FRONTIERS OF E-BUSINESS RESEARCH 2003

ADOPTION AND IMPACT OF e-ACCOUNTING

Benita Gullkvist Lic. Sc.(Econ.), Principal Lecturer Vaasa Polytechnic benita.gullkvist@puv.fi

Abstract The Accounting Act of 1997 and further guidelines issued by the Accounting Board in 2000 provide an institutional setting for the use of electronic data media in financial accounting for registering, transfering and storing data as well as reporting information electronically. Thus, source documents and accounting records exist in digital form instead of on paper in an electronic accounting system. This exploratory research will try to further the understanding of the factors influencing small and medium-sized accounting agencies to adopt e-accounting as well as study the impact of eaccounting in agencies that have adopted e-accounting. The study tests a slightly modified adoption model developed by Iacovou et al. (1995). The research model includes four factors as determinants of adoption: perceived benefits, organizational readiness, trust, and external pressure. A survey will be conducted among small and medium-sized accounting agencies in order to provide evidence for the hypotheses. The results will be analysed statistically. Case studies among adopters will be conducted in order to further identify and analyse the actual benefits received, and the impact e-accounting seems to have on accounting procedures and practices. This paper is based on a limited initial review of the literature and provides a brief summary of the theoretical part of the study. It should be regarded as a research proposal of an ongoing research project and as such it may develop and change in the process. Any empirical findings are not yet available. Keywords Electronic accounting, paperless accounting, bookkeeping agency

INTRODUCTION
There has been a constant growth in the use of information and communication technology in business to support the exchange of data and information within and between organisations. New technologies, like the Internet and mobile solutions, have provided new business opportunities and operations. According to IFAC (2002:1) e-business is believed to have a significant impact also on accounting systems, through changing business processes and the evidence available to support business transactions, and leading to changes in the accounting records maintained and the accounting procedures followed. Automatic transmission of 536

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information and data on operating activities directly into the accounting system through the use of integrated software solutions may become the result (IFAC, 2002:8). Challenges facing the financial accounting and the accounting profession have been discussed among researchers (see for example Alles et al. 2000; Olivier 2000; Sutton 2000; Vasarhelyi & Greenstein 2003). There seems, however, to be a number of concepts used in the literature relating to the use of technology in financial accounting. Rezaee et al. (2000 and 2001) write: Many economic events are now being captured, measured, recognized, and reported electronically, without any paper documentation; and online, real-time accounting (RTA) is emerging as the system of choice. Under real-time accounting (RTA) systems, much of the financial information and audit evidence are available only in electronic form. Traditional source documents such as purchase orders, invoices, and checks are replaced with electronic messages, and underlying accounting data (e g. journals, ledgers, and schedules) are in electronic forms or files. Bodnar and Hopwood (2001:411, 426-427) use concepts like on-line input systems, on-line real-time processing and on-line reporting and state as follows: In paperless input systems transactions are input directly into the computer network, and the need for keying in source documents is eliminated. The concept electronic accounting (e-accounting) used in this paper is defined as an overall concept including all of the definitions mentioned above. An e-accounting system could be thought of as an interorganisational system because of its capability to electronically integrate a set of firms. In many operational applications the accounting entries can be generated as a by-product of the underlying transactions. In other cases the accounting information on the original paper-based document can be captured into an electronic file by a scanner. The accounting procedures may thus be further automated and developed by utilizing technological and electronic capabilities. In general, it is said that the first steps towards an e-accounting system in Finland were taken with the development of electronic bank statements in the 1990s, and the recent approval of electronic invoicing. The idea of a paperless accounting has been brought forward mainly by authorized auditors during the last decade (Vahtera & Salmi 1998; Mkinen & Vuorio 2002). The revised Accounting Act in 1997 makes it possible to use technical data media in transfering, maintaining, and storing accounting data in every aspect except for the Balance Book, which should be kept in printed form. In 2000 the Accounting Board issued more detailed guidelines for the use of electronic and technical capabilities in financial accounting. Hence, a paperless financial accounting system is legally permitted in Finland, but there is no obligation to use an e-accounting system. Despite the legal approval of the use of electronic data media in financial accounting already in 1997, the current use of e-accounting systems is quite low in Finland, and the adoption rate has been slower than expected. At the moment, it seems as if the level of usage varies a lot between different organisations, and that mostly big companies have adopted or have 537

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intentions to adopt an electronic invoicing system or e-accounting system in the near future. Some reasons for the slow development may be related to the Y2K problems and euro conversions. In Finland about 80 to 90 percent of the financial accounting and reporting is handled by bookkeeping agencies (Mkinen, 2000). According to Statistics Finland there are some 3800 bookkeeping agencies, and most of these agencies are small and medium-sized enterprises (SMEs) with an average of 2,1 employees. A survey by OECD in 1998 shows, how the percentage of Internet connected SMEs is directly proportional to the company size (Table 1). Even if the adoption rates are much higher in Finland, the same tendency can be seen in a study of Internet use that was conducted by Statistics Finland in 2000. Considering these facts, the small and medium-sized bookkeeping agencies seem to be a relevant and interesting group to conduct a study on. Table 1. Relationships between company size and Internet Adoption Company size
(No of employees)

50-99 10-49 1-9

Internet connected 41 % 30 % 16 %

Previous studies in the adoption of modern information and communication technologies among SMEs have shown, that the main obstacles seem to be the lack of knowledge about the real advantages these technologies could add to their business (OECD 1998) and, more generally, the culture and resistance to change that characterizes small entrepreneurs (for example Bedeian, A.G. 1980; Huczynsky A. & Buchanan D. 1991; Julien P. A. 1998; King W. R. & Teo T. S. H. 1994; Palvia P. et al. 1994). It has also been stated in previous studies in the adoption of EDI, that SMEs do not adopt EDI to any greater extent due to low perceived benefits, high implementation costs and low organizational readiness (Chwelos et al. 2001). One of the difficulties in interorganisational systems is that full benefit of the system can be reached only if enough critical mass is achieved for data and information transmissions. The current low usage rate of e-accounting systems is believed to make it difficult to utilize the eaccounting to its full benefit, something that may influence the adoption. The investment and implementation costs needed to handle the accounting process electronically may thus feel too high in small enterprises compared to the benefits achieved. There seems, however, to exist little previous research on what reasons influence the adoption decision of an electronic accounting system in small and medium-sized accounting agencies. Also, the actual benefits that adopters receive from utilizing an e-accounting system seem to be unexplored so far. The two key questions of this research are: What are the factors influencing adoption of e-accounting in Finnish small and mediumsized bookkeeping agencies? What is the impact of e-accounting in small and medium-sized bookkeeping agencies?

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The objective of this research is first to describe the present state of the art of e-accounting in small and medium-sized bookkeeping agencies in Finland as well as identify managers intentions towards adoption of e-accounting, second to empirically study factors that influence the adoption of e-accounting, and third to study any impact that e-accounting may have in general and more specificly on the accounting procedures and practice in small and medium-sized bookkeeping agencies that have adopted an e-accounting system. This research utilizes a model called Small Business EDI Adoption Model developed by Iacovou, Benbasat and Dexter (1995). The original model will be slightly modified to fit the current research. The study will be limited to Finland.

THE RESEARCH MODEL

An eximination of prior research on the adoption of EDI was taken as a starting point for this study. The examination reveals, that the original research model developed by Iacovou et al. (1995:467) was based on extensive review of the literature on EDI (Electronic Data Interchange) adoption and small business IT. The Iacovou et al. (1995) model has also been empirically tested and the determinants were found to be significant predictors of intent to adopt EDI (Chwelos et al. 2001). The researchers identified three factors - perceived benefits of EDI, organisational readiness, and external pressures - as the main reasons that could explain the EDI adoption behavior of small firms and the expected impact of the technology. Of these factors external pressure and readiness were considerably more important than perceived benefits. The original model is shown in Figure 1.

Perceived Benefits

Organisational Readiness

External Pressure

EDI Adoption and Integration

EDI Impact

Figure 1. Small Business EDI Adoption Model (Iacovou et al. 1995:467)

Perceived benefits refer to the level of recognition of the relative advantage that EDI technology can provide the organisation (Iacovou et al. 1995:468). These benefits can, 539

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according to the researchers, be grouped into direct benefits, for example reduced transaction costs and higher information quality, and indirect benefits or opportunities, which refer to the impact on business processes and relationships, for example increased operational efficiency, better customer service, and increased ability to compete. Organizational readiness refers to the level of financial and technological resources of the firm. Further, financial readiness refers to financial resources available to pay for installation costs, implementation of any subsequent enhancements, and ongoing expenses during usage whereas technological readiness is concerned with the level of sophistication of IT usage and IT management in an organisation (Iacovou et al. 1995:468-469). External pressure to adopt refers to influences from the organizational environment. The two main sources of external pressure to adopt are competitive pressure, and the imposition by trading partners. As more competitors and trading partners become EDI-capable, small firms are more inclined to adopt EDI in order to maintain their own competitive position (Iacovou et al. 1995:470). EDI Adoption is the process during which the small business becomes capable of transacting via EDI. EDI integration is the phase during which a firm alters its business practices and applications so that they interface with its EDI applications internally with other applications and externally with other trading partners. Adoption and integration can also be undertaken at the same time (Iacovou et al. 1995:468). EDI impact refers to the actual benefits adopters receive from utilizing EDI. It is assumed that the level of integration of EDI is positively related to the benefits an adopter can receive. Usually, non-integrated EDI systems will offer adopters only direct benefits, whereas integrated systems will offer both direct and indirect benefits (Iacovou et al. 1995:468). The adoption of EDI requires coordination between at least two organisations, the relationship between the organisation and its prospective trading partner(s). A similar cooperation is assumed to be needed in an interorganisational e-accounting system between the accounting agency and its client(s). E-accounting is, as such, an example of a technology with network effects. Thus, the actions of one firm will depend on other firms. This kind of collective actions and technology have been studied within a number of disciplins, for example the study of Bouchard (1993) about critical mass theory. The positive benefits of having a critical mass of firms adopting the same technology is however only one aspect. Another significant factor is enacted power, such as when one firm encourages the other one to adopt e-accounting. Although the Iacovou et al. (1995) model was found significant for EDI adoption, the model is slightly extended with a fourth factor trust, which is believed to be relevant in this context. Drawn upon prior research by Hart and Saunders (1997), the extension of the model with the factor trust is motivated by the fact that it encourages firms to make the necessary investments and discourages opportunistic behaviour. Researchers have found different dimensions of trust, such as competence, openness, caring, and reliability. In this context trust is mainly considered as openness and reliability. Openness may, for example, mean willingness to share rather than withhold information and thus improve the efficiency of the partners operations. Reliability may concern transmission of accurate data and information 540

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between the partners. According to Hart & Saunders some managers, particularly those in smaller firms, seem to resist adoption of EDI even while they appreciate the potential benefits of EDI. Consequently, trust may be an important factor to consider also when studying factors influencing the adoption of e-accounting.

Perceived Benefits

Readiness

Trust

External Pressure

Adoption & Integration of e-accounting

Impact of e-accounting

Figure 2. E-accounting Adoption Model

According to the Accounting Board (2000) the use of automation will lead to a more efficient and reliable accounting as well as reduce the costs of accounting. These are, however, only perceived benefits and the obtained benefits might differ. As the benefits of an e-accounting system are not widely known or visible, it feels useful and interesting to make a further investigation on this subject. Also, the perceived benefits of non-adopters and adopters of eaccounting may differ, as the non-adopters are expected to describe what they think will be the future, potential benefits, but the adopters are assumed to be more precise about the actual benefits.

HYPOTHESES
Based on the research model in Figure 2, the following six hypotheses have been set up to be tested by statistical methods. According to previous studies, higher managerial understanding of the relative advantage increases the likelihood of allocation of the managerial, financial, and technological resources necessary to implement an integrated system (Benbasat et al. 1993). It it therefore expected that small and medium-sized accounting agencies with management that recognizes the benefits of e-accounting will be more likely to adopt e-accounting and enjoy higher impacts compared with firms with management that do not recognize the benefits.

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H1: Higher perceived benefits of e-accounting will lead to greater intent to adopt eaccounting Small enterprises tend to lack the resources that are necessary for IT investments and interorganizational redesign. Furthermore, the relative low computerization level of the operations of small companies makes the integration of sophisticated information systems difficult, and necessiting costly expenditures (Iacovou et al. 1995:469). Consequently, because small and medium-sized accounting agencies tend to lack these kind of resources, their ability to receive all strategic benefits of the technology is usally limited. It is expected that small and medium-sized accounting agencies with higher organizational readiness for eaccounting will be more likely to enjoy higher benefits that firms with lower levels of readiness. H2: Higher organizational readiness will lead to greater intent to adopt e-accounting Trust between the small and medium-sized accounting agency and the client is considered to be an important factor for the adoption of an e-accounting system, and for the further integration of the system as well as information sharing. Continuity with the same clients increases the likelihood of building a trustful relationship. H3: Higher level of trust will lead to greater intent to adopt e-accounting Based on previous studies in EDI a powerful partner or client may pursue a small agency to adopt e-accounting through three diffrent strategies: recommendations, promises, and threats. Because of the importance of external integration in e-accounting networks, it is expected that small and medium-sized accounting firms are more vulnerable to competitive pressures and more likely to comply with the demands of their clients than larger firms. Further, it is expected that small and medium-sized accounting agencies that encounter pressure either by their clients or from the competition will adopt e-accounting more frequently than those that do not encounter such pressure. H4: Higher external pressure will lead to greater intent to adopt e-accounting. A combination of the four factors above will also be tested. The hypothesis is as follows: H5: Higher perceived benefits, higher organizational readiness, higher level of trust and higher external pressure will lead to greater intent to adopt e-accounting. In order to achieve performance improvements and full beneficial impact of e-accounting, the current accounting information system as well as manual procedures and policies may have to be altered to fit the interorganisational e-accounting system. Thus, it is expected that the integration level of e-accounting in small and medium-sized accounting agencies is positively related to the benefits the adopter receives of e-accounting. H6: Higher integration of e-accounting will lead to higher impacts.

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RESEARCH METHODOLOGY
To test the model and to further investigate the benefits of e-accounting adoption, empirical studies will be undertaken during year 2004. A random sample of small and medium-sized accounting agencies will be selected to test the model. The sample size is planned to be 600. With an expected response rate of about 30 %, this would provide a useful sample of about 200 answers. The sample would include both non-adopters and adopters of e-accounting systems. An introduction letter will be sent to the managers of these companies to explain the purpose of the research and to ask for participation in the research. Two forms of questionnaires will be developed: one for non-adopters and one for adopters. The questionnaires will include both closed format questions and some open format questions. The statements in the questionnairs will partly be adopted from relevant prior studies, with minor wording changes to tailor them to the context. Statistical analysis of the answers will be conducted with the help of SPSS. Single and multiple regression analysis will be used for testing the hypotheses. To further investigate the actual benefits of e-accounting, empirical studies of some ten small and medium-sized accounting agencies will be undertaken. These companies will be selected among the adopters group and chosen with the help of reference lists from software application providers and from information gathered in previous studies. The main data collection method will be face-to-face, structured interviews with managers of these organisations or, when necessary, telephone interviews. All interviews are planned to be tape recorded.

CONCLUSIONS
The contribution of this study will be twofold. First, the contribution of this study lies in the empirical analysis of the determinants of e-accounting adoption. The results of the study may give some evidence on the managers intentions of small and medium-sized accounting agencies towards e-accounting and thus predict future use of e-accounting systems. Second, this study aims at providing some understandings of the actual benefits of the use of eaccounting systems. This study is limited to small and medium-sized accounting agencies for which some adoption factors, assumed to be relevant in this context, are tested. There is a danger that additional significant factors have not been included in the study, and any comments and suggestions for further improvements on this ongoing research project are very welcome.

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