Impact of Information Technology in the Bank Sector Essay Example

generally believed that IT investments can improve the productivity of public accounting firms, the direct impact of IT on firm performance is not easily observable. Therefore, it is important for public accounting firms to understand how technology can transform their work and determine if this transformation will ultimately lead to productivity gains. While there is evidence of a positive marginal contribution of incremental IT expenditure across several firms, there are no reported empirical findings at the firm level in recent IT research literature (Bryn]Alfonse and Hit 1995; Lightener 1995; Journal of Information Systems, Fall 2002).The purpose of this study is to assess the effect of IT implementation on the productivity of a public accounting firm, specifically focusing on a large international firm that recently invested in audit software and knowledge-sharing applications. Qualitative and quantitative data were obtained from five offices of the firm, with input from accounting professionals at various levels. Statistical analysis was conducted to determine if there was an improvement in productivity following the IT changes. The research site's stable business environment and consistent practices allowed for a quasi-natural experimental evaluation of the impact of the new IT program on productivity improvement (Meyer 1995).The firm recently made a significant and permanent investment in IT, which caused a sudden change in the firm's production data after implementing the new IT program. Our empirical findings, obtained through regression analysis and Data Envelopment Analysis (DEAD), demonstrate a noticeable improvement in the firm's productivity as a result of the new IT system. This highlights the value of IT investment in public accounting firms. The rest of the paper is organized as follows: in Section II, we provide

the background and motivation for our research. In Section Ill, we explain how our qualitative analysis led to the research question that we quantitatively examined. In Section 'V, we describe the two estimation models used to evaluate changes in firm productivity and present our empirical results. Finally, in Section V, we discuss the implications of our findings. RESEARCH BACKGROUND Research Motivation: In order to understand the impact of IT on firm performance, it is important to consider how well the characteristics of the IT system align with the tasks performed by its users (Goodbye and Thompson 1995).The use of IT in public accounting firms is likely to improve the productivity of professionals, as their primary responsibility involves information-intensive activities (Auditing Concepts Committee [AC] 1972; Penultimate and Rivalry 1998). Teamwork is crucial in these firms, and the use of groupware technology is expected to enhance work collaboration and communication within teams, thus improving productivity (Ellis et al.1991). Although empirical research has examined the impact of IT investments on firm performance in various industries, such as manufacturing, banking, insurance, healthcare, and retailing, the professional services industry, particularly public accounting firms, has not been thoroughly studied. Therefore, investigating the impact of IT implementation on the productivity of public accounting firms is of great interest to both academics and practitioners. It is important to recognize that the conversion from IT expenditure to business performance enhancement is a longitudinal process (SOHO and Markus 1995) when exploring the productivity impact of IT implementation.

Proper management of information technology (IT) is crucial for effectively converting IT expenditures into IT assets. The appropriate utilization of these assets leads to organizational innovations, improved business

processes, and a competitive edge, ultimately resulting in enhanced organizational performance. A study by Tavern and Kauffman (2000) emphasizes the significance of considering the impact of IT planning and selection activities on the actual value derived from IT.

Several field studies have examined the longitudinal process of IT conversion to identify factors that contribute to the success of IT adoption at different stages. According to Venerates and Davis (2000), subjective norm, voluntariness, job relevance, and output quality consistently influence users' perception of system usefulness before and after IT implementation.

Burgeon and Raymond (1997) discovered that factors such as organizational support, implementation process, and control procedures had an initial impact on the realization of benefits from Electronic Data Interchange (EDI) adoption. However, three years later, only organizational support and control procedures remained significant.

Although there have been studies that examine factors affecting the IT value aeration process, they have not measured any improvements in firm performance resulting from IT implementation. For example, Lucas et al. (1996) conducted a case study on Merrill Lynch's introduction of a financial imaging system. By comparing old and new data flow diagrams, they identified changes in organization structure, workflow, and operations. They reported improved customer service and reduced costs, but did not statistically evaluate the impact on firm performance post-implementation. In contrast, some cross-sectional studies have compared the business performance of firms with and without IT and estimated the impact. For instance, Banker et al. (1990) analyzed data from Harden's fast food chain and found that restaurants using the Positron technology had higher productivity. Additionally, Openings (1995) found that banks adopting ATMs had significantly lower operating expenses compared to those without.

There are also IT productivity studies that assess IT's contribution as an input factor in the production function.

Bryn]Alfonse and Hit (1995) and Bureau and Lee (1997) used cross-sectional data to estimate the economic production function and evaluate the marginal contribution of IT on output. Wang et al. (1997) and Shafer and Byrd (2000) used DEAD to evaluate the role of IT investments in firm production. In contrast, our research examines IT adoption as an event and assesses its impact on the firm's production function, rather than focusing on the marginal contribution of IT input across different sections. We take a longitudinal approach to compare the effects of IT implementation, which sets our research apart.

Our research site, referred to as the FIRM, is an international public accounting firm that primarily generates revenue from auditing and taxation services. We selected this firm because of the recent changes in its IT environment. The FIRM began several major projects in 1997 to enhance its IT capability.

In addition, we chose this firm because we had access to its senior management, allowing us to collect both quantitative and qualitative data. According to our interviews with the FIRM's MIS staff, the firm first considered upgrading its IT capability in mid- to late-1997 and completed major IT project implementations in 1998.

A MIS manager expressed that 1998 was a year of intense activity for their department due to significant changes in IT. Thus, the periods before and after 1998 serve as natural points of comparison to assess the impact of IT spending on company performance. The IT transformations within the company can be summarized as follows:
(1) Computer Hardware: The

company acquired a large number of laptops to replace old desktop computers, enhancing the ratio of computers to professionals. This was done to enable accounting professionals to have computer access wherever and whenever needed. Additionally, network infrastructure was constructed and expanded, including bandwidth expansion at the main office and installation of a network at other offices that previously lacked a local area network (LANA). All offices are now connected to the main office through a Virtual Private Network (VPN), and the network bandwidth between the main office and international headquarters was upgraded.
(2) Computer Software: In 1997, the company began developing its own audit software to better suit its local business operations.

With significant user involvement during the systems analysis stage, the software was designed to suit the auditing style of professionals at the FIRM. The beta version of the new audit software was released in July 1998. Following its formal release, the FIRM mandated the use of this software for work paper preparation in all audit engagements. Prior to 1998, only the main office utilized Lotus Notes for audit work. However, after improving their network infrastructure, all offices began using Lotus Notes in 1998. This deployment established an intranet environment within the FIRM and allowed for connectivity to their international headquarters. The introduction of Lotus Notes and its associated connectivity aimed to facilitate information and knowledge sharing. To implement these IT changes, mandatory training classes were conducted for FIRM professionals to assist them in adapting to the new IT environment. All accounting professionals were required to attend these classes, which provided an introduction to computer systems and file management, as well as training on the

proprietary audit software, Lotus Notes, and knowledge-sharing applications.

To assess the impact of IT changes, we collected data on monthly IT expenditures, including IT support staff salaries, from the five offices of the FIRM for 1997, 1998, and 1999. We also observed the pattern of IT expenditures during this period and found that 1998 was the key year when the actual IT transition occurred. In 1998, IT spending, including IT support staff salaries, was significantly higher than in 1997 and 1999. On average, IT spending in 1998 exceeded that of the other two years by more than 50%.

To understand how these IT changes affected the production process in the FIRM, we conducted interviews with audit managers and staff at different ranks. We examined sources of value creation resulting from the IT investment at various levels within the FIRM (Tavern and Kauffman 2000). At the individual-user level, for IT to have a positive impact on performance, there needs to be a good fit between the IT and the user's tasks (Goodbye 1995). Additionally, training plays a significant role in improving the effectiveness of IT users (Siberia 1990).

The FIRM has designed the new IT program to align with its professionals' requirements and has enforced software training. Our field interviews indicate that these IT changes had a positive impact on auditors' performance.

Based on the composition of an audit team, which consists of professionals at different ranks with various job responsibilities, IT adoption can have different advantages for audit professionals at different levels (Carmichael and Willingham 1989).

For junior auditors, their primary tasks involve assigned audit procedures and the preparation of working papers. These tasks often

require repetitive actions, significant calculations, and referencing across various accounts. By using computer applications, these structured tasks can be automated, resulting in substantial time savings (Babe and King 1988). Moreover, this reduction in monotonous work allows junior auditors to focus on more complex tasks, ultimately improving their individual performance (Giuliani 1982; Mailman and Warwick 1987).

Based on field interviews, we found that the main benefits for junior auditors resulting from IT changes are the savings in effort and the reduction in errors that come with electronic preparation of working papers. Incorrect computations are a major cause of misstatement (Bell et al. 1998), so by minimizing errors, the use of IT also benefits other members of the audit team. One junior auditor shared their experience with the new computerized systems, stating that the most significant benefit is being able to develop working papers electronically.

Without the computer, I have to manually write down all the numbers and perform difficult calculations using a calculator. There are times when I have to repeat the same entry multiple times on different sheets, such as on the balance sheet, working trial balance, cash flow schedule, and bank reconciliation. It can be very tedious and I have to be extremely careful with the numbers. However, with audit software, I only need to input the entry once and select the appropriate option. Then, all the related numbers are automatically generated and cross-referenced, eliminating the need for calculator input.

Using a computer can reduce my working hours on an engagement by more than half compared to not using one. As a senior auditor on an audit team, my responsibilities include assisting in developing audit

plans, organizing audit activities, and supervising and reviewing the work of junior auditors. The audit software provided by the firm organizes all necessary audit procedures in a comprehensive list and cross-references them to items in the working papers.

Since electronic presentation of information enhances information acquisition for users, a senior auditor can benefit from the convenient gathering and organization of information made possible by the new software (Cones et al., 1993).

A senior in the FIRM describes her favorite IT helper as a software that helps her edit her audit plan and programs. It assists her in getting organized by listing all necessary planning items, eliminating the worry of missing any important elements. All related forms are easily accessible through a button click, which is very convenient. Furthermore, there is also a database of document templates available for various occasions.

As supervisors and reviewers, audit managers do not directly benefit from the audit automation process other than the convenience of computer-based information presentation. A study by Kramer et al. (1993) found that managers perceive computer-based information to be more useful based on survey data from 260 public managers. The FIRM's audit software organizes all audit evidence collected by juniors and seniors in an electronic format, making audit managers more effective in reviewing such data. Electronic working papers that comply with a regular organization can provide more consistent audit decision quality, as the order of audit working paper documentation can impact the reviewers' decisions. An audit manager expresses support for the paper software, stating that they only review its output but appreciate the clear and neat screen display.

The FIRM incorporates cross-referenced items, making it simple for me

to track them. I can easily search and rearrange items I desire. The FIRM's Notes include a variety of local and international databases containing information on companies, industries, and regulations. Managers can easily search for relevant information for specific clients to aid in analytical reviews (Cohen et al., 2000). Additionally, the databases are known for their reliability and objectivity (Reamers and Fennec, 1999). The FIRM has also developed exclusive case databases that can be shared among professionals.

These knowledge-sharing applications have been proven to enhance decision-making quality (Rollicks, 1993, 1997). A manager shares his experience, stating that our Notes database has helped increase his professional knowledge. We share case experience and business regulations through the database, which greatly assists in problem-solving and keeps him updated on current trends (214 IT Impact at the Business Process Level).

A current trend is the transition toward a paperless office environment, where electronic documents replace paper documents for easy and efficient access to information. The literature on practical applications highlights the benefits of a paperless office in improving work efficiency and reducing operating costs (Hunt, 1994).

The FIRM, along with their audit software, created a client database to store audit files for each client. These documents can be easily retrieved using a search function or associated links, allowing auditors in the same team to share files and reduce coordination effort. Database storage also allows for quick reference and modification of previous audit plans and reports, resulting in significantly reduced work hours for clients. Additionally, the FIRM uses Notes as a tool for managing internal resources and documents, saving time and increasing effectiveness. The Professional Development Department updates the Notes database

daily and communicates the updates via email. They also set up a Question and Answer bulletin board on Notes to encourage collaboration among audit professionals, ensuring responses to all work-related questions. Overall, knowledge-sharing applications can greatly benefit a professional service firm.The use of network applications in a public accounting firm can improve communication efficiency and facilitate the circulation of information (Carolina 1994). Email is commonly used for communication between colleagues, clients, and overseas colleagues. Some groups in the firm have had positive experiences using the "net meeting" function in Notes for group discussions. This is consistent with experiments by Beamer et al. (1996) and Ho (1999) that show group support system technology leads to higher quality audit decision making. Telecommunications applications have also reduced operating costs such as postage and travel expenses, according to one manager's observation.

The FIRM's new IT program is a good fit for its audit professionals' tasks in three ways (Goodbye and Thompson 1995). First, it provides data to support audit decision making. The audit software organizes audit evidence for segments, and the Notes databases offer relevant supplemental information. Second, the new IT meets the requirements for routine operations in audit engagements. The audit software automates the preparation of working papers, and the Notes applications facilitate communication with clients. Third, the new IT program aligns with the business needs of the firm.The Notes applications support knowledge sharing and provide relevant information for environmentalists in the public accounting industry. The audit software is mandatory in our firm. Our interviews with audit professionals revealed that they find the Lotus Notes applications highly useful. Davis (1989) suggests that satisfaction with IT is linked to its

high utilization.

Goodbye and Thompson (1995) argue that the success of IT largely depends on how well it aligns with user tasks, especially when IT utilization is high. Therefore, we anticipated that the IT changes would improve the firm's productivity. We hypothesize that the FIRM's productivity in 1999 is higher compared to 1997, considering the IT conversion process took place in 1998.

Between 1997 and 1999, there were no changes to the FIRM's incentive scheme, organizational structure, or business strategy. The senior management has remained unchanged for the past decade. Additionally, there were no mergers within the FIRM during this time period. The market and competitive environment of the FIRM remained relatively stable.

Throughout the sample period, there was only a one percent average annual increase in the Consumer Price Index (CPI) at our office locations, totaling a 215 increase overall.The comparison of the FIRM's productivity in 1997 and 1999 can be seen as a controlled experiment, given the circumstances. If there is a significant increase in productivity from 1997 to 1999, it is likely that the IT changes in 1998 played a major role.

IV. EMPIRICAL ANALYSIS Data Description and Intervention Analysis

We gathered a panel of data consisting of 24 monthly observations from January 1997 to December 1997, and January 1999 to December 1999. The data was collected from the monthly income of each office. We measured the office output by calculating the monthly revenue (REVENUE), which was determined by allocating annual fees based on the proportion of staff resources assigned to different audits each month.

The main inputs for production in each office are professional labor costs (PROFITS) and operating costs (PRESTOS). PROFITS includes salaries paid

to accounting professionals at various levels in each office. PRESTOS includes all other operating expenses incurred in the office, such as rent, utilities, travel expenses, and administrative staff costs.

It is important to note that IT-related expenses were not included in PROFITS and PRESTOS, as our focus is on examining how the use of IT can transform the way the FIRM utilizes its remaining resources for generating output. In order to account for inflation, all variables were deflated by the monthly ICP. The descriptive statistics of the variables can be found in Table 1.