Thesis Paper on Implementation of Accounting Information System of Insurance Industry sector in Bangladesh

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CHAPTER- 01

INTRODUCTION

1.1 An overview about Insurance business in Bangladesh.

1.1.1 Information System of Insurance Business.

1.1.2 Important control features for insurance business

include.

1.1.3 Approaches to Topics.

1.2 Objectives of the study.

1.3 Methodology of the study.

1.4 Scope of the study.

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1.1 An overview about Insurance business in Bangladesh

Insurance is a mechanism of transferring risk. Insurance should be treated as a basic human need in terms of wide range of human activities and situations. The insurance industry of Bangladesh now consists of 44 General Insurance Companies (non-life) including state owned Sadharan Bima Corporation and 18 Life Insurance Companies including state owned Jiban Bima Corporation. The sector is playing a vital role in the economy of the country. 1.1.1 Information System of Insurance Business

The insurance business accounting information system must not only aid the insurance companies in achieving its basic objective but also incorporate those features necessary to comply with regulatory requirements. The insurance business accounting information system includes following areas:

1 Organization

2 Unique accounting practices

3 Management information requirements 4 Accounting controls

1.1.1

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1 Organization: The organization of an insurance business depends upon its functions and services. Most insurance companies are divided into a marketing division, underwriting division, re-insurance division, claims division and financial division. If the insurance company offers trust services a trust division is often established.

1.1.1

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2 Unique accounting practice: Insurance companies must comply with certain regulatory requirements and reporting practices.

1.1.1

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3 Management Information requirements: Insurance business management needs a variety of reports and information for both external and internal purposes. Financial statements are often required by stockholders, the SEC and other regulatory agencies.

For internal purpose, management needs a variety of reports should include a variety of information reports on marketing activity, underwriting activity, re-insurance activity, claim activity and financial activities.

1.1.1

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4. Accounting controls: Many aspects of insurance accounting are unique. Almost every piece of paper utilized by insurance company becomes a sources document for the accounting entry. Such papers include Money Receipts, checks, deposit slips, debit and credit vouchers. Insurance company process hundreds of source documents each day. As consequence, it is imperative that insurance companies make posting their books each day. Assets of insurance companies including cheques, cash.

One of the most important accounting controls is the safeguarding of these assets. Primary objectives of insurance company‟s internal control should be to promote dual control over

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such cash and cash equivalent assets and to fix responsibilities for recording transactions and maintaining assets.

1.1.2 Important control features for insurance business include:

 Segregating duties among personnel handling assets, recording transactions and supervision.

 Rotating duties among employees.

 Requiring that every officer and employee of the employee take full uninterrupted vacations so that transactions under the control of any one individual may clear.  Exercising dual control over cash and cash equivalent assets by requiring the

authorization, approval or action of two individuals to complete a transaction.  Establishing a strong, independent internal audit department.

1.1.3 Approaches to the Topic

Insurance should be treated as a basic human need over a very wide range of human activities and situations. Insurance companies need an efficient Accounting Information System that enables the company to administer and present Insurance services and products effectively. Insurance companies must maintain an IT based Accounting Information System to survive in the competitive Insurance market.

During the last twenty years, insurance industry in the developed world has undergone tremendous change, Deregulation, technological innovation and competition contributed largely to the developments that took place during the decades. As a result, insurance information is very much important for the economy. To provide relevant information in time the insurance sector should have a unified accounting information system. Effective AIS is essential for data collection, data management, data maintenance, and data control and information generation of the insurance business. But the information handing units of the insurance business have not been properly organized. Rules and procedures have not been properly developed to guide information handling departments. In this situation this thesis

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1.2 Objectives of the Study

There are two objective of this paper they are:

1.2.1 Board objectives:

The Board objectives of the report are to analyze the concept of Accounting Information Systems.

 To know about the system mainly the insurance companies follow for their Insurance business operation: manual, computerized and combination of manual and computerized.

 To know about the methods of accounting system they follow in their Insurances: accrual and combination of accrual and cash.

 To know about their overall data control or internal control system: weak, sound or totally sound.

 To know how they provide information to their internal management and external decision makers.

 To know about the satisfaction of the insurance companies about their AIS and problems of AIS.

1.2.1 Specific objectives: The Specific objectives are:

 To analyze the existing Accounting Information System  To identify the problems of implementing existing system.

 To find out the strengths and weaknesses of the process and also the problems usually face to implement Accounting Information System.

 To find out proper solution for the problems of existing AIS.

1.3 Methodology of the study

The study has been conducted through review of the relevant provisions of the applicable laws, Accounting software, Accounting manual, Reports, Publications etc., Survey, discussion and interview have also been made.

Primary Data: The various methods which will be used to collect primary data these are: 1. Direct personal investigations.

2. Oral conversions and interviews. 3. Information from colleagues. 4. Survey.

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Secondary Data: The various methods of collecting secondary data will be as follows: 1. Published text books, Journals, Research papers, articles, etc.

2. Annual reports of Insurance companies.

3. Insurance Act, Insurance Rules, Securities and Exchanges Commission Rules, Income Tax ordinance, Accounting manual, Software.

4. Internet.

1.4 Scope of the study

The scope is restricted with AIS of insurance business guided by the relevant laws, regulations and warranties of the insurance Act 1938, the Insurance Rules 1958, the Companies Act, 1994, the Securities and Exchange Commission (SEC) Rules 1987, Bangladesh Accounting Standards (BAS) and other applicable laws and regulations and prevailing practices.

1.5 Limitations of the study

I had secondary data available; I had to face some limitations while doing this study. These include:

 Time constraints  Misinterpretations

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CHAPTER- 02

HISTORY OF INSURANCE

INDUSTRY

2.1 Introduction.

2.2 History and Development of Insurance.

2.2.1 Marine Insurance.

2.2.2 Fire Insurance.

2.2.3 Life Insurance.

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2.1 Introduction

Insurance is a system of spreading the risk of one onto the shoulders of many. Whilst it becomes somewhat impossible for a man to bear of himself 100% loss to his own property or interest arising out of an unforeseen contingency, insurance is a method or process which distributes the burden of the loss on a number of persons within the group formed for this particular purpose.

2.2 History & Development of Insurance

The origin of insurance is lost in antiquity. However, there is no evidence that insurance in its present form was practiced prior to the twelfth century. A brief chronological historical development of the various branches of insurance is given below

2.2.1 Marine Insurance

Marine is the oldest form of insurance and came first in the list. This type of insurance probably began in northern Italy sometime during the 12th& 13th century and gradually the concept was rather transferred to or taken over by the United Kingdom. During the 13th / 14th century the Italian merchants went to UK and along with the merchandise carried with them the trading customs including the concept of marine insurance. Marine insurance as such was not being practiced as a separate specialized entity during that time since it were the merchants who used to transact marine insurance business side by side with their general trading activities.

2.2.2 Fire Insurance:

After marine insurance fire insurance develop in present form. It had been observed in Anglo-section Guild form for the first time where the victims of the fire hazards were given personal assistance by providing necessaries of life. It 15 had been originated in Germany in the beginning of sixteenth century. The fire insurance got momentum in England after the great fire in 1666 when the fire losses were tremendous.

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The third in the list of development is the life insurance business. The earliest policy of which there is a record dates back to 1583. During this period only short term polices were used be issued meaning that only at the death of the life assured during the term period the money was to be paid. On survival nothing was payable. In 1693 Halley introduced the mortality table giving a definite value to risk of death. In 1974, the life Assurance Act was passed in the British parliament requiring the presence of insurable interest before one could affect a life policy on the life of another. All these gradually gave life assurance a sound, systematic and scientific basis as we see in the present day.

2.3 Development of Insurance in Bangladesh

Insurance is not a new idea or proposition to the people of Bangladesh. About half a century back, during the British rule in the then India, some insurance companies started transacting insurance business, particularly life in this part of the world. Since 1947 until 1971 insurance business gained momentum in this part of what was then known as East Pakistan. There were about 49 companies transacting both life and general insurance business. These companies were of various origins, Viz, British, Australian, Indian, West Pakistani and East Pakistani. Except a few companies these were mostly limited liability companies acting under a free competitive economy. With the emergence of the People‟s Republic of Bangladesh, the government in order to make available the fruit of liberation to the general mass, nationalized the insurance industry in 1972 by presidential order no 95 more specially known as the Bangladesh insurance (Nationalization) order1972.

By virtue of the order, save and except postal life insurance and foreign life insurance companies (other than the Pakistani companies), all companies and organization transacting all types of insurance business in this country came under this nationalization. Five insurance corporations were basically established, Viz.

i) Jatiya Bima Corporation ii) Teesta Bima Corporation iii) Karnaphuli Bima Corporation iv) Rupsa Jibon Bima Corporation

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9 v) Surma Jiban Bima Corporation

The Jatiya Bima Corporation was not an under writing corporation, actually, it was a central corporation to supervise and control the activities of the remaining four subsidiary corporations. As per this order Teesta and Karnaphuli were made responsible for general insurance business and Rupsa and Surma was made responsible for life insurance business. All the existing 49 companies were merged with this 4corporation whilst life companies or the life portion of a composite company joined the Rupsa and Surma, the general companies or the general portion of a composite company joined the Teesta and Karnaphuli. Formation of two corporations Although the basic idea behind creating 2 corporations in each main branch was to encourage competition even under a nationalized system, it was observed soon that the unnecessary administration expenses for maintaining these two corporations in each front and are apex institution. Therefore, on 14th May, 1973 the structural arrangement under nationalization was changed vide act VI 1973.

The previous 5 corporation were abolished and instead 2corporations were established, Viz. i) Sadharan Bima Corporation for transacting general insurance business only. The two

general insurance corporations were merged under it. ii) Jibon Bima Corporation

For transacting the life insurance is business only. The two life insurance corporations were merged under it. In the sector, postal life insurance business and corporation of life business by foreign companies (other than Pakistan) are still permitted as before.

This is the present structure under which the insurance business in transacted in this country. Insurance is not altogether a new idea in this country, but somehow it could not flourish much. Now however, there is enough provision for tapping the untapped resource and potentialities. During the Pakistan or Pre-Pakistan period this market was basically a production market dealing only in limited conventional types of insurance business both in life and general. Consideration used to be missing as to what type of policy would suit best the requirement of the people. Hence, even though there was tremendous growth prospect, it never gained momentum in the past. Lake of proper technical know-how of the insurance personnel and the general ignorance of the public as to the importance of insurance business were also partly responsible for extremely slow growth of insurance activities in the past.

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Also partly responsible extremely slow growth is insurance activities in past. It should be remembered by the students that the insurance industry had to pass through a number of difficult during the initial stages after nationalization. However, the handicaps were kept under constant review by the government on the management of the industry and remedies are gradually being implements to accelerate the growth and progress.

Year Establishment / Act Authority

1 March, 1972 P.O. 19/1972 Adoption of Insurance Act in Bangladesh

Ministry of Commerce Bangladesh

8 March, 1972 P.O. 95/1972 Bangladesh Insurance (nationalization ) order 1972

16 March, 1972 P.O. 95/1972 Bangladesh Insurance (nationalization ) order 1972

26 March, 1972 P.O. 30/1972 Bangladesh Insurance (Emergency provision ) order 1972 1 November, 1972 P.O. 30/1972 Bangladesh Insurance

(nationalization & Amendment ) order 1972 30 December,1972 P.O. 30/1972 Bangladesh Insurance corporation

(Dissolution ) order 1972

14 May, 1972 Ordinance 7/73/ Insurance Corporation Ordinance 1973

November, 1973 Bangladesh Insurance Academy 1984 Private Insurance Company Act

After 2008 Govt. Life Insurance in one & private life Insurance Company is 19.

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CHAPTER- 03

THEORETICAL ASPECTS OF

ACCOUNTING INFORMATION SYSTEM

3.1 Implement an Accounting Information System.

3.2 Interaction with External and Internal Parties.

3.3 Compare Between Data and Information.

3.4 Roles of Accountants with Respect to AIS.

3.5 Enterprise Resource Planning (ERP).

3.6 Development of AIS.

3.7 Classes of Systems.

3.8 File Classifications.

3.9 Record Key.

3.10 Flags.

3.11 File Oriented Approaches.

3.12 Flowchart.

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Theoretical Aspects of Accounting Information System

3.1 Implemention an Accounting Information System

3.1.1 Accounting

It is the principal way of organizing and reporting financial information. It has been called the “language of business.”

Accounting and information systems comprise the functional area of business responsible for providing information to the other areas to enable them to do their jobs and for reporting the results to interested parties.

To that end, an accounting system is used to identify, analyze, measure, record, summarize, and communicate relevant economic information to interested parties.

3.1.2 Information

Information is intelligence that is meaningful and useful to persons for whom it is indented. 3.1.3 System

A System is an entity consisting of interacting parts that are coordinated to achieve one or more common objectives. Systems must possess.

Organization: Transactions-Journals-Ledgers-Financial Statements

Interrelationships: The relationship between Subsidiary ledgers and the General Ledger Integration: Individual transactions to Financial Statements

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Fig: The business firm as a system

So, a system is a set of two or more interrelated components that interact to achieve a goal.

3.1.4 Information System

An Information system is a framework in which data is collected, processed, controlled and managed through stages in order to provide information to users. It evolves over time and becomes more formalized as a firm grows and becomes more complex. It can be a manual or computerized system. Firms depend on information systems in order to survive and stay competitive. Organization Information System Operational System Environment Of the Firm Busi

AIAISSness

Firm Organizations Functions AIS TransactionCycles Business Events from Operations

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Fig: Information system

3.1.5 Accounting information system

An accounting information system (AIS) is a unified structure within an entity such as business firm that employs physical resources and other components to transform electronic data into accounting information, with purpose of satisfying the information needs of variety users.

Input Processing Output

Fig: Accounting information system

Financial

events or

transactions

Information through financial statements

Through several

accounting functions

Data

Hardware

Software

Information

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3.2 Interaction with external and internal parties

The AIS interacts with external parties, such as customers, vendors, creditors, and governmental agencies. The AIS also interacts with internal parties such as employees and management. The interaction is typically two ways, in that the AIS sends information to and receives information from these parties.

Fig: AIS Interaction 3.2.1 Components of AIS

AIS consist of five components:

1. The people who operate the system and perform various functions.

2. The procedures both manual and automated, involved collecting, processing, and storing data about the organization‟s activities.

3. The data about the organization‟s business process. 4. The software used to process the organization‟s data.

5. The information technology infrastructure, including computers, peripheral devices, and network communications devices.

Together these five components enable AIS to fulfill three important functions in any organization:

(A) Collecting and storing data about the activities performed by the organization.

(B) Transforming data into information that is useful for making decisions that enable management to plan, execute, and control activities.

(C) Providing adequate control to safeguard the organization‟s assets including its data, to ensure that the data are available when needed and accurate and reliable.

Internal Parties

AIS

External

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3.3 Compare between Data and Information

3.3.1 Data

Data refers to any and all kind of the facts that are collected, stored, and processed to produce information by an information system.

3.3.2 Information

Information is data that have been processed and are meaningful and useful to users. The terms “meaningful” and “useful” are value-laden terms and usually subsume other qualities such as timeliness, relevance, reliability, consistency, comparability, etc.

3.3.3 Functional Steps in Transforming Data into Information

 Data collection - capturing, recording, validating and editing data for completeness and accuracy.

 Data Maintenance/Processing - classifying, sorting, and calculating data.  Data Management - storing, maintaining and retrieving data.

 Data Control - safeguarding and securing data and ensuring the accuracy and completeness of the same.

 Information Generation - interpreting, reporting, and communicating information.

Fig: The Universal Data Processing Model

}

Exchange Events Internal Events Environmental Events Input Processing Storage Consumers Data Output Information

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3.3.4 Characteristics that make information useful

 Relevance: Information is relevant if it reduces uncertainty, improves decision makers‟ ability to make predictions, or confirm or corrects their prior expectations.  Reliability: Information is reliable if it is free from error or bias and accurately

represents the events or activities of the organization.

 Completeness: Information is complete if it does not omit important aspects of the underlying events or activities that it measures.

 Timeliness: Information is timely if it is provided in time to enable decision makers to use it to make decisions.

 Understandability: Information is understandable if it is presented in a useful and intelligible format.

 Verifiability: Information is verifiable if two knowledgeable people acting independently would each produce the same information.

 Comparability: Information is comparable if it is presented in a way that can be compared with that of information of others.

3. 3.5 The AIS and corporate strategy

Strategies and Strategic positions

Michael Porter, world-renowned professor of business at Harvard, argues that there are basic business strategies that companies can follow.

1. A product differentiation strategy entails adding some features or services to the product that are not provided by competitors.

2. A low-cost strategy entails striving to be the most efficient producer of a product or service.

Porter argues that the fundamental choice companies must make involves selecting a specific strategic position they wish to adopt. He describes three basic strategic positions:

1. A variety-based strategic position involves producing or providing a subset of the industry‟s product or services.

2. A need-based strategic position involves trying to serve most or all of the needs of a particular group of customers.

3. An access-based strategic position involves serving a subset of customers who differ from other customers in terms of factors such as geographic location or size, which creates different requirements for serving those customers.

3.3.6 Factors influencing design of the AIS

AIS design is affected by

 Information technology  Organization‟s strategy  Organization‟s culture

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Fig: Factors influencing design of the AIS

Through the development of information technology, AIS makes information easily accessible and widely available for users. Information technology affects the company‟s business strategy. The value of IT depends upon how it is used strategically to improve the organization. AIS aids to develop business strategies implement those strategies and modify those strategies through new developments in IT. AIS function should be designed in such a way so that it reflects the value of organizational culture.

Figure shows that the arrow between organizational culture and the AIS is bi-directional i.e. organization‟s culture influence the design of AIS and the design of AIS also influence organization‟s culture by controlling the flow of information within the organization.

3.3.4 Value chain

The ultimate goal f any business is to provide value to its customers. A business will be profitable if the value it creates is greater than the cost of producing its products or services. Value is provided by performing a series of activities referred to as the value chain. These include:

(A) Primary activities (B) Support activities

An organization‟s value chain consists of five primary activities that directly provide value to its customers:

1. Inbound logistics consists of receiving, storing, and distributing the materials that are inputs used by the organization to create the services and products that it sells.

2. Operational activities transform inputs into final products or services.

3. Outbound logistics are the activities involved in distributing finished products or services to customers. Organizational Culture AIS Information Technology Strategy

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4. Marketing and sales refers to the activities involved in helping customers to buy the organization‟s products or services.

5. Service activities provide post-sale support to customer.

PRIMARY ACTIVITIES Fig: Value chain

Support activities are sometimes referred to as “line” and “staff” activities respectively. Support activities include:

1. Firm infrastructure refers to the accounting, finance, legal support, and general administration activities that are necessary for any organization to function. The AIS ia part of the firm infrastructure.

2. Human resources Involves recruiting and hiring new employees, training employees, Paying employees, and handling employee benefits.

3. Technology refers to activities to improve the products or services (e.g., R&D, Web Site development).

4. Purchasing buying the resources (e.g., materials, inventory and fixed assets) needed to Carry out the entity‟s primary activities.

5. Service- Repair Maintenance 4. Marketing and sales- Advertising Selling 3. Outbound logistics- Distribution Shipping 2. Operations- Manufacturing Repackaging 1. Inbound logistics- receiving and Storing Materials SUPPORT ACTIVITIES  Firm Infrastructure  Human Resources  Technology Development  Purchasing

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3.4 Roles of Accountants With Respect to AIS

 Financial accountants- prepare financial information for external decision-making in accordance with GAAP

 Managerial accountants- prepare financial information for internal decision-making  Auditors - evaluate controls and attest to the fairness of the financial statements.  Accounting managers - control all accounting activities of a firm.

 Tax specialists - develop information that reflects tax obligations of the firm.  Consultants - devise specifications for the AIS

3.5Enterprise Resource Planning (ERP)

ERP systems are large-scale information systems that impact an organization's AIS. These systems permeate all aspects of the organization and require technologies such as client/server and relational databases. Other system types that currently impact AISs are supply chain management (SCM) and customer relationship management (CRM).

Traditional AISs recorded financial information and produced financial statements on a periodic basis according to GAAP pronouncements. Modern ERP systems provide a broader view of organizational information, enabling the use of advanced accounting techniques, such as activity-based costing (ABC) and improved managerial reporting using a variety of analytical techniques.

3.6 Development of AIS

The development of AIS includes five basic phases: planning, analysis, design, implementation, and support. The time period associated with each of these phases can be as short as a few weeks or as long as several years.

3.6.1 Planning

Planning refers to project management objectives and techniques. The first phase of systems development is the planning of the project. This entails determination of the scope and objectives of the project, the definition of project responsibilities, control requirements, project phases, project budgets, and project deliverables.

3.6.2. Analysis

The analysis phase is used to both determine and document the accounting and business processes used by the organization. Such processes are redesigned to take advantage of best practices or of the operating characteristics of modern system solutions. There are three types of Analysis. These are:

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(A)

Data analysis is a thorough review of the accounting information that is currently being collected by an organization. Current data are then compared to the data that the organization should be using for managerial purposes. This method is used primarily when designing accounting transaction processing systems.

(B)

Decision analysis is a thorough review of the decisions a manager is responsible for making. The primary decisions that managers are responsible for are identified on an individual basis. Then models are created to support the manager in gathering financial and related information to develop and design alternatives, and to make actionable choices. This method is valuable when decision support is the system's primary objective.

(C)

Process analysis is a thorough review of the organization's business processes. Organizational processes are identified and segmented into a series of events that either add or change data. These processes can then be modified or reengineered to improve the organization's operations in terms of lowering cost, improving service, improving quality, or improving management information. This method is appropriate when automation or reengineering is the system's primary objective. 3.6.3 Design

The design phase takes the conceptual results of the analysis phase and develops detailed, specific designs that can be implemented in subsequent phases. It involves the detailed design of all inputs, processing, storage, and outputs of the proposed accounting system. Inputs may be defined using screen layout tools and application generators. Processing can be shown through the use of flowcharts or business process maps that define the system logic, operations, and work flow.

Logical data storage designs are identified by modeling the relationships among the organization's resources, events, and agents through diagrams. Also, entity relationship diagram (ERD) modeling is used to document large-scale database relationships. Output designs are documented through the use of a variety of reporting tools such as report writers, data extraction tools, query tools, and on-line analytical processing tools. In addition, all aspects of the design phase can be performed with software tool sets provided by specific software manufacturers.

Reporting is the driving force behind an AIS development. If the system analysis and design are successful, the reporting process provides the information that helps drive management decision making. Accounting systems make use of a variety of scheduled and on-demand reports. The reports can be tabular, showing data in a table or tables; graphic, using images to convey information in a picture format; or matrices, to show complex relationships in multiple dimensions.

There are numerous characteristics to consider when defining reporting requirements. The reports must be accessible through the system's interface. They should convey

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information in a proactive manner. They must be relevant. Accuracy must be maintained. Lastly, reports must meet the information processing (cognitive) style of the audience they are to inform.

Reports are of three basic types: A filter report that separates select data from a database, such as a monthly check register; a responsibility report to meet the needs of a specific user, such as a weekly sales report for a regional sales manager; a comparative report to show period differences, percentage breakdowns and variances between actual and budgeted expenditures. An example would be the financial statement analytics showing the expenses from the current year and prior year as a percentage of sales.

Screen designs and system interfaces are the primary data capture devices of AISs and are developed through a variety of tools. Storage is achieved through the use of normalized databases that assure functionality and flexibility.

Business process maps and flowcharts are used to document the operations of the systems. Modern AISs use specialized databases and processing designed specifically for accounting operations. This means that much of the base processing capabilities come delivered with the accounting or enterprise software.

3.6.4. Implementation

The implementation phase consists of two primary parts: construction and delivery. Construction includes the selection of hardware, software and vendors for the implementation; building and testing the network communication systems; building and testing the databases; writing and testing the new program modifications; and installing and testing the total system from a technical standpoint.

Delivery is the process of conducting final system and user acceptance testing; preparing the conversion plan; installing the production database; training the users; and converting all operations to the new system.

Tool sets are a variety of application development aids that are vendor-specific and used for customization of delivered systems. They allow the addition of fields and tables to the database, along with ability to create screen and other interfaces for data capture. In addition, they help set accessibility and security levels for adequate internal control within the accounting applications.

3.6.5 Internal controls and security measures

Security exists in several forms. Physical security of the system must be addressed. In typical AISs the equipment is located in a locked room with access granted only to technicians. Software access controls are set at several levels, depending on the size of the AIS. The first level of security occurs at the network level, which protects the organization's communication systems. Next is the operating system level security, which protects the computing environment. Then, database security is enabled to protect organizational data

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from theft, corruption, or other forms of damage. Lastly, application security is used to keep unauthorized persons from performing operations within the AIS.

Testing is performed at four levels. Stub or unit testing is used to insure the proper operation of individual modifications. Program testing involves the interaction between the individual modification and the program it enhances. System testing is used to determine that the program modifications work within the AIS as a whole. Acceptance testing ensures that the modifications meet user expectations and that the entire AIS perform as designed.

Conversion entails the method used to change from old AIS to a new AIS. There are several methods for achieving this goal. One is to run the new and old systems in parallel for a specified period. A second method is to directly cut over to the new system at a specified point. A third is to phase in the system, either by location or system function. A fourth is to pilot the new system at a specific site before converting the rest of the organization.

3.6.6 Support

The support phase has two objectives. The first is to update and maintain the AIS. This includes fixing problems and updating the system for business and environmental changes. For example, changes in generally accepted accounting principles (GAAP) or tax laws might necessitate changes to conversion or reference tables used for financial reporting. The second objective of support is to continue development by continuously improving the business through adjustments to the AIS caused by business and environmental changes. These changes might result in future problems, new opportunities, or management or governmental directives requiring additional system modifications.

3.7 classes of systems

There are two broad classes of system, to describe below:

 Batch systems

 Real-time systems 3.7.1 Batch Processing

In batch processing, transaction data are stored in a transaction file until a master-file update is performed. The storing of transaction data in a transaction file may occur either through off-line or on-line entry of data.

3.7.2 Real-Time Systems

 Process transactions individually at the moment the economic event occurs.

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 Generally require greater resources than batch processing since they require dedicated processing capacity; however, these cost differentials are decreasing.

 Oftentimes have longer systems development time.

3.7.3 Importance of IT and Computer Networks to Accountants

 To use, evaluate, and develop modern AIS, accountants must be familiar with IT.  Computers enable accountants to perform their duties more quickly, accurately, and

consistently than by manual methods.

 Software such as electronic spreadsheets aid accountants in analyzing financial statements and in developing budgets.

3.7.4 Gains from IT for Accountants

 Faster processing of transactions and other data.

 Greater accuracy in computations of and comparisons with data  Lower cost of processing each transaction.

 More timely preparation of reports and other outputs.

 More concise storage of data, with greater accessibility when needed.  Wider range of choices for entering data and providing outputs.

 Higher productivity for employees and managers, who learn to use computers effectively in their routine and decision-making responsibilities

3.7.5 Types of Network Architectures

(A) Wide-Area Network (WAN): A WAN is a network that is dispersed over a wider

geographic area than a LAN. It typically requires the use of:  Gateways to connect different types of LANs

 ridges to connect same-type LANs

WANs may use common carrier facilities, such as telephone lines, or they may use a Value Added Network (VAN).

(B) Local-Area Networks (LAN):

A type of distributed network created when two or more linked computers are grouped within a limited geographical area. LAN can be configured in one of three basic ways:

i) Star configuration: A star configuration is a LAN configured as a star; each device is directly connected on the central server.

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Fig: The STAR configuration

ii) Ring Configuration: In a LAN configured as ring, each node is directly linked to other

nodes.

Fig: The RING configuration

Host Computer or Server Local Files Local Files Local Files Local Files Central Files

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iii) Bus Configurations: In a LAN configured as bus, each device is connected to the main channel, or bus.

Fig: The BUS configuration

3.7.6 The Network Operating System

 In peer-to-peer networks, the Network Operating Software (NOS) is installed in each user workstation.

 In a server network, most of the NOS are installed in the file server and a portion also resides in each workstation.

 To run centralized LAN applications, the NOS installed in the file server interacts with the NOS and the local operating system installed in the workstation. The client workstation NOS initiates a request to the file server NOS to load files and programs into the client workstation‟s RAM.

 In a peer-to-peer network, a client NOS initiates a request to another client NOS, which also functions as a server, to load the requested files and/or programs into RAM

3.7.7 Enterprise-wide Processing and Data Systems

 Enterprise-wide on-line transaction processing systems collect and process mission-critical accounting and operational applications.

 Enterprise Resource Planning Systems (ERP) such as SAP R/3 overcomes the limitations of legacy applications.

 Firms typically develop two types of On-line Analytical Processing (OLAP) systems that supplement ERP or legacy systems.

Bus channel

Host Computer or

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 A firm can model the relevant aspects of business events contained within the business processes allowing for the use of relational database-related query language commands.

 Firms can create a data mart or data warehouse to generate predefined reports for executives and other managers.

3.7.8 Data Marts and Data Warehouses

 Both Data Marts and Data Warehouses organize and store copies of “informational” or decision support data.

 A Data Mart stores copies of decision support data in a data base for a portion of a company.

 A Data Warehouse stores copies of decision support data in an integrated data base for an entire enterprise.

 As opposed to applications-oriented data in legacy systems, data in a data mart or warehouse are stored by subject areas (e.g., customers).

 Data may be stored in either summarized or “raw” form.

 Both have “drill down” and “data mining” features.

3.8 File Classifications

3.8.1 Master files

These contain (semi) permanent data (records) pertaining to entities (people, places, and things). Accounting related examples include:

 General and Subsidiary ledgers.

 General ledger master file.

 Customer/Accounts Receivable master file.

 Vendor/Accounts Payable master file.

 Inventory master file.

 Employee/Payroll master file.

 Open WIP master file.

 Standard cost master file. 3.8.2 Transaction files

These contain records pertaining to events currently being processed, such as sales, receipts of goods, etc.

 Transaction files capture detailed transaction data. They are counterparts to general and special journals in manual systems.

 Transaction data are periodically posted to related master file(s) and are then either purged or archived.

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28 Accounting related transaction files include:

 General/Special journal file (General ledger).

 Sales/Cash receipts file (Accounts receivable).

 Receiving/Purchases file, Cash disbursements file (Inventory, Accounts payable).

 Inventory issuance file/shipment file/sales file/adjustments file (Inventory).

 Payroll/Cash disbursements 3.8.3 Reference files

These contain tables or lists of data needed for making calculations or for checking the accuracy of input data. e.g., product price tables, customer lists, etc.

3.8.4 History files

These are also called archive files since they contain records pertaining to completed transactions such as past sales.

3.8.5 Open files

These files record incomplete transactions. Whereas transaction files are purged or archived at the end of a given period, open files remain indefinitely open. Only individual records from Open files get purged as the transaction actually occurs or does not.

3.8.6 Report files

These are derived from records within master or transaction files. e.g., data may be periodically extracted from the Accounts Receivable master file to construct an aging schedule.

3.8.7 Backup file

This is a copy of a current file generated so that the original file can be recreated from it. 3.8.8 Suspense file

This is a collection of those records of a transaction file that appear to contain erroneous or questionable data.

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3.9 Record-Key

These are data elements within records that serve as sort keys. e.g. Customer-account number. Two types of keys often used in master and transaction file records are a primary key and one or more secondary keys.

 A Primary key (also called a record key) is the attribute that uniquely identifies a specific record. They are usually of numeric or alphanumeric modes, e.g. customer number.

 A Secondary key is an attribute other than the primary key and represents an alternative way to sort or access records in a file, e.g. customer last name.

3.10 Flags

 Flags that are symbols or characters used for control purposes, e.g. end-of-batch flag.

 Flags are not visible to the end-user. It is a system-managed field that is transparent to the user.

3.11 File-Oriented Approach

3.11.1 File-Oriented Approach to Data Storage

 In the file-oriented approach to data storage computer applications maintain their

own set of files.

 This traditional approach focuses on individual applications, each of which has a limited number of users, who view the data as being “owned” by them.

3.11.2 Deficiencies of the File-Oriented Approach

 Files and data elements used in more than one application must be duplicated, which results in data redundancy.

 As a result of redundancy, the characteristics of data elements and their values are likely to be inconsistent.

 Outputs usually consist of preprogrammed reports instead of ad-hoc queries provided upon request. This results in inaccessibility of data.

 Changes to current file-oriented applications cannot be made easily, nor can new developments be quickly realized, which results in inflexibility.

 It is difficult to represent complex objects using file processing systems.

3.11.3 The Database Approach to Data Storage

 A database is a set of computer files that minimizes data redundancy and is accessed by one or more application programs for data processing.

 The database approach to data storage applies whenever a database is established to serve two or more applications, organizational units, or types of users.

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 A database management system (DBMS) is a computer program that enables users to create, modify, and utilize database information efficiently.

3.11.4 Data Dictionary

 A data dictionary is a computer file that maintains descriptive information about the items in a database.

 Each computer record of the data dictionary contains information about a single data item used in AIS.

 Examples of information that might be stored in a data dictionary are source

document(s) used to create the data item, programs that update the data item and classification information about the item’s length and data type

3.11.5 Advantages of the Database Approach

 Efficient use of computerized storage space.

 Each subsystem has access to the other‟s information.

 All application programs utilize the same computer file, thereby simplifying operations.

 Fewer backup files for security purposes.

 Relieves some users from data-gathering responsibilities in situations where these users previously gathered their own data.

3.11.6

Dis

advantages of the Database Approach

 Databases can be expensive to implement because of hardware and software costs

 Additional software, storage, and network resources must be used.

 A DBMS can only run in certain operating environments, which makes some unsuitable for certain alternate hardware/operating system configurations.

 Because it is radically different from the file-oriented approach, the database approach may cause initial inertia, or complications and resistant.

3.11.6 Data-Flow Diagrams

A data-flow diagram shows the physical and logical flows of data through a transaction processing system without regard to the time period when each occurs.

3.12 Flowcharts

Flowcharts include three types:

 Document flowcharts describe the flow of documents and information between departments or units.

 System flowcharts describe the relationship between inputs, processing, and outputs for a system.

 Program flowcharts describe the sequence of logical operations performed in a computer program.

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CHAPTER- 04

ANALYSIS OF ACCOUNTING INFORMATION

SYSTEM OF INSURANCE INDUSTRY IN

BANGLADEH

4.1 Jiban bima Corporation

4.2 American Life Insurance Company

4.3 Pragati Life Insurance Ltd

4.4 Popular Life Insurance Company

4.5 National Life Insurance Company

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4.1 Jiban Bima Corporation Accounting Information Systems (AIS) of Jiban Bima Corporation:

Jiban Bimacorporation uses foreign company software for execute their all operation & use tally software for their regular data

.

They made an agreement with an American company toprovide service their customer effectively and efficiently

.

This graph shows very good result for this company it indicate that this company is perfectly operatingtheir operation.

4.1.1 Top & middle Management Commitment to AIS:

A long-standing question for both IT research and management practice has been: how can IT be used in organizations to increase firm performance? Top & middle Management have provided many capabilities that impact business and financial performance, including enterprise architecture, IT governance, IT metrics, top management engagement, IT-business alignment, and business and IT unit capabilities. Top & middle Management propose that a limited number of enterprise commitments are key to maximizing business value from IT. We demonstrate, via a survey of 5 respondents in publicly traded firms, that these commitments are positively correlated to Business Impact from IT, which in turn correlates with higher financial performance.

0 1 2 3 4 5 6

Over all data Quality Accuracy Timeliness Completeness Consistency

JIBAN BIMA COR POR ATION QUALITY

DATA

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33 4.1.2 Team work

Businesses often ask employees to complete projects that require they work as a team. Working together has many benefits, including the possibility to create new friendships, a sense of group accomplishment and distribution of responsibilities. Conversely, teamwork also may cause tension and anxiety among employees because of poor communication. Effective communication can eliminate much of the stress and negative feelings sometimes associated with working closely as a team. Business owners should encourage their employees to communicate with one another clearly when working together. This is especially important for smaller companies, whose employees often must work closely with one another. 0 1 2 3 4 5 6 7 Top management recognize the importance

Middle management commitment to AIS

Education and training DQ controls

Top & middle Management Commitment to AIS

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34 4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6 6.2

Between different departments and within departments

Between different professionals, such as, accounting and IT

Team work

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4.1.3 Nature of the Accounting Information Systems

Accounting Information Systems of Jiban Bima Corporation is Intuitive and easy to us. All users can use the features very easily. Automatically performs as much validation of data as possible (based on business rules etc). The system of Jiban Bima Corporation is Adequate& sufficient documentation for people to follow & uses the system. It‟s user friendly. Ease of modification / upgrade. But the system is not mature it is now in beta stage. Last three years they operate this system. The system is up-to-date (adopt new technology): regular. Level of the integration and system Interpretability is high. Jiban Bima Corporation has Effective data management approach, such as, centralized database, and data warehouse.

4.1.4 Understanding of the systems and Data Quality

All the employee of jiban bima Corporation is understand importance of data quality management. They are always prepared & active to improve the overall data quality appropriate DQ controls, approaches, and adequate processes.

0 1 2 3 4 5 6 7

Nature of the Accounting Information Systems

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36 4.1.5 Miscellaneous Activity:

Jiban Bima Corporation records all the financial and non-financial data about the organization‟s activities via the existing system. And they don't use any another subsystems are used for collecting non-financial data. they use ERP system. JBC have Transactional web sites for checking balances, transferring funds, applying for credit cards etc. Exist in the organization. The organization is involved with on-line commerce science 2011. Accounting Software is used for the entire activities. Name of the Software (tally) .this the Accounting Software satisfying all the users. If any malfunction arises then the existing software is supportive. JBC use networking System only in internal activities. There is a back-up computer system for their internal activities

0 1 2 3 4 5 6 7

Understand how the systems work (technical competence)

Understand the importance of DQ Understand the usefulness and usage of information

Understanding of the systems and DQ

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4.2 American Life Insurance Company

Accounting Information Systems (AIS) of American Life Insurance Company (Met life Alico):

American Life Insurance Company also known as Met life Alico is the world best and biggest Life insurance company. Alico use their own customize software to keep their all clients account record. They have huge number of highly talented employee, they collect & maintained high quality data.

4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6 6.2

Quality Data American Life Insurance Company

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Management of Alico is committed to establish good accounting information system, to run their business. They regular train-up their employee. Try to better performance provide for customers satisfaction.

4.2.2 Team Work

Team work is very important for an organization. Like other organization Alico has that facility their employee can work together via using software but employee must have the authority or have permission to do team work. They even do work between different departments and within departments or between different professionals, such as, accounting and IT. 4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6 6.2 Top management recognize the importance

Management Commitment to AIS

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Accounting Information Systems of American Life Insurance Company (Met life Alico) is Intuitive and easy to us. All users can use the features very easily. Automatically performs as much validation of data as possible (based on business rules etc.). The system of Alico is Adequate & sufficient documentation for people to follow & uses the system. It‟s very user friendly. Ease of modification / upgrade. The system is not mature enough. The system is up-to-date (adopt new technology): regular. Level of the integration and system Interpretability is high. Alico has Effective data management approach, such as, centralized database, and data warehouse.

All the employees of American Life Insurance Company (Met life Alico) are understanding importance of data quality management. They are always prepared & active to improve the overall data quality appropriate DQ controls, approaches, and adequate processes. They are highly trained to bring or maintained Quality data.

4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6 6.2

Team Work

(Communication):

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American Life Insurance Company (Met life Alico) records all the financial and non-financial data about the organization‟s activities via the existing system. And they don't use any another subsystems are used for collecting non-financial data. they use ERP system. Alico have Transactional web sites for checking balances, transferring funds, applying for credit cards etc. Exist in the organization. The organization is involved with on-line commerce science 2011. Accounting Software is used for the entire activities. .this the Accounting Software satisfying all the users. If any malfunction arises then the existing software is supportive. Alico is used networking System only in internal activities. There is a back-up computer system for their internal activities

0 1 2 3 4 5 6 7

Understanding of the systems and Data

Quality

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4.3 Pragati Life Insurance Ltd.

Accounting Information Systems (AIS) of Pragati Life Insurance Ltd:

Pragati Life Insurance is the rewound Life insurance company. Pragati Life Insurance Ltd use their own customize software by a Bangladeshi software company to keep their all clients account record. They recorded high quality data form their client.

Management of Pragati Life Insurance is committed to establish good accounting information system, to run their business. They regular train-up their employee. To provide the better performance for the customers satisfaction. They organize regular training for their employee to bring better output form them

.

4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6 6.2

Quality Data

Pragati Life Insurance Ltd

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43 4.3.2 Team Work

Like other organization Pragati Life Insurance has that facility their employee can work together via using software but employee must have the authority or have permission to do team work. They even do work between different departments and within departments or between different professionals, such as, accounting and IT. They must have permission because of security reason.

4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6 6.2 Top management recognize the importance

Management Commitment to AIS

Importance Performance Column2

4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6 6.2

Team Work

(Communication):

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Accounting Information Systems of Pragati Life Insurance is Intuitive and easy to use Pragati Life Insurance pursues this form a local software firm. All employees can use the features very easily. Automatically performs as much validation of data as possible (based on business rules etc). The system of Pragati Life Insurance is Adequate & sufficient documentation for employee to follow & uses the system. It‟s very user friendly. Ease of modification / upgrade. The system is not mature enough. The system is up-to-date (adopt new technology): regular. Level of the integration and system Interpretability is high. Pragati Life Insurance has Effective data management approach, such as, centralized database, and data warehouse.

All the employees of Pragati Life Insurance are understanding importance of data quality management. They are always prepared & active to improve the overall data quality appropriate DQ controls, approaches, and adequate processes. They are highly trained to bring or maintained Quality data.

4.4 4.6 4.85 5.2 5.4 5.6 5.86 6.2

Nature of the Accounting Information

Systems

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Pragati Life Insurance records all the financial and non-financial data about the organization‟s activities via the existing system. And they don't use any another subsystems are used for collecting non-financial data. they use ERP system. This the Accounting Software satisfying all the users. If any malfunction arises then the existing software is supportive. Pragati Life Insurance is using networking System only in internal activities. There is a back-up computer system for their internal activities

0 1 2 3 4 5 6 7

Understanding of the systems and Data

Quality

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46

4.4 Popular Life Insurance Company

Accounting Information Systems (AIS) of Popular Life Insurance Company:

Popular Life Insurance Company‟s the rewound Life insurance company.Popular Life Insurance use their own customize software by a Bangladeshi software company to keep their all clients account record. They recorded high quality data form their client.

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Management of Popular Life Insurance is committed to establish good accounting information system, to run their business. They regular train-up their employee. They organize regular training for their employee to bring better output form them.

0 1 2 3 4 5 6 7

Quality Data

Pragati Life Insurance Ltd

Popular Life Insurance

4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6 6.2 Top management recognize the importance

Management Commitment to AIS

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48 4.4.2 Team Work

Popular Life Insurance has that facility their employee can work together via using software but employee must have the authority or have permission to do team work and it is for limited. They even do work between different departments and within departments or between different professionals, such as; accounting and IT. They must have permission because of security reason

.

Accounting Information Systems of Popular Life Insurance is Intuitive and easy to use Popular Life Insurance pursues this form a local software firm. All employees can use the features very easily. Automatically performs as much validation of data as possible (based on business rules etc). The system of Popular Life Insurance is Adequate & sufficient documentation for employee to follow & uses the system. It‟s very user friendly. Ease of modification / upgrade. The system is not mature enough. The system is up-to-date (adopt new technology): regular. Level of the integration and system Interpretability is high. Popular Life Insurance has Effective data management approach, such as, centralized database, and data warehouse. 4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6 6.2

Team Work

(Communication):

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49

Popular Life Insurance companies all employee of are understand importance of data quality management. They are always prepared & active to improve the overall data quality appropriate DQ controls, approaches, and adequate processes. They are highly trained to bring or maintained Quality data.

0 1 2 3 4 5 6 7

Nature of the Accounting Information

Systems

Importance Performance 0 1 2 3 4 5 6 7

Understanding of the systems and Data

Quality

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Popular Life Insurance records all the financial and non-financial data about the organization‟s activities via the existing system. And they don't use any another subsystems are used for collecting non-financial data. They use ERP system. This the Accounting Software satisfying all the users. If any malfunction arises then the existing software is supportive. Popular Life Insurance used networking System only in internal activities. There is a back-up computer system for their internal activities.

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4.5 National Life Insurance Company

Accounting Information Systems (AIS) of National Life Insurance Company:

National Life Insurance Company is the rewound Life insurance company. National Life Insurance use their own customize software by a foregin software company to keep their all clients account record.

Management of National Life Insurance is committed to establish good accounting information system, to run their business. They regular train-up their employee. They organize regular training for their employee.

0 1 2 3 4 5 6 7