective internal control systems, improvement of the quality of financial reports, enhancement of
performance measures, facilitating financial transaction processes and helps in expansion of profitability of the
organization. Saeidi (2014) examines the impact of accounting information systems on financial performance. The study
employed a survey research design and obtains data from 40 top managers in Tata consultancy services (TCS) companies
in India through questionnaire. The study analysed the collected data using the statistical package for social sciences
(SPSS) and uses the one samples t-test statistics to test the hypotheses. Findings revealed that accounting information
system has a significant relationship with knowledge and understanding of managers and accountants, decision making,
financial performance and organizational resources. The study concluded that there is a positive relationship in
Knowledge and understanding of managers and accountants, decision making, financial performance and organizational
resources.
CONCLUSION AND RECOMMENDATION
The study concludes that the biggest impact Information technology has made on accounting is the ability of companies
to develop and use computerized systems to track and record financial transactions in facilitating management decision
making, internal controls, and quality of the financial report. It is therefore recommended that the continuous u.se of
requisite ICT infrastructures that makes up an Accounting Information System, which will lead to more effectiveness and
productivity in firms must remain a focal point
References
Augustine Muhindo, Maureen Kapute Mzuza and Jian Zhou ( 2014). Impact of Accounting Information Systems on
Profitability of Small Scale Businesses: International Journal of Academic Research in Management Vol. 3, No. 2,
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Ayabei (2020) Impact of Accounting Information System on the Organizational Performance: A Case Study of Procter
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DEPARTMENT OF ACCOUNTING – 2nd Departmental Seminar Series with the Theme – History of Accounting Thoughts: A Methodological Approach Page 59
Effect of Accounting Information System on Financial Performance of Firms: A Review of Literature

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