I '1 THE EFFECTS OF DATA PROCESSING SERVICE BUREAUS ON THE PRACTICE OF pueuc ACCOUNTING Thesis for the Degree of Ph. D. MICHIGAN STATE UNIVERSITY Constantine Konstans 1966 THESIS LIBR /3' £15. 7 Michigan. Stave Umvctsxty This is to certifg that the thesis entitled THE EFFECTS OF DATA PROCESSING SERVICE BUREAUS ON THE PRACTICE OF PUBLIC ACCOUNTING presented bg CONSTANT INE KONSTANS has been accepted towards fulfillment of the requirements for Ph.D. degme in Business Administration gawk)" Major professnf/ Date August 8, 1966 i 0-169 ROOM IUSI: ONLY ”QUE I ’ IrADV7 ‘Wfil data ‘ II II III I CIII . II: I ABSTRACT THE EFFECTS OF DATA PROCESSING SERVICE BUREAUS I ON THE PRACTICE OF PUBLIC ACCOUNTING By Constantine Konstans ' The problem examined in this thesis is the influence of data processing service bureaus on the practice of public account- ing. Substantial amounts of literature exist extolling the merits of service bureau usage by CPA firms; however, little research has been conducted to determine the extent of service bureau usage by CPA firms, factors influencing such use, and related I implications and complications. The primary objectives of this study are (l) to examine certain challenges confronting the accounting profession; (2) to consider the information—providing aspects of accounting; (3) to introduce data processing service bureaus as a potential infor— ' mation—providing tool for the CPA; (4) to examine empirically the service bureau relationships and factors influencing these for a sample of CPA firms; and (5) to evaluate emerging develop— ments in the service bureau concept as they affect the practice 0f accounting . The research consists of a literature search; interviews With CPA firms and service bureaus; and an analysis of question_ naires sent to the member firms of the Michigan Association of A; Certif servi< II) III cana Constantine Konstans certified Public Accountants, and to a sample of data processing service bureaus and commercial banks located in Michigan. The first two chapters examine certain challenges presented to accounting by the availability of related disciplines which can aid the information-providing function of accounting. Chap- ter Three consists of an appraisal of the service bureau industry while Chapter Four delves into the relationship between CPAs, flmir clients, and service bureaus. Chapter Five evaluates the results of the questionnaires and Chapter Six considers emerging develOpments in the service bureau concept. The conclusions of the CPA firm survey include the follow— ing: 1. A very large proportion of Michigan CPA firms are not involved to any degree with service bureaus. However, a large area of commonality exists between involved and non-involved firms with respect to the large proportion of non—Opinion audit clients served. Service bureau usage appears unrelated to such factors as single— or multi—office status, proximity to large cities, and various measures of size such as clients served, billings, and number of staff members. However, measures indicating large size appear more common to firms using service bureaus than to non-users. 3. Firms involved with service bureaus are more in— volved in management services activities and cer— tain component activities such as EDP feasibility studies and systems work. Various levels of service bureau usage open to the CPA exist, beginning with automating write-up work and extending to various analytical and control applications. Relatively few CPA firms are involVed servi burea III Constantine Konstans with the more sophisticated levels of use. It appears that many CPA firms are guilty of the same practices the first computer owners followed: service bureaus, like computers, are generally employed as giant desk calculators rather than as components of information systems. The following conclusions were drawn from the survey of service bureaus and commercial banks, the latter offering service bureau—type services: 1. CPA firms may be generally uninformed about the services available from data processing service organizations. 2. CPA firms may not be actively involved in systems work to the extent commonly assumed. They appear to be by-passed in the systems installation and modification phases of their clients" service bureau applications. CPA firms may be neglecting data control and reli— ability implications inherent in clients" use of off-premise data processing arrangements. The future effects of the service bureau industry on the practice of public accounting may be quite dramatic. The con- tinued aggressive entry of commercial banks into the business Of offering service bureau—type services presents interesting inmlications to CPA firms engaged in write-up work. In addi— timn as the banking industry gains expertise in processing its own more sophisticated data processing services, it is reasonable to assume that these will be offered to the business cmmmnity. Already, prognostications assert that the banking industry will some day become the purveyor of sophisticated information systems. Of special importance is the challenge ' L ZIILEI ties, 5an i0 III These each info for Constantine Konstans , banks may provide many local CPA firms acting as part-time con- trollers for their clients. The expertise of banks in financial , matters is unchallenged; and, as they develop systems capabili— ' ties, it is reasonable to expect them to provide services re— sembling, in part at least, the CPA's management services. ' A further deveIOpment in the service bureau concept relates to multiple-access—computer (time—sharing) service bureaus. These organizations are the forerunners of tomorrow's informa— tion utilities, a network of integrated service bureaus sharing each others facilities and providing users with true management information systems without requiring corresponding commitments I I for equipment or for personnel. Although only a handful of such organizations currently exist, the commentary excited by their accomplishments indicates that they represent a startling new concept in information systems. Moreover, they provide prac- I titioners a versatile new tool for improving client services. If their potential effectiveness is recognized by the profes- sion, the accountant“s future is indeed promising. THE EFFECTS OF DATA PROCESSING SERVICE BUREAUS‘ ON THE PRACTICE OF PUBLIC ACCOUNTING I by I Constantine Konstans A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Accounting and Financial Administration 1966 Inn MUN IlIu -/ , ..,'/I-, fl)?“ 0") IBIS-I“ III I :I W” . 3,10 , I I ) Copyright by _ CONSTANTINE KONSTANS 1966 Jones, the em I ma Ind Ma me II Ion BI Iial 1 the m ACKNOWLEDGEMENTS I wish to express my sincere thanks to Professor Gardner Jones, not only for his supervision of the study, but also for the encouragement he has provided during the past three years. A great measure of thanks is also due Professors Charles Lawrence and Mary Virginia Moore for their excellent suggestions and guid- ance which contributed greatly to the study. A special expression of thanks must go to Professor James Don Edwards, Chairman of the Department of Accounting and Finan— cial Administration, for his confidence in me and for providing the necessary financial assistance during my tenure at Michigan State University. Likewise, sincere thanks is expressed to the Haskins & Sells Foundation and to The Michigan Association of Certified Public Accountants for financial assistance during the course of the study. A debt of gratitude is owed to a great number of individuals and organizations for supplying ideas and data for the study. In Particular, Mr. John Healy of The Service Bureau Corpora- tion, Mr. W. H. Evans of The Association of Data Processing Service Organizations, Mr. Vance Genzlinger of Plante and Moran, Mr. Norbert Madison of Rutten, Welling and Company, and Mr. William Ludwig of The Michigan Association of Certified Public Accountants must be singled out for their contributions. In addition, Mr. and Mrs. Stuart Thomas ably assisted me through ii progri aims] out I their computer programming and statistical skills. I owe a great debt to my Mother and Father for their guid— ance and sacrifices on my behalf. In particular, this study would not have been possible without the determination inherited from my Father, to whose memory this work is dedicated. Finally, I wish to acknowledge the joy brought into my life during the past year by my son, Stephen Peter. Above all, I must express the special debt I owe my wife, Sondra, for shoul— dering more than her share of the effort needed to complete the program and this study. Her attitude and love created a happy atmosphere which was a source of comfort and inspiration through— out the program . IIIIIOI IIS’I ( Inapb ACKNOWLEDGEMENTS. LIST OF TABLES. LIST OF FIGURES . LIST OF APPENDICES. Chapter II. III. TABLE OF CONTENTS 9 o o o o o o o o o o o o o o a o a o a n o a o 0 INTRODUCTION . . . . . . . . . Purpose of the Study. Sc0pe of the Study. Background. . . . . . . . . . The Challenge . . . . . . . . Importance of the Study MANAGEMENT SERVICES AND THE INFORMATION NEEDS OF CLIENTS - o o o a o o o a n 0 Introduction. . . . . . . . The Nature of Information . . . . . . The Effectiveness of Accounting as a Provider of Information . . . . . Management Information Systems. . . . The Public Accountant"s Management Services Role Summary . n a o c o o a o a o o a a o o o o a o o n a o 0 THE DATA PROCESSING SERVICE BUREAU o a 3 Introduction. . . . . . . . . Service Bureaus: Some General Considerations. . . . . . . . . A Descriptive Summary of the Different Types of Service Bureaus. Service Bureau Organization and Operation Summary . . . . . . . . . . . . . . . iv Page ii vi xi xi NGIPLAJI“ '_l l7 l7 19 31 36 53 59 59 60 78 101 110 Chapter III. Chapter Page IV. THE CERTIFIED PUBLIC ACCOUNTANT, HIS CLIENTS, AND SERVICE BUREAUS . . . . . . . . Introduction. . . . . . . . . . . . . . . . . 111 General Considerations. . . . . . . . . . . . 111 Categories of Service Bureau Employment . . . 119 Selecting a Service Bureau. . . . . . . . . . 136 ‘ Advantages and Disadvantages of Service ‘ Bureau Employment . . . . . . 161 ' Summary . a o a a o o c n o o o n . . . . . . . . . . . . . 166 V. THE EFFECTS OF DATA PROCESSING SERVICE BUREAUS ON THE PRACTICE OF PUBLIC ACCOUNTING IN MICHIGAN. . . . . . . . . . . . . . . . . . 167 Introduction. . . . . . . . . . . . . . . . . 167‘ The Population Sampled. . . . . . . . . . . . 168 CPA Post Card Questionnaire . . . . . . . . . 168 CPA Detailed Multi-Part Questionnaire . . . . 171 ' Service Bureau - Commercial Bank I Questionnaire . . . . . . . . . . . . . . . 207 Summary and Conclusions . . . . . . . . . . 219 VI. EMERGING DEVELOPMENTS IN THE SERVICE BUREAU CONCEPT . . . . . . . . . . . . . . . 224 Introduction. . . . . . . . . . . . . . . . 224 Computerized Commercial Banks . . . . . . . . 224 The Multiple—Access—Computer Service Bureau. . . . . . . . . . . . . . . . . . 245 Summary . . . . . . . . . . . . . . . . . 27o VII. SUMMARY AND CONCLUSIONS. . . . . . . . . . . . 272 APPENDICES........ ......28D BIBLIOGRAPHY. o o a o o o . . . . . . . 312 Table LIST OF TABLES 9 Table v-l Service Bureau Relationships of a Sample of Michigan CPA Firms. . . . . . . . . . . V—2 Response Distribution to the Second Phase of the CPA Survey. . . . . . . . . . . . . . V-3 Office Classification of Responding CPA Firms. . . . . . . . . . . . . . . . . V—4 Respondent's City Size or Size of Largest City Within Twenty Miles . . . . . V—5 Distribution of Respondents by the Number of Clients Served in 1965 . . . . . V—6 Distribution of Respondents by 1965 Billings V-7 Central Tendency Measures of Professional Staff Size . . . . . . . . . . . . . . . . V-8 Percentage of Firms in Each Category Exhibiting Selected Staff Characteristics. V'9 Central Tendency Measures of Certain Client Characteristics Expressed as a Percentage of Total Clients . . . . . . . . . . . . . lFlO Billings From Management Services Engagements as a Percentage of 1965 Gross Billings . . V—ll Rate of Change During Recent Years of Management Services Billings Relative to Changes in Billings From all Other Services Combined . . . . . . . . . . . . . . . . . V—12 Number of Client Requests for Services Related to Electronic Data Processing. . . V-13 Disposition of Client Requests for Services Related to Electronic Data Processing . e o o a e o o o e o e o . vi Page 169 172 173 175 176 177 177 178 180 181 182 183 Table V—l4 V-15 V—l6 V-l7 V—18 V-l9 V—22 V—24 V-26 Opinions Relating to the Future Effect of Electronic Data Processing Upon the Accounting Profession as Compared to the Effects to Date. o a u a o n a a o o 0 Opinions Related to the Tendency of Service Bureau Usage to Reduce Gross Billings. . . Exclusive Sources of Service Bureau Know— ledge for Non—Involved Firms, by Opinion Relating to the Effects of Service Bureau Usage on Billings. o o o a o n n u n o a 0 Office Classification of Responding CPA Firms Involved in Various Ways with Service Bureaus. a o a a o a D o o o u o a Involved Respondent's City Size or Size of Largest City Within Twenty Miles. Number of Clients Served by Involved Firms, 1965. a o o o o o n e o a a a n 0 Gross Billings of Involved Firms, 1965 . . . Measures of Central Tendency Relating to Staff Sizes of Involved Firms. 0 o o o 0 Percentage of Firms in Each User Category Exhibiting Selected Staff Characteristics. Distribution of Write—Up Clients as a Percentage of Total Clients. 0 o u a c o . Distribution of Non-Opinion - Audit Clients as a Percentage of Total Clients . . . . Distribution of Clients Preparing Their Own Financial Statements as a Percentage of Total Clients . o a o o o o o n e o o a Mean of Selected Client Characteristics Expressed as a Percentage of Total Clients for Each Category of Firms . o a o a a . . Page 183 184 185 187 188 189 189 190 191 192 193 193 194 Iable Table V—27 V-28 V-29 V—30 V—3l V—32 V-33 V—34 V—35 V—36 V—37 V-38 Billings From Management Services as a Percentage of 1965 Gross Billings. Rate of Increase During Recent Years of Management Services Billings Relative to Increases in Billings From all Other Services Combined. Number of Client Requests for Services v Related to Electronic Data Processing. Types of Applications Used by Clients Dealing Directly with Service Bureaus. Number of Clients Directly Using Service Bureaus Directly as a Percentage of Total Clients. . o a a o a a o Billings From Clients Directly Using Service Bureaus as a Percent of Total Billings . . . . . Responses of CPA Firms Reporting on the o o o e 0 Need of Systems and Procedures Modifications Service Bureau Usage. Caused by Clients' Disposition of Modifications Needed. Selected Service Bureau Applications by CPA Firms for Servicing Clients Through Service Bureaus. o 0 Number of Clients Being Serviced Through a Service Bureau as a Percentage of Total Clients. . . . . o o o a o o o o a Billings From Clients Serviced Through a Service Bureau as a Percentage of Total Billings . . . . Opinions Relating to the Future Effect of a o a o o o 9 Electronic Data Processing Upon the Accounting Profession as Compared to the Effects to Date. viii o o u p o o Page 195 196 196 198 200 200 201 204 205 Table I Table V—39 V-40 V-43 V-44 V-45 V-46 V-47 V-48 V—49 V—SO V—52 Measures of the Number of Years Clients Have Been Directly Using Service Bureaus . Measures of the Number of Years Clients Have Been Serviced Through Service Bureaus Selected Benefits Reported by Firms with Clients Directly Using Service Bureaus, by Category. . . . . . . . . . . . . Selected Benefits Reported by Firms Using Service Bureaus to Service Clients, by Category . . . . . . . . . . . . . . Participation in the Service Bureau — Commercial Bank Survey . . . . . . . Equipment Operated by the Responding Service Bureaus and Commercial Banks Customers Serviced in 1965 . . . . . Direct CPA Users as a Percentage of the Number of Customers Served . . . . . CPA Referrals as a Percentage of the Number of Customers Served . . . . . Respondents' Evaluation of the Extent to Which CPAs Are Apprised of and Know How to Use Data Processing Services. . . Performance of Most of the Systems Work Associated with a Data Processing Application. . . . . . . . . . . . . Respondents" Opinions of the CPA”s Proficiency as a Systems Man . . . . The Extent to Which a Customer“s CPA Firm is Contacted for a New Application or a Modification of an Existing Application. PrOportion of CPAs Requiring Information on Service Bureau Processing Controls. ix 0 Page 206 206 207 207 208 209 210 211 212 213 214 215 216 217 E T I\l Table V-53 V-54 VI-l VI—2 Type of Assistance or Training Services Offered Customers. . . . . . . . . Services Offered by Respondents. . . . Type of Service Arrangement. . . . . . Computerized Customer Services Offered by Fourteen Michigan Commercial Banks . Page 217 218 229 239 n In B C m: I. . . l. W I. ll I I LIST OF FIGURES Figure II—l Components of”Time1iness“. . . . . . . III—1 Service Bureau Organization Structure. . . . IV—l How to Rate a Data Processing Center . . . . LIST OF APPENDICES Appendix A CPA Post Card. . . . . . . . . . . . . . . . B CPA Detailed Questionnaire . . . . . . . . . C Service Bureau-Commercial Bank Questionnaire D Statistical Measures Employed. . . . . . . . xi Page 23 103 160 Page 280 282 304 310 III I I I I . I l Q en .510 1. . LI. 0 AI. R In I I. II I VI P» I. .r. 1 3 CI. 0 I. II. II. D . tori «I II .IHu .hqu M...» I mun VIII.» In... Dr. . MU. . III. NIT III» II he» ht.» I CHAPTER I INTRODUCTION Purpose of the Study The purpose of this study is to determine the effects, if any, of data processing service bureaus on the practice of pub— lic acc0unting. It is assumed that data processing service bureaus are a potential aid to certified public accountants who perform various services for clients unable to justify economi- cally their own automated data processing installations. Fore— nwst among these services is that of providing management with information critical to the operation of an organization. Data Processing service bureaus help to generate such information by fummshing sophisticated equipment and highly skilled personnel Without requiring corresponding capital commitments or organi— zational alterations. These are provided in any desired mix, depending upon the problem, for the duration of a particular reQUirement. If the certified public accountant (CPA) employs data pro— ceSSing service bureaus to service clients, one would expeCt to see the various services he performs, especially his advisory SerVices, expand. In addition, changes in client mix, quality and cm SIIIiIa bureau assuII IIfec IIIen EIIIIIII IIIgI cIOSI 2 and composition of staff, gross billings, etc., may occur. Similarly, if certain elements of the data processing service bureau industry expand their services into activities histori- cally provided by certified public accountants, it is reason— able to expect that a diminution of CPA participation in these activities will occur, with accompanying changes in the present nature of accounting practice. To determine the validity of these expectations, the asmmmtion that data processing service bureaus are potentially effective aids for CPAs providing a wide range of services to clients, especially advisory services, is examined. In this context, certain challenges confronting the ac— counting profession are evaluated in Chapter I. These chal— lenges are attributable to technological advances in disciplines closely related to accounting such as mathematics, statistics, oPerations research, and computer technology. Until recently, the degree of interdependence between accounting and these disciplines has been largely ignored by the profession. In Chapter II, management's need for information, an area of mutual interest to service bureaus and to CPAS, iS ConSidered. In addition, the CPA's advisory services and their relationship to the management information system are Examined . A description of the service bureau industry is the subject of Cha severe firms, a llty.I sonal and s the e Kichi were Publ isa 3 of Chapter III. This is accomplished through an examination of several general considerations, an analysis of the industry's firms, and an evaluation of the organization and operation of a"typical" service bureau. Based primarily upon a review of the literature and per— sonal interviews, the relationships between a CPA, his clients, and service bureaus are examined in Chapter IV. In contrast, 'Uw effects of these relationships upon public practice in Michigan are evaluated in Chapter V. through an analysis of the- resPonsest0several questionnaire surveys. The groups surveyed were the member firms of the Michigan Association of Certified Public Accountants, service bureaus Operating in Michigan, and a sample of Michigan commercial banks. In Chapter VI, two tOpics which may have profound effects mithe future of the public accounting profession receive a cursory examination. The first is the entrance of commercial banks into the service bureau industry. The second is the multiple—access—computer service bureau, a revolutionary new Concept in service bureau employment. SCOpe of the Study The major portion of the study's empirical research is lhm¢ed geOgraphically to Michigan. However, its applicability need not be restricted geographically because the literature reviewed is not limited to Michigan nor is a portion Of the In ad( nanag a. . .V HM t . «MM \ .11.. Mr... sum»; ‘..r.\ .J MN under the C Mm. I7——— vi 4 empirical research consisting of interviews and correspondence. In addition, the study relates to the role of the CPA as a pro— vider and interpreter of information. As such, it emphasizes ’ the CPA's advisory function because of its relationship to the management information system. Background When the history of our age is written, I think it will record three profoundly important tech— nological develOpments; Nuclear energy, which tremendously increases the amount of energy available to do the world's work; Automation, which greatly increases man's ability to use tools; And computers, which multiply man‘s ability to do mental work. Some of our engineers believe that of the three, the computer will bring the greatest benefit to man. The words of Ralph J. Cordiner, formerly chairman of the board of directors of The General Electric Company, have impli— cations the public accounting profession cannot ignore. Multi— Plying man's ability to perform mental work implies creative and imaginative thinking, a pursuit fundamental to the survival 0f any profession in our rapidly changing economic environment. Certainly, creative and imaginative thinking, resting on a l”Computers: A Delayed Revolution," Business Week (June 21' 1958). p. 69. tute compu studi is t1 501111 In h 5 foundation of integrity, is the essence of the public accounting profesSion's service to the economy. The computer‘s impact on the accounting profession has been the subject of great concern to the American Institute of Certi— fied Public Accountants (AICPA). ”For more than a year the Insti— tute has been studying various aspects of a big problem — how computers will affect accounting practice. The more it is studied, the bigger the problem grows. The only answer so far is that the impact will be tremendous — soon.”2 This was the dominant theme during the Institute's annual meeting in 1965. hirecent issues of the Institute's publications, the impact of the computer on the profession has been highly publicized. The following are examples: If we don't master the computer, it could destroy us. If we do master the computer, it will give us an abundantly creative instrument with which to work.3 If they (CPAs) make an ally of the computer, it will assist them to achieve an even higher level of emin— ence; and if they ignore or resist it, they will pay a terrible price in lost prestige.4 These warnings are ominous, but timely. There is great femm however, that these warnings are not being heeded. In John L. Carey, "The Impact of Computers on Practice,” The CPA (March, 1965), p. 3. 3 _ Edwin T. Boyle, "What the Computer Means to the Accounting Profession," The Journal of Accountancy (January, 1966), p. 56. Bernard B. Isaacson, "Special Report to Council Alerts Practitioners to Computer Challenge," The CPA (June, 1965), p, 7. this c undoin '2 M: Q 6 this context, Trueblood suggests that "complacency could be our 5 undoing, if we permit it to take hold." The Challenge These warnings are in a sense misleading and lacking in perspective. The computer, per se, is not the fundamental challenge facing the profession. The fundamental challenge is that the computer permits the effective integration of related disciplines and the more intensive utilization of the knowledge of a single discipline for solving an assortment of problems. A new science has thus been created “. . .concerned with the problems of classifying, processing and interpreting informa- tion. This science encompasses a field including such subjects as widely divergent as bookkeeping and cybernetics, neurology and Operational research, standard costing and servomechanisms. fins new science has been rather tentatively christened Infor- 6 As the knowledge boundaries of information mation Technology.” technology expand, professional engagements relying exclusively upon traditional accounting methodology may result in tomorrow's CPA and information technologist occupying the same relative pOSition to one another as do today's bookkeeper and CPA. Information technology, through the electronic computer, 5Robert M. Trueblood, ”From Prediction to Preparation," EEESEA (November, 1965), p. 2. 6 . F. W. McRae, The Impact of Computers on Accounting (Lon— don. England: John Wiley and Sons, Ltd., 1965), p. vii. oreseni zany ( ten '1: provi Ratio forms M C0n: 7 presents the public accounting profession with a three—part challenge related to reporting financial history, preparing and analyzing decision—making information, and auditing. fiporting Firflmial History The CPA's role as a reporter of financial history consists of determining the necessary financial information needed by the many diverse but interested parties; designing an effective sys— tem including the underlying procedures and methods needed to provide this information efficiently; and presenting this infor— mation within stated time—limits, in a usable or prescribed format, consistent with "generally accepted accounting prin— ciples." The first phase of the fiduciary function, that of deter- mining the financial information requirements of the diverse interest—groups, is simultaneously aided and made more compli— cated. The computer allows the rapid and relatively inexpensive processing of vast quantities of data into many useful forms. Consequently, the economic reasons for allowing the information requirements of various parties to remain unsatisfied are no longer valid. However, before machines can produce anything of value, they must be supplied with something potentially Valuable. Such a requirement forces the accountant to ascer— tain which items of financial information are relevant to each group's needs. This is a relatively uncomplicated exercise in the as: pertisl prtie The se for cc format factm law In :enta tion in 3951‘ 5M1 3le Syst 5931 8 the assumption—rich world of theory, but it demands great ex— pertise in practice. Because the information needs of the various interested parties are different, accounting methodology attempts to adapt. The second phase, that pertaining to the design of the system for collecting and processing financial data and presenting in— formation, has been changed time after time to reflect such factors as Securities and Exchange Commission requirements, tax law modifications, and internal requirements such as the imple- mentation of standard costing. The trend has been in the direc- tion of more financial information and of more relevant and timely financial information, especially for internal uses. Reflecting this trend, accountants with foresight designed new systems which, in each succeeding modification phase, often substituted automated equipment for manual methods. Generally, systems became progressively more efficient and complex. The third phase, that of information presentation, has been greatly improved, certainly in terms of punctuality. In addition, the computer's capabilities allow the preparation of reports more analytical in nature. For example, income state— ments with year-to—date and current account balances and per— centages are easily prepared, as are a variety of exception— type reports. aqemen l l i uses is for cc i paring l Hakim infon \ than I 9 Preparing and Analyzing Qpantitative Information for Decision—Making ”During the last thirty years, and especially since the end of the Second World War, the accountant has found ‘it necessary to adapt his bookkeeping model more and more to the needs of man- agement.”7 The growing importance of information for internal uses was briefly considered in the previous section. The reason for considering the accountant's advisory function, that of pre- paring and analyzing quantitative information for decision— nmking, as a separate category is to emphasize that all relevant information necessary for decision—making is not necessarily financial in nature. The computer facilitates, economically and physically, the accumulation of quantitative data such as machine running times, number of sub—assemblies completed, or units of raw material in process of conversion. Often such seemingly obscure variables or other variables expressed in terms or flnmtions of tons, yards, passenger—miles, etc., are the key to profitability for a firm. The CPA must realize the importance Of this type of data and incorporate its capture, preparation, and presentation into the information system in order that he may remain management's information specialist. The typical financially—oriented information system does not always accu- mulate such data. When it does, these data are often obscure bY‘products of the primary financial data flow. 7 . Ibid., p. 50. perta: ports as an compu Pique hams. tion mg 1 iore cont Iela 30y int 10 An even graver challenge confronts the CPA than the one pertaining to his ability to prepare meaningful and timely re— ports. Information technology challenges the accountant's role as an analyst Of information for decision—making because the computer permits the application Of Operations research tech- niques for rapid and relatively precise analyses of various prob— lems. These techniques make it possible to take into considera— l tion more variables than when utilizing the traditional account- ing techniques available; to assign values to variables hereto— ' fore unquantifiable and hence ignored; to assign probabilities i to the future values Of variables; and to develOp alternatives i and thus make possible the selection of an Optimal solution. In contrast, the accountant‘s traditional reliance on arithmetical relationships lacks precision and often produces relatively ambiguous results. Auditing a Computerized System The third challenge to the accountant relates to his role as auditor. Information technology can be of use to management generally through the availability of a computer, either in- house or at some other location, to collect and process data, and to present information. As a client's needs and recognition Of these needs become more acute, pressures arise to acquire SOphisticated equipment commensurate with these needs. The auditor soon finds his traditional "audit trail" obliterated as t:_._‘..__— 'seal- at one summer than n nnlog ennee techs hash L’—_7 11 "real—time" computers are adOpted. Not having available, all at one time, the various source documents. journals, ledgers, summaries, and financial statements presents problems different than ever before encountered. At the heart Of these problems are two related considera— tions. Felix Kaufman aptly states these. The computer ". . . with its never ending flow of improvements, represents something foreboding and mysterious to those concerned with controls over information processing."8 A constantly changing computer tech— nology affects the auditor's understanding of computers, and his concern for control creates great anxieties for him. One possible technique for coping with these anxieties is to pretend they do not exist. Many engineers, systems analysts, and programmers believe the auditor is overly pre—occupied with internal con— trol and incompetent to judge a computerized information sys— tem's reliability. Their belief may indicate his use of such a coping technique. If their contentions are true, the auditor's task should be sharply curtailed. Perhaps some other source, upon whom the auditor Would rely, should determine the infor— mation system's degree of reliability. The auditor would then merely satisfy his requirements as expressed in the Securities Exchange Act of 1934. However, if the internal control phase 0f the attest function is abdicated» and if it is agreed that 8 , . . . . Felix Kaufman, Electronic Data ProceSSing and Auditing (New York: The Ronald Press Company, 1961) . p. 3. for s on fi no he 12 for satisfying the CPA's advisory function exclusive reliance on financial information is inadequate, then today's CPA has no basis for his claim to the role of management's information specialist. If these conditions hold, the information he pre— sents is deficient in reliability and in relevance. To combat this challenge, the CPA must arm himself with the necessary tools which will satisfy the requirements Of all his functions. This, of course, implies that he must develop to the point Of being a true information technologist. A fur— ther implication is that the CPA no longer can adOpt a specialty area within the discipline of accounting to the complete exclu— sion of the other areas. A measure Of true proficiency in a given discipline is the ability to interrelate that discipline wiflnother disciplines after the ability to interrelate the com- ponents of that discipline is developed and demonstrated. Importance of the Study The importance of this study is directly related to the importance of the CPA's activities in the field of general management consulting or management services. Contrary to pOpular belief, the accountant's role in management services is not a recent phenomenon nor is it limited to a particular group of accounting firms. Under the sub—caption of "crowding infl'a leading business periodical stated that ". . .major accounting firms. . .are working hard to do much more for busine half-d nanage which tends the p] I gory ; an en 13 business than simply make the books balance. Over the last half—dozen years they have been rapidly expanding the variety of management services they are prepared to sell."9 This statement, which considers the CPA as a relative newcomer into this field, tends to add credence to warnings Of the challenges confronting the profession. Actually, American CPAs were offering services in this cate— gory as long ago as the turn of the century.10 While they were an early factor in management consulting, as a result Of the pressures of other interests related primarily to the Revenue Act of 1913 and the Securities Exchange Act of 1934, management services slipped to third place in terms Of the accountant's interest.ll During this period most Of the management consult— ing firms were organized.12 Between World War I and World War II, many of the larger national, regional, and local accounting firms maintained separate management services departments while their smaller counterparts performed similar services through . , , 13 their auditing and tax staffs. 9 . "What Management Consultants Can Do,” Bus1ness Week (January 23, 1965), p. 88. 10K. S. Axelson, ”The Development of Management Services in the Public Accounting Firms," Management Controls (January, 1963) , p. 4 ll . Ibid. lzIbid. 13 0 Ibid. Si vices h ereasin trainir the AI( 14 Since World War II, the CPA's interest in management ser— vices has grown remarkably and ”. . .its ramifications are in- creasingly evident in accounting education, recruiting and staff training. . .and in the professional development activities of 14 the AICPA. ” Yet in spite of all the encouragement given by pro- fessional organizations, the cries of business man— agers for help, the qualifications Of CPAs to perform management services, and the cold statistics on the volume and lucrative rewards of the consulting busi— ness, many CPAs have apparently not entered this field nor are they relatively frequently called upon by firms seeking consulting services. There are several reasons for this. Certainly, one of these is that many CPAs lack technical knowledge sufficient to handle problems effectively in such areas as inventory control, pro— duction scheduling, and product distribution. Underlying this apparent lack of skill is the failure of many accountants even to appreciate the decision—aiding power of the computer and of such disciplines as mathematics, statistics and Operations re- search. Bookkeepers Of this and past generations failed to devehxsa knowledge of standard costs, budgeting, and breakeven analysis as these techniques gained in popularity and were demanded by clients. The implied analogy may be too severe, but it nevertheless is a possible outcome. l4Morton F. Moss, "Management Services and the CPA Examina_ thn,“ The Accounting Review (October, 1962), p. 730. 15A. W. Patrick and C. L. Quittmeyer, “The CPA and Manage- ment Services)" The Accounting Review (January,-l963), p; 110. i" oi the see ot] sideren the na Beyer inforn tistic tion t elect: budge inene We ions; the 1 cent this Seam [+7 15 If the CPA fails to provide management advisory services of the caliber available from other sources, he can expect to see others performing various services which he has long con— sidered a part Of his overall advisory function. But what is the nature of the advisory, or management services, function? Beyer suggests that it is related to the concept of a management information system wherein are merged such disciplines as sta— tistics, Operations research, long range planning, ”. . .in addi— tion to accounting and all its satellite activities such as electronic data processing, systems analysis, cost accounting, budgeting and profit planning.“16 The purpose Of the CPA's man- agement services function is to aid the entire figure—gathering process of the firm in becoming a sophisticated management in— formation system which.will supply all levels of management with theihformation it needs to run the firm}7 Clearly,Beyer's con— cept of the accountant's management services function resembles McRae's definition Of information technology. Therefore it seems reasonable to conclude from this that a CPA performing ins management services, as envisioned by Beyer, is an infor- mation technologist. And what does an information technologist d0? He designs the management information system which identi— fies, collects and processes reliable and relevant quantitative l6 . . . Robert Beyer, ”Management SerV1ces—Time for Dec1sion," The Journal of Accountancy (March, 1965), P° 48° l71bid. ( data; ' nanagen the on the no contro 16 data; and he interprets this data for the purpose of providing management with information for decision—making pertinent to the overall operation of an economic enterprise. In addition, the role of an information technologist encompasses the internal control considerations of an auditor because data must be reli- able as well as relevant. SOME p is the inqua] sUftpt: iiipt: that P?” CHAPTER II MANAGEMENT SERVICES AND THE INFORMATION NEEDS OF CLIENTS Introduction Individuals trained in the discipline Of accounting have at some point in their education encountered the phrases ”accounting is the language of business" and ”accounting is information." Unqualified, these phrases are ambiguous because of certain as— mmmtions which can be ascribed to them. For example, one as- mmption made possible by viewing these phrases jointly can be that "all business information is expressed in monetary terms.” Another assumption can be that ”all business information is historical in nature.“ Further assumptions relating to the effectiveness of accounting in communicating management's deci— sions to the appropriate organizational elements, or as to the lack of any limitations upon accounting's ability to control a giant corporation, are also possible. In fact, any number of asmmmtions, many of them clearly erroneous, attach to these phrases. Bierman implicitly recognizes this by stating that l . ”accounting islg language Of business. . . .” (EmphaSis added.) l . . . Harold Bierman, Jr., FinanCial and Managerial Accounting: An Introduction (New York: The Macmillan Company. 1963), p. 3. l7 Elliott an M added. l Biern language c data are t accounting but he in 3 entices . enjoys a ll recOgn iiRancial In 0 iiiagenen lition n5 mightier illountiy is “he. hat of in the C 18 Elliott and Wasley go further and assert that "statistiqpl busi— ness data constitute the 'language of business'"2 (Emphasis added.) Bierman's qualification to the phrase, ”accounting is the language of business,” questions the implication that accounting data are the sole form Of business information. He considers accounting data as an important source of business information but he implicitly recognizes the existence of other unspecified sources.3 Elliott and Wasley dispell the notion that accounting enjoys a special distinction as a form of business information by recognizing that reports based on a wide variety of data, financial and non—financial, are deemed useful by management.4 In order to examine the implications raised, the CPA's management services function is related to a client's infor— mation needs. To do this, the nature of information and of management information is reviewed. Then, the Objective of accounting is explored and the status of managerial accounting is related to management's information needs. Finally, the con— Cept of a management information system is developed and reIated t0 the CPA's advisory role, i.e. the management services func— tion. 2 . C. Orville Elliott and Robert S. Wasley, §E§i22§§_22£2£m§; tion Processing Systems (Homewood, Illinois: Richard D. Irwin, InC., 1965), p. 16. 3 . Bierman, Op.cit., p. 3. Elliott and Wasley, Op.cit., P- 23- 19 The Nature of Information Information is the basic ingredient of decision making. As the situations in which decisions must be made be— come more complex, the need for information correspond— ingly increases. And it has been characteristic of modern life that it is complex. Business, science and technology, government —— each is concerned with a world encompassing more and more interrelationships, and the need in each case has therefore become even greater to provide the decision maker with more in- formation. The need for information has not gone unrecognized. The term ”information explosion” describes a state where it has been estimated that 60,000 books, 100,000 research treatises, and 1,300,000 articles are published annually throughout the 6 . . . world. Nor is this phenomenon limited excluSively to sources outside the boundaries of organizations. The torrent of inter- nally—generated information has reached massive proportions as various items of automated equipment replace manual clerical methods. Of course, the information explosion is not without concomitant problems for the potential beneficiaries. Infor— mation storage, retrieval, and dissemination problems become highly complex. In addition, even the definition of relevant information, that information necessary for effective decision— making, is obscured by the sheer quantity of information actu— ally and potentially available. 5Joseph Becker and Robert M. Hayes, Information Storage and Retrieval: Tools, Elements, Theories (New York: John Wiley and Sons, Inc., 1963), p» 3° 6Elliott and Wasley, op.cit., p. 16. accrue the na‘ and da the es 5? IE” 20 Before favorable effects from increased information can accrue to the decision—maker, it is useful for him to understand the nature of information by distinguishing between information and data, reviewing the qualities of information,hand analyzing the essence Of managerial information. Information and Data Information pertains to ”. . .knowledge. . .concerning some fact or circumstance; news."7 Data may cover all facts or cir— cumstances but lack the "news“ content of information. In effect, information is a subset of data in that all information is data, but not all data is information.8 Gregory and Van Horn suggest that while ”the word data may be used to cover all types of facts obtained; the term information is useful for denoting the particular facts management wants to know."9 A meaningful modi— fication of the preceding notion may be that information is re— lated to the facts management needs to know in order to perform its two most important functions, planning and controlling. 7 The American College Dictionary, ed. Clarence L. Barnhart (Harper and Brothers Publishers, 1951), p. 624. 8Ned Chapin, An Introduction to Automatic Computers (2d edd Princeton, New Jersey: D. VaiNostrand Company, Inc., 1963), p. 220. 9 Robert H. Gregory and Richard L. Van Horn, Automatic Data BflfifififiimljflggfigL: Principles and Procedures (2d ed.; Belmont, California: Wadsworth Publishing Company, Inc., 1963), p. 3° The s but nonetl about even after sell some uniq informati qualities sing. An understan MU i I The these are iletenesy p lienI iii ihat com b'Sis fo inlay will wt '3 human 21 The differences between data and information are subtle, but nonetheless important. Data represents all facts gathered about events or circumstances, while information evolves only after selected data, when combined or otherwise processed into some unique form, exhibit certain qualities. In order to create information, emphasis must be placed upon the attainment of these qualities rather than indiscriminate data-collection and proces— sing. An examination of these qualities may assist in better understanding the composition of managerial information. Quality of Information The quality Of information has several dimensions. Among these are accuracy, timeliness, predictability, relevance, com— pleteness, quantifiability and availability. Accuracy. Accuracy is a measure of reliability or perfec— tion, the ”. . .long—run ratio of correct answers to total answers that comprise information. . . ””10 Information serves as the basis for Operating decisions and hence its degree of reli— ability affects the results of decisions. Undesirable results occur when inaccuracies in information are caused by factors such aslnmmn error, equipment malfunction, or a poorly conceived network of related procedures which fail to combine stored in— formation, facts pertaining to current events, men, and equip- nmnt into a truly effective system. 10 Ibid., p. 516. nented nuhber a con; is the value cost; iCCOll‘ 22 However, accuracy has a cost. Error control can be imple— mented in the form of human inspectors, check digits in account numbers, parallel circuitry in computers or checks designed into a computer program. Each method has a theoretical value which is the favorable results attained. However, at some point the value attributable to control devices will be less than their cost; and all succeeding equal increments Of control cost may account for continuously diminishing increments of value. For some applications, management will decide to stop short of this point, but for others it can accept only an infinitesimal degree of error. Timeliness. Timeliness enhances the quality of information in the sense of its being available at some desired point in time. "Timeliness, or the age of information, has three com- ll ponents: interval, delay, and reporting time.“ Interval is the time-period between the start of successive preparations of information in report form. It can be a constant as in weekly reports, or it can be variable as in special purpose reports. Delay time refers to the time—period from the point additional transactions are not accepted for inclusion in a particular report to the dissemination of the report to users. This time- period is composed of the cumulative time necessary for data processing, report preparation, and delivery. The reporting 1 . lIbid., p. 576. period larly 1 with t' natica tion i report nesioc‘ lnforn the (is equal thee 23 period is the time-period covered by the report and, for regu- larly recurring reports, it is usually equal to and coincident with the interval. These relationships are illustrated sche— matically in Figure II—l. Assume in Figure 11-1 that the information under considera— tion is contained in a monthly financial statement and that the mporting period and interval are equal and coincident. Delay wriods are also assumed equal. Then, the age of the most recent nformation in a particular reporting period is the length of he delay period while the age of the oldest information is qual to the interval plus the delay period. /— Delay Peri‘cy——\~ nterval I Interval i Interval : Interval } #2 ' #3 . #4 L i l sporting Reporting ‘ Reporting 1 Reporting ariod #1 Period #2 Period #3 Period #4 mm = 0 Time = w COMPONENTS OF ”TIMELINESS“ FIGURE II—l TO further illustrate the relationship, assume the exist— ce of two firms, one a large departmentalized manufacturing ration, the other a relatively small retail establishment. ause of the scale and complexity of operations associated with larger firm, monthly financial statements are meaningless as the linanc source guentl ularly suift portis annua types hahin gents lllti ( lepoy eeat tier 24 as the sole basis for action to control operations, i.e., monthly financial statements are not the exclusive nOr the most important source of information for decision-making purposes. Conse— quently, the delay period of financial statements is not partic— ularly crucial unless non—operating considerations require their swift processing, preparation, and distribution. Thus, the re— porting period can be extended to a quarter-annual or even an annual basis without adversely affecting operations because other types of information are available to aid managerial decision— naking. For the small retail establishment, monthly financial state— mnts are often the only formal source of information for planning md control. Because of this, their delay period is crucial since eporting is, by its very nature, after—the—fact. Hence manage— ent may take steps to shorten delay time by streamlining lerical operations through work simplifications projects or by nstalling automated equipment in order to obtain finished re— rts at a point in time closer to the reported events. Obvi- sly, this enables them to control operations more effectively permitting decision-making to take place nearer the time of e reported events. Similar results occur if the reporting riod were shortened or if the reporting period, interval, and lay time were concurrently shortened. The values to decision— king increase; but, the costs in terms of manpower and equip— nt needed to modify an existing system may exceed these values. events houndev detail certai cones nore v decisi ahili‘ facts infor test only incur 25 Predictability. Information pertains to a continuum of events which, in terms of management's knowledge of these, is bounded by two absolutes, certainty and uncertainty. Clearly, detailed information is more readily available for relatively certain or predictable events than for those whose possible out— comes are more obscure. However, detailed information is often more valuable with respect to uncertain events. It is here that decision—making takes on crucial dimensions because the prob— ability of making a sub—Optimal decision without having all the facts is greatest. For relatively predictable events, detailed information quickly attains a negative value. Relevance. For facts to be classified as information, they must be pertinent to the problem confronting the receiver; and, only when considered in relation to the receiver's previously accumulated information, prior experience, and degree of analyti— cal sophistication, do facts acquire an informational content. Concern for informational relevance comes after three levels of communication are satisfied. The first deals with the accuracy Of the information conveyed in terms of the trans— mitted symbols being identical or equivalent to the symbols used by the sender in describing an event. The second is the ”. , , precision by which the transmitted symbols cover the desired “waning.”12 The final level relates to the ”. . .Observable 12Wayne S. Boutell, Auditing With the Computer (Los Angeles: University of California Press, 1965). p. i4- results nitted ments i in the vain pv format 26 results of the conduct of the recipient in reacting to the trans~ . l3 . . . mitted symbols." For information to be relevant, the require— ments implied in the levels of communication, and particularly in the third level, must be fulfilled. The user's point of View must also be considered. "The main point here is precisely that information is management in- formation only to the extent to which the manager needs or wants 't; and it is significant to him only in terms of its relation. . . . . . . . l4 . . . 0 his personal respons1bility.” Similarly, facts obtained bout events the receiver cannot control through his actions re often irrelevant data rather than information. Completeness. Incomplete information about an event is item, for decision-making purposes, more serious than a complete ack of information. Perfect knowledge or information is one f the important simplifying assumptions of micro—economic theory; ut it is understandably not appropriate other than for analyti- a1 purposes. Consequently, management must at all times recog— ize that even the most seemingly complete information lacks mmleteness because of the costs associated with improving 1e sophistication of an existing information system and the mits placed by existing technology on possible improvements. 13 Ibid., p. 15. l4Edmund D. Dwyer, "some Observations on Management Infor- tion SYStems," Advances in EDP and Informppign Systems, AMA nagement Report Number 62 (New York: American Management sociation, 1961), p. l7° Efforts iirecte quality and ill to even it is adds t neasua its in 27 Efforts to produce information which is more complete should be directed to those areas where the pay—Off is greatest. The quality of completeness also introduces the concept Of judgment and illustrates that this human factor must be always present to evaluate all information received, in order to verify that it is indeed information, before basing a decision on it. Quantifiability. The quantification or measurement of data adds to its usefulness. The more sophisticated the method of measurement, the more useful is the data measured in terms of its informational content. Measurement in its most primitive aspect involves forming classes of equivalent objects or events. This is the basis Of identifying, recognizing, and labeling ordinary Objects. Moving up the scale of measurement, more information is communicated about the items measured. Progression is from statements of equality (within classes) through knowledge of greater than or less than (or positional relation- ships) to statements about the magnitude Of differ- ences, and finally to ratios. Thus quantification conveys more information than strictly qualitative statements. 15 nformation which is developed through increasingly SOphisticated ethods of quantification may enhance the receiver's ability for ecision—making which in turn reflects upon the operations for hich he bears responsibility. Availability. Only available information has a positive nfluence on decision—making. Consequently, in an effective 15 . . "A Statement of Basic Accounting Theory,” Final draft of e American Accounting Association's Committee to prepare a tatement of Basic Accounting Theory, Chapter II, p. 4. (Mimeo_ aphed.) report sary f items villin I inform “real- this : gtvent of co vith infor prob: tion hark data this I 28 reporting system, making available the information deemed neces— sary for decision—making is a very important consideration. Most items of internal information can be generated if management is willing to pay the price. Remote data collection devices, vast information storage units with rapid retrieval capabilities, and "real-time" computers are accomplishing phenomenal results in this respect. On the other hand, desired external data is fre— quently difficult to acquire. For example, the pricing policies of competitors are usually closely guarded. This data, together with internal data on a newly proposed product, would result in information useful to a new-product—introduction decision. The problem then becomes that of finding useful substitute informa- tion already available or which can be derived by such tools as market research studies. By constantly developing new tools, data previously unobtainable is acquired. But, as of a given point in time, potential information is not information until it is available for aiding decision—making. Managerial Information For every enterprise there is a unique set Of discernible variables which are of utmost importance to management if it is to perform effectively its primary functions of planning and con- trol. Consequently, information, relating to these variables, exhibiting the qualities discussed, is an essential item upon Which to base decisions. While the set of variables may often appear is sup which other varia? inter iinan oftev tine Chili 29 appear identical between firms in similar lines, this identity is superficial if for no other reason than that one variable which will affect the perception of and the reaction to all other variables will always be different between firms. That variable is peOple. It is useful to differentiate these variables as between internal and external and further as between financial and non- financial. singularly each variable is important, but it is often more meaningful to consider them in terms of their rela— tive importance to Operations and to the degree of control which can be exercised over them. Internal financial variables are those which determine re— turn on investment or earning power. These are sales volume, selling price, product mix, all costs, and investment in all classes of assets. Internal non-financial variables may include the quality of personnel and recruiting policy; the firm's re- porting system and its responsiveness; and the age of equipment, its efficient utilization, and the labor/capital employment ratio. External variables, financial in nature, would include the conditions of the money and capital markets and official policy affecting these. Non—financial external variables relate to such factors as consumer tastes and preferences, conditions in the factor markets, and technological advances. As between financial and non—financial variables, non— financ ¢ recogI mation t0 tht estab tute. than ment 30 financial variables affecting a firm may be more difficult to recognize and consequently there may be less available infor- mation pertaining to them. (The dearth of information relative to these variables may reflect upon the accountant in that the established information system is essentially financial in na— ture.) Because non—financial variables are often more critical than the financial variables with which they interact, manage- ment must be informed about them. Neuschel notes that: For any business — large or small — these (non— financial variables) will ordinarily consist of not more than four to six factors. They are the activities or aspects of the business that have a major impact, not only on short—term profit results, but also on long-term growth and competitive strength. As such they are the more important because they represent the only means through which the key 16 financial variables. . .can be influenced or changed. These factors vary more widely from industry to industry than do the financial variables. For example, in the automobile in— dustry, car—styling and the effectiveness of the dealer force is important; for the chemical industry, the important factors include new product research and develOping new uses of existing 17 products. Accounting, to be considered the language of business and synonymous with information, must supply management with infor— mation on variables critical to overall operations regardless 16Richard F. Neuschel, Management by System (New York: MCGraw-Hill Book Company, Inc., 1960), p. 212. l7Ibid. of the not re the s qrowt uted, while cult} atte1 ist _: lg 31 of their source or nature. If it does not, the accountant will not remain management's chief information specialist. The Effectiveness of Accounting as a Provider of Infgrmgtion Accounting, like other professions, has been experiencing the sensations of elation and frustration caused by the rapid growth of our economy. The profession's elation can be attrib- uted,.w in part, to the increased prominence it has been accorded while the frustrations are associated primarily with the diffi— culty inherent in absorbing new developments while concurrently attempting to digest older ones. Underlying this frustration is the ever present problem of ascertaining the true objective of accounting. No matter how obscure this problem may be made tO appear when thrust into the background by considerations jUdged temporarily more critical, it is fundamental to the pro— fession's existence. The Objective of Accounting It is the contention of this study that the fundamental ob ective of accounting is to provide a continuous source of lnformation exhibiting the qualities of accuracy, timeliness, redictabilit , relevance, com leteness, quantifiabilitv and aVailability relating to critical internal and external vari- EEEEhifinannial and non—Financial in nature. Further, the EEEi£E£§B§iOnS of this information should include past. p§§§§33' This and Com Vid< cm in 32 and for internal reporting pprposes only, anticipated events in the life of a business enterprise, useful to the variousyparties maintaining an economic interest therein, upon which they may base future actions. The preceding statement of the objective of accounting is not in complete accord with earlier definitions of accounting. An example of this disagreement follows: Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.18 This definition emphasizes the accountant's stewardship role and implies adherence to standardized reporting practices and conventions which often work against the accountant as he pro- Vides information for managerial decision—making. Trueblood , , , l9 Cites the advent of LIFO as one example of this dilemma. Another cited is in the design of cost systems. It is questionable whether a useful cost accounting System can or needs be tied into the accountant's over-all principle of historical costs. Perhaps an improved concept of cost accounting would be one involving theories of replacement and oppor— tunity cost. . .20 18 . . ‘ Accounting Terminology Bulletin NO. 1 (New York. American Institute of Certified Public Accountants, 1953): P‘ 9' 9 Robert M. Trueblood, “Accounting and New Management AttitUdeS." The Journal of Accountancy (October, 1958)' p. 38' 20 _ _Ib.ld°l p. 39. The definiti as to t] prise a: decisio for the ported the puz Th tions 3 tional providh of the Inform and sp herat cial 3 990111: of th tion iddit min \ n:— / l—’- m i n/ 33 The objectives of accounting inferred from many older defimflfions of the discipline thus create a basic misconception as to the complexities involved in managing a business enter- prise and to the potential role of accounting as an aid to decision—making. What management needs is information pertinent for the job at hand, not standardized reporting procedures sup— ported by often-conflicting alternative conventions invoked for the purpose of complying with the concept of stewardship. These comments are not meant to imply that traditional func— tions should be de—emphasized. Instead, their positive informa- tional content should be emphasized. Financial accounting should provide information on the present position and past operations Of the enterprise tailored to the needs of interested parties. Information of this type may require such concepts as general and Specific price—level adjustments, and distinctions between Operating profit and holding gains to be incorporated in finan— Cial reports.21 Taxing authorities should receive information Peculiar to their requirements without affecting the discharge 0f the other functions except as they provide useful informa— tion for investment decisions, capital expenditures, etc. In addition, the attest function should provide assurances to the Various parties that the information received is reliable and adequately descriptive of economic reality. The auditor's 2 . lSee Edgar 0. Edwards and Phillp W. Bell, IEE_EEEQ£X_§E§ MEasurement of Business Income (Los Angeles: University of C alifornia Press, 1964)- state} the e hatio the r her comm EVER hcco Pro 500 34 statement as to reliability guards against the degeneration of the existing information system and his assurance that the infor— mation is adequately descriptive of economic reality protects . 22 the reporting system from obsolescence. Managerial Accounting and Management's Informgtion Egggg In the early 20th century, the scientific management revolu— tion found the discipline of accounting an effective means for communicating information to management relative to operational events.23 HOWever, one important modification had to be made. Accounting had to shift its emphasis from the past to the present and future in order that management could use the communicated information for planning and control. Accountants developed useful techniques such as standard costing, direct costing, flexible budgets, responsibility accounting, and cost-volume- profit analyses. Originally non—financial information was accepted and re-cast into financial terms. Current events were compared to anticipated projections. All levels of man— agement decision—making were aided by developments such as cost variance reports and product—line profitability analyses. Today, the complexities inherent in large—scale Operations have created a dissatisfaction with the available managerial 2 . 2Trueblood, op.Cit., p. 39. 2 . . 3”The Field of Management Accounting,” NAA Bulletin, Sec— tion 3 (June, 1963). p- 4~ infer inade Pfenn 35 information. The accounting techniques in use are considered inadequate for generating the desired managerial information. Pfenning's comments represent this dissatisfaction: Information so supplied to (management) comes from balance sheets, profits and loss statements, inven— tory statements and budgets and forecasts. Granting that these familiar documents are one type of an in— formation system, I submit that by themselves they are not sufficient for today's complex business environment. Hence it is my view that if accounting organizations are to remain the principal suppliers of management information, they must make sure there is: (l) enough information, (2) that it's the kind needed, and (3) that it's available when needed. Already some observers point out that many controllers have failed to keep these facts in mind - that they have not broadened their vision of the information needs of business and, as a consequence, have been relegated to a secondary role.24 It is ironic that managerial accounting is criticized at a time when it has apparently broken from many of the constraining external reporting conventions which bind financial accounting. However, when one examines managerial accounting critically, strong adherence to the monetary convention is found to persist. Accounting information is still synonymous with financial infor- mation. However, if managerial accounting is to be considered essentially an information system and if the accountant is to be considered as management's information specialist, . . .it is 24 . - R. E. Pfenning, ”BuSiness Information Systems," The Accounting Review (April, 1962), P- 235- here for 0 large tion. anal} ECO! tenu‘ ted 36 increasingly difficult for the accountant to accept responsibility for one set of financial data without becoming involved with a larger and larger share of the organization's information func- tion."25 Given such developments as electronic computers and analytical tools such as operations research, the line between accounting and non—accounting information becomes increasingly tenuous. In reality there is a single pool of data from which to derive managerial information. To stOp short of providing management with all the decision-making information needed may imply that the managerial accounting function will some day only provide data for inclusion within an information report prepared by some unspecified party, presumably not an accountant. Such an outcome distressingly resembles the task of the present—day plant bookkeeper laboriously preparing detailed data for inclu— sion in the plant accountant's variance report. Management Information Systemg It is becoming apparent that managerial accounting must move beyond the traditional boundaries which act to restrict its use— fulness. A broader concept of managerial accounting is needed Which will embrace all activities involved in gathering man— agerial information. Such a concept opens the way for the 25 . ”A Statement of Accounting Theory," Final draft of the American Accounting Association's Committee To Prepare a State- ment of Basic Accounting Theory, Chapter 4, page 3.(Mimeographed.) accom ogist speci nate t Befor matic syste bush H: m; We as 1 Such hen com 37 accountant's transition to becoming a true information technol— ogist, thus maintaining his position as management's information specialist. To accomplish this, a vehicle is needed to coordi- mafiathe various activities and skills inherent in such a role. The management or business information system is that vehicle. Before examining the concept of a management or business infor— mation system, it may be useful to trace the development of the systems concept and the related technological advancements in business—oriented computers. The Systems Concept in Business The systems concept in business has been in transition since its early days, some twenty—five years ago.26 Its beginnings reflect its heritage from the Taylorian scientific management movement which in turn draws from thoughts centuries old. Then as now, many industrial engineers were engaged in the field. Such factors as forms, files, office equipment, and personnel were coordinated through standardized procedures in order to combine, simplify, and improve repetitive clerical operations involving several peOple within an organizational department. Techniques such as time and motion studies, flow charts, organi— zation charts, and office layout diagrams were also used. However, the emphasis was placed almost solely on paperwork 26 . . . W. J. Bates, "Business Systems in TranSition,” Data Pro- cessing for Management (March, 1963), Po 20- improveme rather th might be its relat avital I greatly I The unified ; tional b. were dev Purchasi inventor “tOtal p Stare wh almost 5 cal Wher input (1; systems lienal ”hireme ness in tion St 38 improvements and only portions of a problem were considered rather than the problem in its entirety. "To illustrate, a study might be made of a credit handling problem without redognizing its relationship or impact on an order system of which it was a vital part."27 Systems concepts were obviously influenced greatly by the functional organization structure. The next step occurred when procedures were developed which unified a particular process without concern for intra-organiza- tional boundaries. Procedures involving more than one department were devised for such sub—systems as sales and cash receipts; purchasing and cash disbursements; timekeeping and payroll; and inventory and production control. DeLuca refers to this as the "total procedures stage,” to differentiate it from the previous stage where intra—organizational boundaries were considered almost sacrosanct.28 The total procedures stage became practi— cal when technological developments allowed the multiple use of input data. The phrase, "capture once,” became a by—word in Systems work. However, ”this concept was concentrated on opera— tional improvements, rather than on management information re— quirements.“29 Furthermore, as the rigidity inherent in busi- ness information systems due to the influence of the organiza— tion structure began to disappear, a new rigidity appeared 27A. Richard DeLuca, "Understanding Total Systems,” Total §1§E§E§ (Detroit: American Data Processing, Inc., 1962), p. 31. 281bid. 29Ibid. influenm Each app. trained ; A m systems" tween th The tota resource their '1; tional j and Sal! 39 influenced by the equipment introduced as a part of the system. Each application had to be explicitly defined and only specially- trained personnel could perform certain jobs. A more subtle approach to business systems, the "total systems” concept has developed. The fundamental difference be- tween this and the total procedures stage is conceptual in nature. The total systems approach views the organization as a bundle of resources in terms of capital, labor, etc., and is interested in their interactions while continuing the de—emphasis of the tradi— tional functional organizational framework of finance, production, and sales. With total systems (management thinks) in terms of resources such as material, personnel, and customers, and interactions between the resources. It is also highly desirable (if not essential) to have all use- ful information become a part of the system. By moving beyond the total procedures stage or as Genzlinger terms it, the "integrated systems stage," one leaves a stage imbued predominately with a middle—management—oriented frame of reference, concerned with the control of processes which cross Organizational boundaries but where information interrelating these processes is a relatively minor consideration.31 Entering the total systems phase, more of a top management viewpoint is mandatory. The emphasis shifts to providing the information K 3 . OVance Genzlinger, "A Computer Philosophy for Smaller Businesses," Data Processing (December, 1964), p. 19. 3lIbid. reguir organi tens. tage. sub-sg by the eguipr syster has i- data sents trans rapre hey data tions renor from , , 40 required to formulate organizational plans and to facilitate organizational control through integrating the various sub—sys— tems. However, the total systems concept has a major disadvane tage. Being oriented to the output requirements of the various sub—systems, which implies separate handling of common data by the different sub—systems of the organization,problems of equipment efficiency, information timeliness, and inter—sub- system reconciliation are possible.32 Because each sub—system has its own data—generating capabilities, each must have its own data storage facilities. For common items of data, this repre— sents redundant storage. Furthermore, the requirement for data transmission between sub—systems affects data timeliness and represents inefficient use of equipment. When equipment is busy transferring data, it cannot concurrently update stored data based on new events. In addition, due to possible varia— tions in the degree of data timeliness between sub—systems, reports reaching management reflecting the integration of data from several sub-systems may be internally inconsistent in terms of the time dimension. Instead of a clear picture of the situ— ation, management will have a picture blurred by data from different time dimensions. But this is not new. This is true even in non—computerized data processing systems. 32 Adolph F. Moravec, "Basic Concepts for Planning Advanced Electronic Data Processing Systems/'Management Services (May— June, 1965), p. 57. It is : Snalie: enjoy cept. I—‘l r—l- n =1 ”—4 The b Sary i l ten a sYSte orig; a con this 41 Recently, a new business system concept has been proposed. It is referred to as the "single information flow" approach. Smaller firms, although often dependent upon manual methods, enjoy a flexibility in their operations analogous to this con— cept. The single information flow concept might be likened to the efficient one—man storekeeper, who came quite close to ultimate real—time random-access infor- mation handling. The cans on the shelf and a few pencil marks gave him both inventory and purchasing information; the book next to the cash drawer pro— vided accounts receivable, credit and customer information; the bank book plus cash drawer gave him his cash balance; and accounts payable were visible on the nail on which he Spindled the bills. 33 The basic philos0phy underlying this approach is that all neces— sary information must be available in only one place in the sys— tem and for all uses. As opposed to the output-oriented total systems concept, the single information flow concept is input- oriented. It concentrates on collecting the essential data into a common storage facility and from there servicing the informa— tion needs of everyone in the firm. Other characteristics of this concept are that it satisfies the basic data requirements, to include both transactions and results of decisions, for the appropriate managerial level and position in the firm; and it Provides secondary or "off—line" processing and storage facili- ties for information relevant only to a segment of the firm.34 33 , Ibid., p. 53. 34Adolph F. Moravec, ”Basic Concepts for Designing a Funda_ mental Information System,” Management Services (July~August, 1965) l p. 40.. Obviously 4 periphera The Role The are possi practical firm's o} nology h; concept nercial, lSSociat COncept, @ I the firs items 0: activit: machine zations Ta eon wi product apaper “Caitlin Sales ‘ Obviously, very sophisticated programs, computers, and items of peripheral equipment are needed to implement this concept. The Role of the Computer The more advanced information systems concepts discussed are possible without the computer, but usually they are not very practicable. Much depends upon the scale and complexity of a firm's Operations. However, the developments in computer tech— nology have stimulated the growth and importance of the systems concept in business. In fact, the various improvements in com- mercial, as opposed to scientific, computers can be loosely associated with the various levels in the develOpment of that concept. DevelOpments prior to 1954. Prior to the introduction of the first electronic computer into business, the most advanced items of equipment available for automating data processing activities were tabulating or unit record machines. These machines are still very much used by various types Of organi- zations. Tabulating machines are used very effectively in conjunc— tion with equipment which produces punched-paper tape as a by— Product. For example, in Operations such as order and billing, a paper tape is produced at the initial order writing which "Captures” inventory, receivables, sales, cost of sales, and sales analysis data. The tape is then converted into punched— cards fl Th develop ‘ stage. such as using 1 data p: was th tion i alize, Equipn advanv conce: StInc the c losit ltpa] latl writ of l ellv: ins 43 cards for processing by the tabulating equipment. The capabilities of this equipment influenced strongly the develOpment of the "total procedures” or ”integrated systems" stage. Information systems, actually a group of sub—systems such as the sales and cash receipts sub—system, were designed using tabulating equipment to handle the routine, repetitive data processing tasks. The equipments“ economic justification was the reduction of clerical personnel and a concurrent reduc- tion in paperwork. Although these benefits often did not materi— alize, systems designers were given comparatively sophisticated equipment to incorporate into their designs. It appears that advances in equipment were instrumental in allowing the systems concept to reduce the influence of the functional organization Structure. Systems designers were given the means to expand the concepts inherent in manual equipment, such as the three- position writing board which streamlined Operations within a department, to larger segments of the firm. In effect, tabu— lating equipment became to the various sub-systems what the writing board was to the check writing Operation. The electronic computer. The outstanding characteristic of the electronic computer which distinguishes it from tabulating equipment is an internally stored program, a set of operating instructions inserted into the machine in the same way and place as data to be processed. The computer's control is the program. lating er tion and through Boolean lirectic 0i SOphi fail to often c. lilting Th ing and tens or moving mgr—P3040 44 program. It is analogous to the control board found in tabu— lating equipment, and it controls data input, storage, manipula- tion and output. However, the computer's program, acting through electrical circuitry conceptually based on the logic of Boolean algebra, allows the computer a limited degree of self— direction. The self—directing capability permits a great degree of sophistication in computer applications. Many applications fail to recognize this potential. The computer was and still is often considered a super tabulating machine, useful for expe— diting the performance of clerical Operations. The electronic computer, basically because of its process— ing and data retrieval speeds, affected the development of sys- tems concepts by refining the integrated systems phase and moving it in the direction of the total systems concept. Many fine examples of integrated systems were developed. Card and paper tape punches were added to nearly all document writing devices to provide automatic inputs. Magnetic tape units were added to the computer. The turnaround document was perfected. Computer outputs were designed to become input after adjustments and additions were made. But unfortunately, the computer was usually superimposed upon the existing system, merely taking over the functions of manual methods or tabulating equipment. “The systems designers seem to have adOpted the point of View that it is possible to put a Cadillac engine in a Model—T; that the computer is compatible 35 Genzlinger, op.cit., p. 19. with exist sensible i This considerat computer t iying the Everyone 1 force, bu‘ i0 percei‘ imposed 0r tabula nology we to proces where a l another ( businesS informat between llickpy the it plain u cuppa” \ 36 of Re fe 45 with existing systems except insofar as the links between machine— sensible input and output are concerned.”36 This situation has been furthered by at least two other considerations. First, it is easier to justify economically a computer to management in terms of cost savings than by quanti— fying the intangible benefits inherent in improved information. Everyone understands the economic significance of a reduction in force, but the benefits from better decisions are more difficult to perceive. Emphasizing cost savings leads to comparing the proposed computer as a replacement for existing manual methods or tabulating equipment. Secondly, the state of computer tech— nology was characterized until recently by capabilities limited to processing data in accumulated groups, i.e. ”batch—processing,” where a particular job had to be completely processed before another could commence. The great majority of computers in business use today have this characteristic. Consequently, information pertinent to concurrently occurring Operations, as between two dependent sub-systems, is Often not available quickly enough to be useful for controlling Operations. There— fore it is submitted that these two considerations help to ex— Plain the absence of true systems modifications and the con— comitant sub—optimal equipment use when firms acquire a computer. 36 . . Wayne S. Boutell, ”Business Oriented Computers: A Frame Of Reference," The Accounting Review (April, l964), p. 308. erthermon lures COD! but no fu: R_ec_e puters, p 1 " granning informati quality 1 considers " . .rar Stations‘ Slvnsefit Ivutine, form Sim' age: dat Priority is feedh palrvll formant Cill rat} In Elev rev 46 1 Furthermore, the continued employment of the integrated proce— dures concept or the transition to the total systems concept, but no further, is a logical outcome, given these considerations. Recent developments. Recent technological advances in com— puters, peripheral equipment, communications devices, and pro— , gramming techniques have aided in the develOpment of computerized information systems which have concretized the abstraction ”high quality information.” Clerical cost reduction is a secondary consideration to newer equipment configurations which feature '2 . .random access devices, remote inquiry and data generation stations, automatic interrupt of processing and immediate re— sponse."37 These computers are controlled by an executive routine, a special computer program which allows them to per- form simultaneously the operations Of data input, search Of stor— age, data manipulation, and output. Control considerations have priority over processing; therefore, control information, such as feedback results of a decision, interrupts the processing Of payroll or of an Operations research application. Stored in- formation or “files” are updated instantaneously as events oc— cur rather than at some future point as in "batch—processing." In such a system the computer is in a position to acquire information covering thousands of occur— rences such as orders of products, receipts of raw materials, break—downs of equipment, production of 37J. F. Dudas, "On-Line Inquiry with Real—Time AnSWers," QEELEEQEEEEEEEv Vol. VIII (Philadelphia: Data Processing Management Association, 1965), p. 48. parts, inform and sit to the him to i In addition, puter will c nent that al sing these < single info and the eme: underscores VanCES in e, Concepts_ We Manage lily as evi for deSign lied experj Equipment ( concept of resulted i] “Tuber Of a \ 1 38“ “trod . N W 1965 ) JOE EI::T____________________________________7 4i”’ 47 parts, engineering changes, and so forth. This information can be analyzed and compared with plans; and situations that require attention can be brought to the attention of the prOper person in time for him to take corrective action.38 In addition, aided by Operations research techniques, the com— puter will often choose the most effective alternative and imple- ment that alternative automatically. Items of equipment pOSses— sing these capabilities, are a prerequisite for implementing the single information flow concept. The advent of such equipment and the emergence of the single information flow concept further underscores the important interaction between technological ad— vances in equipment and the development of information systems concepts. The Concept of a Management Inforpgtion Systep Management information systems are ill-defined conceptu— ally as evidenced by the ". . .lack Of either a general theory for design or, in lieu Of such a theory, a broad base of quali— . _ 39 . fied experience." Writers seem to confuse systems concepts, equipment configurations, and operational functions with the concept of a management information system. This confusion has resulted in ". . .a plethora of descriptive techniques and a number of pedestrian descriptions of a business (management) 38E.WamnWright.Martin,Jr” Electronic Data Processing: An Introduction (lst ed., Homewood, Illinois: Richard D. Irwin, Inc., l965), p. 12. 39 . Joseph Becker and Robert M. Hayes, Op.c1t., p. 230. information Every f ultimate goa pletely info affect them. tions, from small proprj nunicate wit submitted tl information t0 accomod ma“agement . lhe abiliti Of Course, ‘ Basic; comPromise terms (1ng 1. m 48 . . "40 information system. Every firm has a management information system with its ultimate goal being ". . .to keep all levels of management com— pletely informed on all developments in the business which 41 . affect them.” Regardless of the scale or compleXity of Opera— tions, from the word of mouth information characteristic of a small proprietorship to giant corporations where machines com- municate with one another without human intervention, it is submitted that underlying the ultimate goal of the management information system is the concept of "tailoring” that system to accommodate a unique set of individuals referred to as management. This concept recognizes the innate differences in the abilities of individuals to perceive, assimilate and decide. Of course, most systems fall far shOrt of the ultimate goal. Basically, the c0ncept of tailoring a system involves a compromise between several factors which should dominate sys— temscflfifign considerations. These factors are: l. The absolute minimum amount Of information needed to plan and control operations to the degree neces— sary for the firm to remain in business, given the firm's management, other resources, competition, and the state of the arts. 2. The maximum amount of information the firm‘s man— agement is capable of comprehending and effectively 4OBoutell, Auditing With the Computer (Los Angeles: Uni— Versity of California Press, 1965), p. 9. 41James D. Gallagher, Management Information System and the SQEEEEEE (New York: American Management Association, 1961), P. 17. Factor On signer's the "ceil and as sr lower the Given thj follows; hiiities availabl. tion gen firm's a Thi adopt or about hc t0 eonsg The 49 using, limited by the firm's resources and the state of the arts. 3. That amount of information theoretically possible, limited only by the state of the arts. Factor One establishes the conceptual "floor" in the systems de- signer's quest for adequate information while Factor Three sets the "ceiling” or ideal. Factor Two represents the attainable and as such becomes the standard. Factor Two must at no time be lower than Factor One and cannot technically exceed Factor Three. Given this condition, the conceptual design rule becomes as follows: design a system maximizing management's inherent capa— bilities and the firm's other resources within the boundary Of available technology, but never allow the quantity of informa— tion generated to fall below a level necessary to maintain the firm's ability to compete. This concept does not Specify the systems approach to adopt or the degree of desired automation. It says nothing about how to organize a firm or which personnel selection policy to consider. But it strongly implies the following: There is a finite limit to which systems development can be carried, and every company must decide for itself at what point that limit will be reached. You cannot sipply transplant a system from one com— pany to another (emphasis added). Not only are the systems requirements different from-company to com— pany but also the ability to perfect all management skills, including systematization, will not be the same in any two companies. Models from other com— panies, books, or computer manufacturer manuals may be helpful as checklists or guides, but the major portion signed manager With re be stressed often requir of operation designed and in many inst irrational . is said to T alenient inf In 0rd for Plannin mation SYSt informatiOn ETtonic ti thQOIY, C01] Operations ment inforp research 81 4\ 2J0}! tion Systeh l. 30. 43 Jam Teens, In Ad little an} 44 BOT] 50 portions of the system have to be especially de—. signed to meet the needs of (a) business and its managers. With respect to a system's equipment requirements, let it be stressed that while SOphisticated computer installations are often required, these are a function of the scale and complexity of Operations. Excellent management information systems can be designed and serviced by a local data processing service bureau. In many instances manual methods would suffice. In fact, the irrational importance attributed to computers or "computeritis," is said to be one of the major obstacles to establishing a man— agement information system.43 In order to provide management with information necessary for planning and controlling Operations, the management infor- mation system, being the information—providing vehicle of the information technologist, draws from various disciplines. Economic theory, organization theories, accounting, information theory, communication theory, mathematics, statistics, and Operations research add to the conceptual framework of a manage— ment information system. In addition, the tools of Operations research such as network theory, mathematical programming, and 42 . . John W. Kovalinka and J. G. Trentin, ”Management Informa- tion Systems,” Management Services (September—October, 1965), p. 30. 3 . James S. Hendrich, "Management Information Systems in FOCUS," Advances in EPP and Information Systems (New York: American Management Association, Inc., 1961), p. 19. 4 Boutell, op.cit., Chapter 2. prohabilis in improvi the many i The d the knowle a framewor ments are: r—e—h—a . AA ”.11er 51 probabilistic and simulation models assist systems designers in improving overall system quality by finding and investigating the many interrelationships existing in a firm. The decision rule developed earlier, the equipment, and the knowledge drawn from various disciplines must be based upon a framework composed of certain essential elements. These ele— ments are: l. 3. 4. 5. The firm's objectives. What does management wish to accomplish with the resources under its control and the restrictions it may be subject to. Alternative approaches to accogplish Objectives. For example, a profit objective may be attained by adjustments in margin and/or turnover. Standards to measure the relative efficiency of the various alternatives in attaining an objective. For example, margin and/or turnover adjustments must consider the cost aspects underlying an alternative. One approach may be more efficient than all others to accomplish an objective. Management must be in— formed which alternative that is. Guidelines for attaining objectives. A firm can successfully attain a profit objective by ”sharp" practices only in the shortvrun, due in part to customer alienation. In addition to delineating an objective, considerations as to how to attain it should be specified. Clear division Of guidelines gppng the functional components of the organization. The consideration involved here is that in order to attain the firm's Objectives, its functional elements must be con— trolled. With each element assigned a specified portion of a guideline its Operations can be con- trolled more effectively. This is essential be- cause the firm's Optimal performance involves a balance between the efforts Of its functional com— ponents, not a summation of their efforts. Im— plied here is the fact that one or more elements These aferment in Adequate p the finish Tram. Bur “St for d five‘Year their mane 52 may have to sub—optimize their own performance in order to Optimize the firm's performance. A mechanism for comparingyactual operations with established standards. Included therein would be the ability to feedback the effects of prior Opera- tions and the results of non-human routine decision— making on the state of the system. In addition, the mechanism should be able to signal for human intervention when automatic controls fail to adhere to established standards or because of a require— ment for a non—routine decision. Adequateqsystem controls. The system should be so designed that the firm's assets are adequately protected and the operations subject to review.45 These e1ements,which help determine the design of the man— agement information system, are themselves not easily determined. Adequate planning underlies their realization from the start to the finish of a management information system installation pro— gram. Burroughs Corporation develOped a useful 10 point "action" list for determining these elements when they inaugurated a five—year program, in 1962, aimed at develOping and implementing their management information system. These are: 1. 2. 45 Appreciate the limitations Of existing "hardware.” Challenge all existing procedures and ways of doing things. Define the system‘s needs by having the individual managers formalize their own needs. Elicit positive sympathetic leadership from manage- ment. Ibid., p. 17. Th2 Clien ofthe dev the Capabj iht. Mar We to ti larsolmel \\ 46Ch hdiign' H 53 Educate and motivate all levels of management as to the importance of such a program. Insist on a single integrated system concerned with all of the relationships within the system. DO not start with the accounting function when designing the system. Concentrate initially upon the basic data pertaining to people and products and their activities and movement. The pay—Off is highest here. Control the implementation centrally but allow active participation by all levels of management. Employ adequate amounts of resources. The effective— ness of resources is found to be approximately equal to their square. Hence a dissipation of resources occurs when inadequate amounts are employed. Integrate management and Operations with the system. Plan and schedule in minute detail. Tools such as PERT should be used to monitor the whole of the development and implementation phase.46 The Public Accountant's Management Services Role Clients of public accounting firms are increasingly aware of the developments in systems concepts, technology, and of the capabilities of the accountant as an information technolo- 9ist. Many clients are not large enough to provide this assist- ance to themselves. Larger clients find the paucity of skilled ”personnel a prOblem. Many are turning to their CPA for advice _9)! pp. 4 & 5. Defining thé is argued as necr "expansionists" : vice for managemr professions so ii of view includes objectives and p almost limitless This study ment services . Consulting, as d Performed Only i there it is poss tiVe bisis."53 is considered to troller, manager It is assumed ti‘ nary regard Was trol to One Whex hiddes neCeSsan that the bOUnda1 the mandgement S with 53 Beyer, 2] 56 Defining the contents of the management services function is argued as necessary by some and unnecessary by others. The "expansionists" imply that the practitioner may perform any ser— vice for management which does not breach the confines of other professions so long as he is proficient to do so. Their point of view includes such client services as planning organizational objectives and personnel recruitment. In effect, they favor an almost limitless boundary to the management services function. This study accepts a contrary View of the scope of manage— ment services. It is based on the idea that ". . .professional consulting, as distinguished from personal advice, is properly performed only in relation to a structured body of knowledge, where it is possible to review consulting advice on an objec- tive basis."53 The scope of the management services function is considered to be affected by the changing role of the con— troller, management"s internally—located information Specialist. It is assumed that this role has expanded from one where pri— mary regard was for financially—oriented information and con— trol to one where concern is for all information and tech— niques necessary for overall control. It is further assumed that the boundaries of this role are determinable. Therefore, She management services function is considered to be concerned flth all phases of the management information system, ". . . 53 Beyer, Op.cit., p. 47. which has to do i nation gathering limited to it'“ I the accountant a costs and foreca also incorporate In Order to role, CPAS must ‘ matter of the en ciplines. Furth ing with these d confronting Clie state of compute affect the manag able to incorpOI tions. Only in maintain the SPE mation technoloc i- »he transition t In an atten is a component r 54 Beyer, 9E 57 which has to do with the entire process of quantitative infor- mation gathering, inclusive of the accounting function but not .imited to it."54 All the traditional tools and techniques of he accountant are included here, such as budgets, standard osts and forecasts; however, newer tools and techniques are 150 incorporated and coordinated with the traditional ones. In order to perform effectively the management services ole, CPAS must be well—informed on the theoretical subject atter of the entire field of accounting and of related dis— iplines. Furthermore, they must be able to integrate account— ig with these disciplines while solving the practical problems )nfronting clients. They must be familiar with the existing Late of computer technology and all new developments which fect the management services function. CPAS must also be le to incorporate these into systems concepts and applica- ons. Only in this way will the public accounting profession intain the Special place it now enjoys when the era of infor— tion technology becomes a complete reality. Like it or not, a transition to that era is under way. inseam In an attempt to discover the effectiveness of accounting a component discipline of information technology, the concept 5 4Beyer, op.cit., p. 48. and qualities of observations on information was necessary for th these managerial cannot be limite managerial accou this respect, it hind financial a Particularly the area of Systems, menal informat the PUblic pract services functic system, the mana knowledge Commer the CPA can beer informatiOn tee} 58 rd qualities of information were considered followed by some >servations on managerial information. Traditional accounting iformation was found not to satisfy completely the requirements acessary for the planning and control of operations. While rese managerial functions require financial information, they annot be limited to such information. Although the field of anagerial accounting goes furthest toward aiding management in 1is respect, it still suffers from some of the traditions which ind financial accounting. However, the managerial accountant, l articularly the public practitioner, has been active in the 1 :ea of systems, an area which holds great promise as a man— i aerial information—providing vehicle. From the standpoint of i re public practitioner, it was concluded that his management arvices function Should encompass all aspects of a Special stem, the management information system. By developing his owledge commensurate with the requirements of that function, e CPA can become an important member of the discipline of formation technology. TH During the terms have begun literature of pr ment services ac Client re‘lllests information and exPectations of from an awarenes computers, rangj large COmPUters mms,clients re and retrieVal air many clients fur the Clerica11y_( Consequently. ti 1 EquiPm 9‘ 131. | ‘1 OIHath lAt Ent’n Uh p m CHAPTER III THE DATA PROCESSING SERVICE BUREAU Introduction During the past year, existing management information sys— ems have begun to resemble those predicted in the technical iterature of preceding years.1 For the CPA engaged in manage- ant services activities, there is an ever—increasing stream of Lient requests for the installation or modification of existing rformation and control systems. Many of these requests convey mectations of computerized systems. The expectations stem om an awareness of the existence of versatile and flexible mPuters, ranging from highly sophisticated desk models to rge computers capable of accommodating many different firms. us, clients recognize that automated data processing, storage, d retrieval are feasible for firms of practically every size. my Clients further realize that the day for automating only : Clerically-oriented operations, SUCh as payroll, has ended. lsequently, the CPA not only faces more numerous requests, M‘— "Automatic Data Processing -— Services by SUPPliers Of lipment, ” Dun" s Review and Modern Industry (January, 1966) 1310 59 but requeSts whi as an important of production - In this cha components Of me First, a group C bureau industry vice bureaus are vice specialty. tional structure Servir In order tr Vice bureaus as consider the in to examine some role of the ind' PIOblem areas cm W The servic organizations w vices t0 CUStom services Offere ta ta PrOCesS inC 60 out requests which indicate information is receiving recognition as an important resource, sharing equal status with the factors 3f production. In this chapter, data processing service bureaus, potential :omponents of management information systems, are examined. First, a group of general considerations relating to the service >ureau industry are explored. Then the different types of ser- dce bureaus are described, differentiated by ownership and ser-' ice specialty. Finally, a ”typical” service bureau organiza— ional structure and method of operation anaconsidered. Service Bureaus: Some General Considerations In order to appreciate the potential capabilities of ser— ice bureaus as information systems aids, it may be useful to onsider the industry, to trace the history of service bureaus, o examine some industry financial statistics, to review the ole of the industry trade association, and to describe certain :oblem areas confronting service bureaus. E Service Bureau Industry The service bureau industry is composed of fee—charging ganizations which offer a wide range of data processing ser- ces to customers on an as—needed and contract basis. The rvices offered are broadly categorized as machine—time rental, ta processing, programming, and problem solving. An organization may offer a comp Relatively few c various combinat employed being 6 For the pur tion of a servic Service bur Some have 1 specialize tackle almr others 10c; some have ( facturers, and divers: list but i CommOn is . Pr0cessing This definition fimsr i.e., th, sively in the d and the "Proble reqUiring great latter gmup of ten or Program the computer On Some °°mPUter s t' . ion with Conve 2 BrUCe . (January. 192:] 61 offer a complete line of services or any combination thereof. atively few offer a complete line. Services are provided by ious combinations of personnel and equipment, the combination loyed being dictated by the nature of an engagement. For the purpose of this study, the broadest possible defini— n of a service bureau is adopted. It is as follows: Service bureaus come in almost every Shape and size. Some have lots of equipment, some have none; some specialize in particular applications, some will tackle almost anything; some Operate nationally, others locally; some have hundreds of employees, some have only one; some are run by equipment manu— facturers, some are independent. . . . The contrasts and diversities of the industry are too numerous to list, but the one thing all service bureaus have in common is that they each perform some type of data processing service on a fee basis. 5 definition is broad enough to include the computer services is, i.e., the ”software houses,” firms specializing exclu— aly in the develOpment of computer systems and programs, the ”problem solvers,” firms undertaking only those projects iring great imagination, creativity, and foresight. The er group of firms usually develOpS a complex computer sys— or program as the end product of a project or they may use computer only as a means for deriving a project's solution. computer services firms offer these services in conjunc- with conventional data processing assistance. Usually, Bruce Gilchrist, “The Service Bureau Industry," Datamation rary, 1964), p. 31. if a firm offers ance, it will be cessing and pros study, organizai tions Operated l ties, and come: sing industry ar services to out: 0ffer‘ed by firm: twin bureau industry notes that I. the the Peeple in p further adds th aserviCe bur ea the least Signi that they can g the best PeOple The Skill those required 62 a firm offers services in addition to problem solving assist— :e, it will be a "full line house," also offering data pro— :sing and programming assistance. For the purposes of this fly, organizationally independent data processing installa— ns Operated by accounting firms, banks, foundations, universi— s, and commercial enterprises not a part of the data proces— g industry are considered to be service bureaus if they offer vices to outside parties of a type and on a basis as those ered by firms in the service bureau industry. Personnel employed. The personnel employed in the service aau industry are its most important asset. Leonard J. Palmer as that "the equipment is already more capable than most of people in private organizations know how to utilize.”3 He :her adds that ". . .of all Significant factors that go into arvice bureau organization makeup, I would say hardware is least significant. . . . I have told equipment manufacturers .they can give me the worst computer in an organization and best people and I will compete with anybody.”4 The skill levels of the personnel employed range from e required to operate tabulating equipment to those neces- for solving problems requiring originality and imagination. 3Leonard J. Palmer, ”A Seller*s Market for Data Processing .ceS,” Proceedings of the January 21, 1963, Management Sym— Eln or contract the processing portion of a project to another l 7vice bureau. Even without equipment, these firms can be midered service bureaus because of the staff employed. On sother hand, a number of banks too small to own their own a processing installations often offer service bureau—type vices to customers. These banks have either an automated respondent bank perform this work or they contract it to a Vice bureau. While such organizations may consider them— Ies a part of the service bureau industry, they are excluded ause they do not employ the required staff. In addition, rless reputable firms and individuals offer data process— services from time to time without utilizing their own pment. Their customer's work is either contracted to rvice bureau or run on an employer“s equipment, often business hours. Again, such operations are not considered service bureaus Meier—2f— that some 1:200 in the United S office firm sep offices of mult lating installa tions which Pro puter centers 0 and foundations Historical Sket The servic zation characte successfully a vances availabl POSitions or w}. ledge content c f Ortunate. In v' hich the small tlnEIIICial consi personnel to m. C t l heir PIESent ( 7 Dun's RData Pr< % 65 rice bureaus. Number of firms in the industry. It has been estimated : some 1,200 computerized commercial service bureaus operate .he United States and Canada, counting each office of a multi— ce firm separately and including in this count some of the ces of multi—office firms which operate large scale tabu— ng installations.7 The numerous smaller tabulating installa— s which proliferate the industry and the fee—charging com- r centers of CPA firms, banks, business firms, universities, foundations magnify that number many times over. )rical Sketch of the Industry The service bureau industry reflects a degree of speciali— >n characteristic of our economy. In order to compete essfully a firm must have access to the technological ad— es available to its industry. Larger firms create new tions or whole departments to reflect the specialized know- content of new developments. Smalher firms are not as nate. In terms of equipment, there is a point beyond the smaller firm cannot progress, usually because of ial considerations. Furthermore, requiring existing nel to master new techniques while continuing to perform present duties places great limitations on their overall "Data Processing Service Centers (Computer Centers),“ Review and Modern Industry (January, 1966), p. 136. effectiveness . to outside serv Larger firms fr . One of their pr service organiz performance cos The data p in the services Egyptians and E recording servi fee basis for v POSsessed and v i“Greased in sc Ages in certair Processing ser\ evidenced by t} late nineteentl offering their of the Industr; vices beCauSe th‘eir mm. 8W pig“. william lu nppbllshe: D 9 11nd. 66 effectiveness. Consequently, smaller firms are forced to turn :0 outside service organizations in order to remain competitive. Larger firms frequently use outside service organizations also. )ne of their primary reasons is related to the competence of service organization personnel. Another pertains to relative serformance costs. The data processing service bureau concept had its origin n the services offered by scribes in the days of the ancient gyptians and Hebrews.8 Scribes performed their tallying and ecording services, primitive forms of data processing, on a ee basis for various parties. Their skills were not commonly ossessed and were quite in demand. These skills flourished, ncreased in scope, and reached new heights during the Middle yes in certain northern Italian city—states. From there, data :ocessing services were further refined in feudal England as ridenced by the bookkeeping techniques of stewards. In the te nineteenth century, English public stenographers were fering their special data processing services.9 The pressures the Industrial Revolution found firms demanding these ser- ces because they were either unable or unwilling to provide eir own. Organizations were soon formed to provide such 8 . William Edward Sparling, Data Processing Service Organiza— ns: A Review of Their History and an Analysis of Their Use published Doctoral dissertation, State University of Iowa, 1), p. 44. " 91bid. specialized ser viduals to prov Similarly, rary office ser load personnel or ill employee on the service Occasional eQUipment ments was which full cially use as well as This circu CeP’tance c tions in g unpreceden Source mat suPPlier c Premises, ment, Spac data Proce The grower limited SOlely viduals and org advances in eqi sticks and knot Filmer WhEel a1 Thomas. forerm 10E . UOQh E Illlnois: Th: 67 ialized services because the demand was too great for indi— als to provide them singly. Similarly, in the United States during the 1930's, tempo— office services appeared for the purpose of supplying peak personnel for office work and substitutes for vacationing 11 employees. The development of this concept and its effects he service bureau industry were described as follows: Occasionally, the peak load assignments required equipment as well as people. Among the first assign- ments was the extension of inventory tallies, for which full keyboard calculating machines were espe— cially useful. During World War II this equipment, as well as office personnel, was in great demand. This circumstance accelerated the growth and ac— ceptance of temporary help and service organiza— tions in general. Again World War II witnessed an unprecedented demand for office space, whereupon source material was sent to the office of the supplier of temporary help for handling on his premises. Thus, along with personnel and equip— ment, space was made available to clients, and the data processing service center came into being.10 The growth of data processing service organizations was not ed solely to advances in the techniques employed by indi— ls and organizations offering such services. Important :es in equipment occurred. In ancient times, notched ; and knotted strings gave way to the abacus. Pascal’s ‘ wheel and ratchet, Babbage’s analytical engine, and ' forerunner of the modern desk calculator are further 0 . . Enoch Haga (ed.), Understanding Automation (Elmhurst, is: The Business Press, 1965), p. 83. evidence of su Hollerith and which was capa ensuing advanc available duri In 1932: (IBM) initiate an individual . rental basis . 1 previously jus installations firms found th with IBM. Hem a service burez which had prev: justify the on- no longer do se Many found the: time per week . ' justify leasin ll . Ned Cha 9‘1: Princeton 963). p. 181. 12 Sparl in 13 Sparlin 68 vidence of such advances. During the decade 1880—1890, allerith and Powers developed the first punched card equipment iich was capable of processing great volumes of data.11 With asuing advances, punched card equipment became commercially Iailable during the early twentieth century. In 1932, the International Business Machines Corporation BM) initiated a service offering punched card equipment to individual, organization, or business on a hourly or job ntal’basis.12 During the depression, many firms which had eviously justified the use of their own tabulating equipment stallations no longer could do so. A great number of these i Lms found that they had to cancel their equipment leases th IBM. Hence it appears that IBM inaugurated the idea of service bureau in part as a defensive measure. Of the firms .ch had previously considered themselves large enough to tify the on-premise use of such equipment but which could longer do so because of the effects of the depression, I found they could afford to rent a few hours of machine iper week.13 In addition, many firms which could not ify leasing equipment before the depression found such ll . . Ned Chapin, An Introduction to Automatic Computers (2d Princeton, New Jersey: D. Van Norstrand Company, Inc., I p. 18.1. 12 . . Sparling, Op.c1t., p. 47. 3 . . Sparling, Op.c1t., p. 48. equipment with' ". . .the func rendering data activities -— the introducti and by legisla supply compani For appro the service bu history of IBM Electronic Cal This was the f off-premise rer tronic digital computer was us such as refine: Until the industry throug Bllreau Corporai c(’mlillter manuf' industry and c 69 uipment within their means for the first time.14 By then, . .the functions of supplying temporary office help and of ndering data processing service became recognized as distinct tivities —— a distinction which was completed irrevocably by e introduction of the computer and its peripheral devices, by legislative restrictions involving the temporary help ply companies."15 For approximately the next two decades, the develOpment of service bureau industry was inextricably entwined with the tory of IBM.16 In 1948, IBM installed a Selective Sequence ctronic Calculator in their New York City service bureau.l7 s was the first specialized equipment to be furnished on a -premise rental basis. In 1952, IBM installed a 701 elec— mic digital computer in their New York service bureau. This >uter was used for certain business-oriented applications .as refinery production planning. Until the early 1960's, IBM had a near—monOpoly upon the stry through its wholly—owned subsidiary, The Service iu Corporation (SBC), created in 1957. However, other ter manufacturers and independent firms have entered the try and changed the competitive climate. The more recent ‘4Ibid. 5Haga, Op.cit., p. 83. 6Sparling, Op.cit., p. 48. 7 . Ibid., p. 50. emergence of b bureau—type se to this, the t in importance - Today, machine 1 vices rendered sumed the domi industrial rev equipment and prises and emp introduction 0 concentration the service cei puter is appret Propel the com] of the firm is the modern ser‘ Financial A5261 As noted, allstry fall in order of the d . fol“lance, thes ”fling. progr 7O rgence of bank computer centers as providers of service eau—type services is changing that climate even more. Added this, the types of services offered have changed drastically importance since the inception of the service bureau concept. ay, machine-time rental is a very small segment of the ser— as rendered. Services requiring skilled personnel have as- ad the dominant role. Finally, just as the demands of the istrial revolution ”. . .forced the concentration of capital, .pment and personnel into new and large industrial enter- es and emphasized specialization, in a similar manner, the oduction of the computer into office work has forced the entration of capital and equipment into specialty offices —- service centers."18 And as the true potential of the com— r is appreciated, the importance of skilled personnel to 21 the computer's uses beyond the office and into the whole 1e firm is recognized. It is in this last application that iodern service bureau has the most to offer. gigl ASpects of the Industry As noted, the services rendered by the service bureau in— y fall into four major categories. Ranked in an ascending of the degree of sophistication involved in their per— ace, these services are machine—time renting, data pro— lg, programming assistance, and problem solving. The L8 Haga, 0p.cit., p. 96. market for the expenditures f mately 30 perc electronic dat * and purchases total expendit approached $5. billion.20 Ho services only data processin It should not receive al Eighty percent by the equipme: ing 20 percent at $700 millio: their share th divisionS.23 ration of Amer into this cate J. Ric (March 23, 196 20niiiot, = temper 20, 1965 “raid. 22Ibid. 23Imia. 7l ket for them represents a billion dollar business.19 Annual enditures for these services have been representing approxi— ely 30 percent of all types of expenditures made in the ctronic data processing market which also includes leases purchases of computers and peripheral equipment. In 1964, 1 expenditures in the electronic data processing market oached $5.75 billion; by 1970 they are projected at $9.4 ion.20 However, the rate of increase in expenditures for (ices only will be greater than that for aggregate electronic 1 processing expenditures by 1970, accounting for $3 billion.21 It should be noted that the service bureau industry does receive all of the revenues from data processing services. ty percent or more of these service revenues are captured he equipment manufacturers.22 In addition, of the remain— 20 percent, estimated at $350 million in 1965 and projected 700 million in 1970, the computer manufacturers receive share through their service bureau subsidiaries or ions.23 IBM, Sperry Rand, General Electric, Radio Corpo— n of America, National Cash Register, and Honeywell fall this category. However, publicly held independent service ng. Richard Elliott, Jr., ”Program for Growth?," Barron's h 23’ 1964)! p- 3. 20Elliot, ”Flourishing Think Factories," Barron's (Sep— 20. 1965), p. 3. bureaus such a Research Corpo Applications t have approache' - Service Bureau have had a vol There are growth of the the introducti operating in a tions and rand . puter into the . tem." However management inf methods. Thes the reservoir the personnel investments of ing for the sp 2 v 6Joseph ’ hall’sis Prep . New Yerk City 72 ureaus such as C—E—I-R, Computer Sciences Corporation, Planning esearch Corporation, Computer Usage Corporation and Computer plications together grossed some $50 million in 1964 and may 4 ve approached $100 million in 1965.2 In comparison, The rvice Bureau Corporation, IBM's subsidiary, was believed to ve had a volume of $70 million in 1964.25 There are several factors which account for the spectacular owth of the service bureau industry. Among these factors is e introduction of second and third generation computers, erating in an on—line real—time mode with high speed communica— ons and random access storage, which have transformed the com— ter into the catalyst for a ”true management information sys- m." However, a firm cannot make the transition to a true aagement information system without innovations in operating :hods. These innovations require skilled personnel. But a reservoir of available personnel has been drained due to apersonnel requirements imposed by the spectacular computer estments of the past few years.26 A second factor account— for the Spectacular growth of the industry is that many lled personnel often prefer employment with a service bureau. 24rbid. ———.— 25Elliott,i"Program for Growth?,” Barron's (March 23, 1964), 2 . 6Joseph Raineri, "Computer SerVice Industry," A Market lysis Prepared for the firm of Steiner, Rouse and Company of York City (January, 1966). p. 4. In addition, t3 a"software gap their software very good cust« the service bu: The ASSOI which uses the trade associat. TOtion 0f serv. Canada.“ In. data Processinw will act as a ‘ tween Servi Ce '. 1“ aPplication some of the an zation. The f as the organiz his owners 73 addition, the computer manufacturers are already experiencing software gap,” finding it increasingly difficult to fulfill :ir software obligations. This factor makes the manufacturers y good customers of service bureaus and assures the growth of service bureau industry. Industry Trade Association The Association of Data Processing Service Organizations, :h uses the acronym ADAPSO, is the service bureau industry's 1e association. ADAPSO, founded in June of 1960, seeks pro- .on of service bureau usage throughout the United States and ,da.27 In order to meet the expanding demand for professional processing services, it is felt that such an organization act as a catalyst for information and idea exchange be— 1 service bureaus. Broader uses of facilities, new concepts aplications, and fresh approaches to problem solving are of the anticipated benefits from membership in the organi- wn. The first president of ADAPSO enunciated the following e organization's initial aim: As owners, managers and executives of data process- ing service companies, we will continually advance the art of rendering such services by stimulating the development of data processing techniques and > ‘7G. M. Waherspoon, Jr., ”Message of Welcome," Proceedings 3 January 20, 1961, Management Symposium (Abington, Penn- iia: Association of Data Processing Service Organizations, p. 3. thus promv The objectives The Assoc the impro possibili for high the creat acceptancv ADAPSO, w' 0i 1965, emplo bership ; EXl3erienc is that O 0f outsid i Utilizing i mSinner th I sibility tained by restlits r Experienc SGlf-COnt Pose ente data PIOC cessing r While re in SUCh a reSpensib maintdine results r g/ R or 20 omuald 3-1 m w 0 O Mgr—’4- RD rf' H.,_. 0&0 :30" ,_. O~ I—h II B .L . Olga . y aid nlzat' : l .31 m P. Q! "U ”(f D (1' m :7 O O (D (I) 07 H 74 thus promote data processing in general.28 objectives of the organization are as follows: The Association shall direct its efforts toward the improvement of management methods and service possibilities; the development of an appreciation for high ethical and performance standards; and the creation of an atmosphere of general public acceptance for data processing services.29 ADAPSO, whose membership numbered an even 100 as of March 965, employs the following definitions as criteria for mem— hip: Experienced operating centers whose major interest is that of performing data processing for a number of outside clients, for profit, while regularly utilizing data processing facilities in such a manner that physical control of, and working respon- sibility for, the chain of processing steps is main— tained by, and prime responsibility for completed results rests with, the bureau. Experienced, formally established, identifiable and self—contained data processing units of general pur— pose enterprises, provided the major interest of the data processing unit is that of performing data pro- cessing for a number of outside clients, for profit, while regularly utilizing data processing facilities in such a manner that physical control of, and working responsibility for, the chain of processing steps is maintained by, and prime responsibility for completed results rests with, the bureau.30 28 . . Romuald Slimak, comments in the Proceedings of the Janu- ). 1961, Management Sygposium (Abington, Pennsylvania: .ation of Data Processing Service Organizations, 1961), p. 5° D '9"By-Laws of the Association of Data Processing Service .zations, Inc.,” Proceedings of the October 28 & 29, 1963, Association of ment Symposium (Abington, Pennsylvania: rocessing Service Organizations, 1963), p. 11. OIbid. The definition should be that tomers and not parent company they exclude o experimentatio control of," a membership fir sublet data pr their Premises such as n. . _ readers, Compu that within th memb‘irShip. da use of COmpute we The Prob] SOlutiQns impe Projected f0“ dent of ADAPS( most of which 1' ACQua the 5 31 Haga I ( 75 e definitions stress that a service bureau's major interest ould be that of providing service to a number of outside cus— mers and not existing to further primarily the interests of a rent company. The words ”for profit" are noteworthy in that ey exclude organizations primarily interested in research, perimentation, or training. Finally, the phrases, ”physical ntrol of," and ”working responsibility for,” exclude from mbership firms which act as brokers in that they gather and blet data processing work. Members must perform the work on eir premises, utilizing the standard service bureau equipment optical ch as ". . .punched cards, punched and magnetic tapes, aders, computers and related pieces.” It should be noted at within the definitions which establish the criteria for mbership, data processing does not, of necessity, involve the a of computers. blem Areas Confronting the Industry The problem areas confronting the industry are numerous and utions imperative if the industry is to realize fully its jected fortunes. In 1962, W. H. Evans, Executive Vice Presi— : of ADAPSO, listed the following among the problem areas, : of which continue to be problems today: 1. Acquaint the business and scientific public with the service bureau. 3 lHaga, Op.cit., p. 82. Creat where capac Convi confi its c Defin contr befor Impre stand Devel the c Overc PIOgr when Deter desic vice Inaug among Lesss COnsj Dete] cert; bure; resp( ' ACCe} the : sale COrr. unin offs of t'. ' Educ 76 Create an improved image among client employees where the service bureau is used in a permanent capacity. Convince the business public, in particular, of the confidential treatment the service bureau will accord its customers' records. Define more precisely the job specifications and control, and the responsibilities of all parties before engagements commence. Impress upon the industry the need for high ethical standards. Develop work of a regular recurring nature, replacing the one—time assignments now prevalent. Overcome the uncertainties surrounding the cost of program develOpment or allow for such uncertainties when entering into contracts. Determine unequivocably the ownership of custom- designed programs, i.e., do they belong to the ser- vice bureau or to the client? Inaugurate a more widespread exchange of programs among service bureaus. Lessen the financial hurdles for service bureaus considering modernizing their equipment. Determine the relationship of service bureaus to certain professions; i.e., where does the service bureau‘s reSponsibility end and a profession's responsibility begin. Accept the apparent conflict of interest between the sale of equipment by manufacturers and their sale of data processing services. Correlate, in some manner, the activities of the university or foundation center, or the free time offerings of industrial or banking units with those of the commercial service bureaus. Educate Clients to the vital importance of maintaining posit data. In 1965, Mr. E following are 1. Train 2. Much preli be re 3. Perfc indus prici whole 4- Probe destr diffi In addition tc Rd“? Service ize' Special: astaff With 5 ration as a 81 tion are the ; quasi‘mOUOPOI COStS by COHCT 77 positive schedules for the delivery of source data.32 965, Mr. Evans provided another list of problem areas. The swing are additions to the preceding list: 1. Trained personnel are in short supply. 2. Much doubt exists as to how, if at all, costs of preliminary systems and procedures surveys should be recovered. ' 3. Performance standards of some members of the industry may not always have precedence over pricing policies; therefore, the industry as a whole suffers. 4. Probabilities of equipment error and document destruction or loss and ensuing liabilities are difficult to guard against.33 ddition to these, Mr. Evans indicated that a vital decision ng service bureaus is the extent to which they will special— Specialization implies specialized equipment and programs, aff with specific talents, a limited market, and the repu- n as a specialist. Some of the advantages of specializa— are the acknowledged leadership in an area with certain '-monopolistic benefits, and the ability to lower Operating by concentrating on only one area. On the other hand, arket may disappear and skilled personnel may be difficult tain. 32W. H. Evans, "Data Processing for Others," Data Process- earbook, 1962—63 (Detroit: American Data Processing, Inc., . pp. 148—150. 33 Haga, op.cit., pp. 86—90. To unders dustry, servic two groupings course, a sing 9r0upings. Ft only feasible differentiated is useful in t services Offex ServiCe Burea1 \ SerVice 1 groups: 1- comp1 inde] depaj COOp‘ comp 000p 5' Vari Each is deScr % puter Inc‘tnufac oureaus as a 78 A Descriptive Summary of the Different Types of Service Bureaus To understand better the nature of the service bureau in— ;try, service bureaus are differentiated and described. The > groupings employed are ownership and service specialty. Of Arse, a single firm will ordinarily be categorized under both upings. Furthermore, the two groupings selected are not the y feasible ones. For example, service bureaus can also be ferentiated on the basis of equipment utilized. Such a basis useful in that it may provide an insight as to the types of vices offered. rice Bureaus Differentiated by Ownership Service bureau ownership falls into the following major lpS: 1. computer manufacturer's divisions or subsidiaries 2. independently owned service bureaus 3. departments of commercial banks or bank computer cooperatives 4. computer centers of CPA firms or CPA computer c00peratives 5. various miscellaneous groupings is described in turn. Computer manufacturers' divisions or subsidiaries. Com— ? manufacturers' find the Operation of their own service lus as a logical extension of their equipment sales activities. 1 manufacturer 2 the equivalent panies do not ADAPSO's first Service Cents] Univac Service accruing to t1 serves as an a customer can ( contemplates ] tothe servic. e(illipment priv turers' Servi SYSteIns or in this approach is determined and large ben take Place ef % service bursa there is a gr tween the la: 34 Slimal 79 ctivities. In the first place, service bureaus provide the anufacturer a place to put equipment to work earning at least ne equivalent of a lease payment. Further, their parent com— anies do not consider them as ”loss—leaders.” Romuald Slimak, )APSO's first president and manager of Sperry Rand's Univac ervice Centers, noted that ". . .I wouldn't be in my job unless "34 Another advantage livac Service Centers show a profit. :cruing to the computer manufacturer is that the service bureau rves as an effective-means of sales promotion. A potential stomer can observe, in Operation, the type of equipment he ntemplates purchasing. In addition, he can bring his personnel the service bureau for training in the Operation of such uipment prior to its installation. Many firms find manufac— rers' service bureaus effective aids in adopting computerized stems or in modifying existing systems. The advantages to .s approach are obvious. Precious capital is conserved if it determined that the computer will not function satisfactorily [large benefits accrue if the transition to a new system can e place efficiently. Independently OWned service bureaus. Independently owned Vice bureaus are generally closely-held companies. Often, re is a great disparity in the levels of sophistication be— en the larger and smaller organizations in this category. The 34 . Slimak, Op.cit., p. 17. — .——.- ._———..___.. -.._..__— larger firms a while the smai entation. F01 vice bureaus, mientists, s1 by the Defens applications , and problem 5: (CSC) in El 3. owners in rea aSpects of da information-r and a group 0 In addition, nat'lonal TGle developing "s tions Satelm the designers Puter manufac among their 1 The majc not in the "c the industry. Dr0c . t es Sing Se 8O :ger firms are often very scientific and research oriented ile the smaller ones hold a more commercial or business ori- :ation. For example, the largest of the publicly—held ser— te bureaus, C—E—I—R, was conceived by a group of top—level entists, statisticians, and mathematicians formerly employed the Defense Department. While C—E—I—R processes commercial lications, it is best known for its high level programming problem solving. Similarly, Computer Sciences Corporation 3) in El Segundo, California, prefers to assist computer ers in realizing the benefits of the complex technological acts of data processing. CSC markets such things as an armation—retrieval system for managing personnel records a group of programs for handling stock certificate transfers. deition, the acquisition of two subsidiaries Of Inter— ‘onal Telephone and Telegraph places CSC in the business of lOping ”software”sukrsystems for the Telstar II communica— 5 satellite. Furthermore, large independent firms often are designers of new ”software” systems introduced by the com— r manufacturers. In fact, the computer manufacturers are 3 their best clients. The majority Of independently owned service bureaus are n the ”computer services“ or "contract service” part of ndustry. These firms provide programming assistance and ssing services, but generally their emphasis is on the latter. This equipment. T of sales anal preparation . usually offer and control a tion. Many i and programmi trants into t tronic data F Filter Coopera 0f developmen In the 1 acute, Betwe rose 40 Perce 75 perCentdE matched by Dr Va1u9_36 Du bank emplOYEe PrOCesSing‘ t SQUeeZel \ Bankiizbeigi ' \z 36I | \ld‘l 81 latter. This is especially true of the firms using tabulating equipment. Their processing services very often consist mainly 3f sales analysis, billing, payroll, and financial statement >reparation. Independently owned service bureaus using computers sually offer these services and rather SOphisticated analyses nd control applications in the areas of inventory and produc— ion. Many in this latter group also offer excellent systems nd programming assistance. Commercial banks. Commercial banks are rather recent en— :ants into the service bureau industry. Through their elec- :0nic data processing departments or divisions and their com— lter cooperatives, they have followed an interesting pattern ’develoPment. In the 1950's the paper handling problems of banks became ute. Between 1950 and 1960, the number of checking accounts se 40 percent and the number of checks processed increased percent.35 In comparison, the increase in paper work was :ched by only a 37 percent increase in demand deposit dollar Lue.36 Due to the fact that approximately one—half of all k employees perform work associated with demand deposit >cessing, the natiOn's banks found themselves in a profit l . eeze. Automated data proceSSing was selected as an answer 35Robert H. Long, "Data Processing Service Opportunities ing." ADAPSO Management Guidon (March, 1965), p. 8. 36Ibid., p. 9. in to this probl Soon, a had excess co idle during processed aft their excess offering the for themselve Portant segme for these bar institutions savings accoi is to Sell c( customers but not just to : and make the The impac t o: CUSSed in 1110: sufficient t. associated w assistancE’ CP m that at leas 37" 82 this problem by many banks. Soon, a number of banks that obtained equipment found they 3 excess computer capacity. In fact, computers were often le during. the working day because most transactions were >cessed after closing hours. In order to utilize some of air excess capacity, banks with on—premise computers began bring the internal computer applications they were processing themselves to their correspondents. This is still an im- tant segment of their computer services sales. The next step these banks was to handle bookkeeping for other financial titutions such as Savings and Loan Associations and systematic ings accounts for mutual funds. ”Now, the real drive by banks to sell computer services to customers —— chiefly corporate :omers but also some individuals. The aim, increasingly, is just to fill idle computer time, but to develOp new deposits make the computer a generator of profits on its own.“37 impact of banks upon the accounting profession will be dis— ed in more detail in a subsequent chapter. For now, it is icient to note that their computer services are generally ciated with business—oriented processing, some programming stance, and virtually no high—level problem solving. CPA computer installations. The AICPA recently reported at least lOO of its member firms had acquired a computer, 37 . ”Banks Open a New Window,” BuSiness Week (October 17, . p. 158. and that at 1 equipment to ciation of Ce that at least data processi cial interest of the servic dering comput insignificant in the contex traditional c rePresent a P infOrlnatiOn t dfiialy, the et been fully r. the Professic Supported 0m with the Syst PrObabh is in the Net the aUtOmate( 38 C0111 ll' tute offifi 39 Se ti 83 i that at least 55 member firms were using another CPA firm’s 38 A survey by the Michigan Asso— lipment to service clients. :tion of Certified Public Accountants in March of 1966 found t at least ll member firms either Operate their own automated a processing equipment for servicing clients or have a finan— 1 interest in such an installation.39 Compared to the size the service bureau industry and the activities of banks ren— ing computerized customer services, these statistics seem ignificant. When the efforts of these CPA firms are examined the context of the profession‘s ethical philosophy and its iitional conservatism, these statistics are important. They resent a positive approach toward meeting the challenges of >rmation technology and the electronic computer. Unfortu— .y. the ethical status of such an approach has not as yet fully resolved by the profession. As in many other areas, profession has adopted a dangerous "wait—and-see" posture orted only by the research of the AICPA in conjunction the System DevelOpment Corporation. Probably the best known CPA—owned computer installation the New York firm of Lennox and Lennox. This firm entered utomated data processing field in 1958 with an add-punch, 38 . Computer Research Study No. 1 (New York: American Insti— Of Certified Public Accountants, l966), pp. ll and 19. 3 . 9See the complete results in Chapter V. which is basi connected to Our init commerci flexible produce bureau s our firn countant accounts needs.4C In time, the the add-puncl NCR bookkeepj tape, In ad: in the field in resPonse 1 budget Compay With tht Clients: nee‘ 0t her CPA fi by theSe pro CP AS for ele SYStems deSi 40 l JOhn W i ‘ "Wu-$.- 84 ch is basically a punched paper tape-producing device usually nected to an adding machine. John Lennox noted: Our initial exposure was gained via the use of a commercial service bureau where a simple, non— flexible, financial statement format was used to produce statements for our clients. This service bureau served a purpose in those days, but we, in our firm, soon recognized that they were not ac— countants and so did not understand the needs of accountants to satisfy, in turn, their Clients' needs. :ime, the firm substituted an NCR 3100 Accounting Machine for add—punch. Soon, the firm's records were maintained on the bookkeeping machine which also produced a punched paper :. In addition, the staff was gaining valuable experience he field of automated data processing. By 1961, partially esponse to the increased demand of clients for budgets, et comparisons, detailed analyses, and special statements, l firm acquired an NCR 390 computer. i With the acquisition of the NCR 390, the firm develOped 1 countants' type programs which fitted a variety of its own ts' needs. Soon, Lennox and Lennox received requests from CPA firms wishing to have their Clients' data processed ese programs. Added to this, referral requests from other for electronic data processing feasibility studies and ms design and installation studies were received. At this 40 John E. Lennox, ”How CPAs Can Adapt to the Computer,” ew York Certified Public Accountant (January, 1966), p. 896. point, Lennox Service Burea the firm was tion to devis Lennox and Le the Associati “hill tions renting tained to sex They are Of r bilSiness-Orie Portant in sc renting time bureaus in a Staffed to Se They usually basis. Certain separate div; assist OUtSL Wider. A] u in. Mono. Cthtel- has '1 service bure 85 .nt, Lennox and Lennox concurrently formed an ”Accounting 'vice Bureau" and a ”Management Services Division." Recently : firm was engaged by the National Retail Merchants Associa- n to devise a complete system for the Association's members. nox and Lennox now have a six year contract to process, for Association's members, the reports designed into this system. Other types of servigg bureaus. Universities and founda— ns renting free time on computers which are primarily main- ned to service their needs are beyond the scope of this study. { are of negligible importance in terms of commercial or iness—oriented applications; however, several are quite im— :ant in scientific work for industry and government. Firms :ing time on their computer installationsare not service aus in any sense of the word because they generally are not fed to serve, nor do they actively solicit, outside clients. usually perform limited processing services on an irregular 5. Certain large firms maintain data processing centers as ate divisions or subsidiaries. These service bureaus t outside firms and consider the parent almost as another der. An example of such an installation is that maintained e McDonnell Aircraft Corporation. The McDonnell Automation I has its main installation in St. Louis with additional ce bureaus in Denver and Houston. A key punch installation to support tr. In total, the million dolls equipment, ar. this organize services to c parent compar PrOblem defir tion. and dat “lately 350 c] Size from Ver engaged in so finanCe, bank In addition, governnlents, 5 tlltiOHS were likes, the Mr material cost production s< Services incl and flutter a d 41 R. Center ll L 1964le 0%“ 86 support the other facilities is located in Columbia, Missouri. total, the McDonnell Automation Center has upwards of $20 lion dollars of conventional punched card, digital and analog ipment, and it employs about 800 peOple.41 Founded in 1960, 5 organization makes available a wide range of commercial vices to outside businesses while concurrently providing its ent company's required processing. Its services include blem definition, consulting, systems design, program construc— n, and data processing. In 1964, the Center serviced approxi— ely 350 clients in almost 100 cities. Customers ranged in e from very small firms to industrial giants. They were aged in such businesses as advertising, accounting, brewing, ance, banking, petroleum engineering, and uranium processing. addition, non—profit organizations such as state and local :rnments,schools, hospitals, and certain religious insti— ons were serviced. In terms of commercial processing ser— s, the McDonnell Automation Center performs labor and rial costing, financial status forecasting, development of action schedules, and advertising research. Its scientific .ces include analysis of variance, matrix calculations. lutter and stress analysis. For its parent company, the r simulates space flights for the Gemini spacecraft in il . . R. L. Harmon, “Versatility Spearheads Giant Serv1ce n H -. Computers and Data Processing Management (December, p. 21. . ____.-..- .. ....-——- . l addition to p istrative dat Service Burea The diff is perhaps tl them. Yet it one category, assumed that described are SlleCialists, the problem 5 group. Ewes tition with : corporation, tome“ rent 1 own persofine. tion (STC) O: Yourself. Se and PrOCess to do the fa miners t0 br 87 iition to providing the other required scientific and admin— :rative data processing services. rvice Bureaus Differentiated by Servicg Specialty The differentiation of service bureaus by service specialty perhaps the most meaningful and useful method of examining am. Yet it is very difficult to classify some firms into only a category. However, for purposes of analysis, it will be sumed that such a task can be accomplished. The types of firms scribed are equipment—time renters, accountants' program acialists, federal income tax processers, industry specialists, 2 problem solvers, the full—line houses, and a miscellaneous mup. Equipment—time renters. In 1959, IBM, in partial compe— ion with its wholly—owned subsidiary, The Service Bureau poration, inaugurated a chain of service bureaus where cus— ars rent computer time and process their own work with their personnel. In 1965, the Statistical Tabulating Corpora— l (STC) Opened, in Chicago, its first Data-Mat, a "do—it- ‘self" service bureau which allows customers to drive in process data much as a housewife drives to a laundromat D the family wash. Basically, these services permit cus- Ts to bring their unprocessed data to a mid—town service M. to park free of charge, to use the facilities of a te office while organizing the unprocessed data, and to process the 6 storage faci] marily operat available at bureaus of ti under whom a1 hat also adve assist users. STC est: tential user: t0 own some ; Of these firm manufacturim PremiSe inst. with their 0‘ “Smirements Standard Bra One of for firms in service bure custOmer' a tion. The C outlays are 42 A. Industry 3 nc‘ 88 ess the data on new, high speed computer systems. Permanent age facilities are even provided. These "data centers" ordi- ly operate 24 hours a day, 7 days a week, with attendants lable at all times to render assistance. In English service aus of this type, the attendants include a ”duty programmer" r whom are a number of lesser technical personnel.42 Data— also advertises the availability of trained personnel to st users. STC estimated that some 2,000 local Chicago firms are po— ial users of Data—Mat, which in effect permits these firms wn some fraction of a computer's total capabilities. Most iese firms are small retail, finance, banking, service, and Eacturing businesses whose volume does not justify an on— .se installation. Another potential market is among firms their own on-premise equipment who have periodic peak-load rements. As of 1965, Illinois Bell, Morton Salt, and ard Brands had contracted for services. One of the primary aims of Data—Mat is to provide services irms in the transition stage between using a conventional :e bureau, i.e., one that performs the entire job for a ler, and maintaining its own on—premise computer installa— The computer and its related investment and maintenance 5 are borne by the service bureau. The customer provides > 'A. R. Bagshaw, ”Organization of a Computing Service for Ty and Commerce," The Computer Journal (July, l961),p.181. his personnel uses the serv premise inste Accounts specialize ir serving a grc the accountir this type to is unfortunat by most CPAs and of the e: narrow under: [MOW- EXar Sllperinmosea further raise llider of man; merits of SUI sion, The a‘ to hear, He not be affec necessary f0 SerViCe cially do so ge“tram pure 89 personnel, who gain valuable experience, and concurrently : the service bureau as a proving ground for a planned on- ise installation. Accountants' program specialists. Some service bureaus ialize in offering programs attractive to an accountant ing a group of relatively small—sized clients. A survey of accounting literature pertaining to service bureaus reveals type to be the most frequently described. Such a situation 1fortunate because it reinforces a basic misconception shared >st CPAs as to the potential of data processing service bureaus >f the electronic computer. It further fosters a very w understanding of the larger field of information tech— y. Examples of unimaginative uses of service bureaus imposed on out—moded systems are common. Each example. er raises questions as to the CPA's competence as a pro— of managerial information. Literature extolling the of such inadequate installations are examples of delu— The accountant is in effect being told what he wishes r. He is assured that his old ways of doing things will affected by service bureau applications. Any efforts ary for him to acquire new talents are minimized. ervice bureaus specializing in accountants' programs gen- do so through the use of ”package” programs. These purpose programs are capable of processing the data of arelatively existing char changes usual cessed. The financial ste the changes v period. In e smaller pract A featui sPecialists ; The accountaJ receives the One of the 11 field emlbhds hands All data t0 the Punched Pape ments. The VariouS gove to include w more SOphist programs Off even offer C 9O relatively wide range of firms. However, modifications in the isting chart of accounts and other relatively minor systems anges usually must be made before a firm's data can be pro- ssed. The most common type of package program prepares the mancial statements, updates the general ledger, and details 2 changes which occurred in each account during an accounting :iod. In effect, the ”write—up" work so prevalent among iller practitioners is now automated. A feature which characterizes the accountants' program Cialists is that they ordinarily deal through the accountant. accountant sends the raw data to the service bureau and eives the financial statements and the updated general ledger. of the leading independently owned service bureaus in this id emphasizes that absolute control is in the accountant's is. All that is required is some means of getting the raw to the service bureau. This is often in the form of had paper tape or it can be the microfilmed source docu— s. The accountant then presents the records to his client. ous governmental compliance reports and payroll processing, nclude withholding statements, are often prepared. The sophisticated service bureaus Specializing in accountants' ams offer various analyses and control applications. Some offer custom—designed programs. Federal income tax return processing services. The computer processing 01 individual ta CPAs during 1 through cert: processing t< bureaus, as : originator o: Sciences Cor] percent of is Clearing Hou. field! among The mecj I First: the C designed inp audit Worksh forTS are se operators tr media are th returns are SOmeWhat lin requiring it efficiently benefits as( 1' Che 9l -ocessing of individuals' federal income tax returns, and the .dividual tax returns in certain states, has been available to As during the past few years. Such services are offered rough certain organizations which contract portions of the ocessing to established service bureaus. There are no service reaus, as such, specializing exclusively in tax returns. The iginator of computer—prepared income tax returns is Computer Lences Corporation. In 1965, Computer Sciences sold over 50 7cent of its interest in the Computax System to Commerce raring House. There are several other entrants into this id, among them Monroe Data Processing's Datatax. The mechanics of the Computax system are fairly simple. st, the CPA enters the necessary information on specially igned input forms. These are similar to the preprinted it worksheets and schedules used by many CPA firms. The s are sent to Computax Corporation where key—punched ators transform the data into machine—sensible media. The a are then processed by the computer and the completed tax rns are returned to the CPA. Of course, this service is what limited in its flexibility: for example, in areas iring judgment. However, most calculations are very ciently processed by the computer. Some of the other fits ascribed to this system are: l. checking the returns for missing information 2. che( i 3. rev‘ 4. rel: It is expect‘ to include 51 1. Pre] 2. .Che« 3. Yea: 4. Deti par‘ 5- Est 6- Inf‘ film with data pr ””119 costs c and, many ti Pregram’ a p EXCEed the f d 45 ital The cation exist veloping a p 92 2. checking the returns for inconsistent information 3. revealing areas for potential tax deduction 4. relieving the accountant of many clerical procedures4 is expected that computerized tax services will be expanded ;nclude such activities as: 1. Preparing corporate, estate and partnership returns 2. .Checking of dividend income and security transactions 3. Year—end tax reviews 4. Determining tax advantages of corporate vs. partnership form of doing business 5. Estate planning . . I‘ ' . . 4 6. Information retrieval of tax court dec151ons, Industry specialists. Probably the biggest cost associated data processing is that of program develOpment. Program— costs can easily run into the tens of thousands of dollars; many times the initial programming cost for a custom—designed lam, a program generally applicable to only one firm, will d the first year's revenue from processing the associated 5 Therefore, if a market potential for a particular appli— exists, it is wise for service bureaus to consider de-~ ng a package program for that application. In this way, 3"Tax Returns—By Computer,” The Journal of Accountancy ary, 1965), p. 23. 41bid. 5W. A. Lynch, "When, Why and How to Undertake Program pment," ADAPSO Management Guidon (July, 1965), p. 8, the various quickly from other advani of the servi many areas; relatively 5 k alterations requirements filing severe toner, the 1 than the use ‘ . 1 tomer must < “in? a pad bureaus Off: modified.46 (Wires high. Cult to pro flexibility Partia Vice bUreau to a partic an induStry 5101th Pac \ 46‘ m 93 3 various costs of program develOpment are recovered more Lckly from a number of users. In addition, there are several 1er advantages of package programs. From the point of view the service bureau, programmersI efforts can be applied to .y areas; and customers using package programs represent a atively stable base of repeat processing business. Future erations in a package program due to an application's changed uirements can be undertaken easily, in comparison to modi— ng several separate custom—designed programs. For the cus- ar, the use of a package program is clearly less expensive 1 the use of a custom—designed program. However, the cus— zr must often accept a certain degree of inflexibility when Lg a package program. To counteract this, some service aus offer flexible package programs with parts that can be fied.46 Such a program is more difficult to develop, re- bs high—level personnel to design, and it may be more diffi— to process. But it is easier to market because of its 'bility. Partially due to the advantages of package programs, ser- bureaus have emerged specializing in applications peculiar particular industry. By concentrating their efforts on dustry, these organizations are able to develop very ef— nt package programs. They are also able to mass the talents 4 6Ibid., p. 9. oftheir sys npllcations ofthe servi dustry. Enic ofthe infle When the prc type of app] hwoicing 1: Problems is Learning th: sveral app: MW Offer vfl HOSPitals, 1 some of the wrviCQ bure Reynolt weCialiZin. ing With a mtionally ‘ onsome Wei 47 Vane Dealer” Io E 4 8n V a. PI 57" P Q 4 / 94 f their systems and programming personnel for developing future pplications. Such applications are easily determined because f the service bureau“s intimate knowledge of a particular in- ustry. Another very important factor is that a certain amount E the inflexibility inherent in a package program is overcome 1en the program is devised for a particular industry. Each me of application varies between industries. "For example, [voicing in a lumber yard with its complex discounting and credit 'oblems is not the same as invoicing in a tool and die shop.”47 arning this lesson, some service bureaus have put together veral applications peculiar to the needs of an industry and w offer what amounts to a package system for that industry. spitals, truckers, form printers and automobile dealers are ne of the lines of business serviced by these specialized rvice bureaus.48 Reynolds and Reynolds is an example of a service bureau ecializing in a package system for automobile dealers. Start— ! with a few local Ohio dealers in 1963, they had expanded ionally to over 1000 dealers in 1965.49 The system is based some well-designed source document forms peculiar to an omobile dealer‘s requirements. The information on the form 47Vance Genzlinger. ”Package Systems and the Automobile ler,“ Data Processing Magazine (August, 1965}, p. 40. Ibid. 49 Ibid., p. 41. is reproduce special add: and humans a bureau. In trols daily, detail jourr Indust: the United : British Iro: t0 relieve Payroll, an Vice Emphas m0“ PrOgram Proble solvers," 0 dynamic par SQPhisticat of them do Prefer to I illustratEE human taler attracting Wards. a 95 s reproduced by an addmpunch into punched paper tape or by a pecial adding machine onto printed tape sensible to machines nd humans alike. The tape is mailed daily to the service ureau. In turn, the service bureau produces Operating con— rols daily, customer statements on the 25th of each month, and atail journals and a general ledger monthly. Industry specialists are not a phenomenon peculiar only to re United States. In 1965, a computer service known as the 'itish Ironmongers' Accounting Service was established in order trelieve ironmongers of work in connection with stock control, yroll, and customers' orders.50 The announcement of this ser- ce emphasized that low costs are made possible because a com— ‘ “er ‘c‘a ”xiii i gig-:5? _ 4..-, n program is used. Problem solvers. Service bureaus classified as "problem lvers,” or ”think factories,” represent the most exotic and namic part of the industry. These firms offer the most >histicated level of computer services available today. Some them do not Operate their own equipment. or "hardware,” but :fer to rent computer time as they need it. Such a situation .ustrates an attitude which cOnsiders machines second to an talent. An outcome of this attitude is success in racting talent. It appears that aside from finanCial re- ds, a professional, given his choice,would rather work among 50"Electronics in the Office,” The Accountant (July 3, 5). p. 25. fellow profs professional located in : standpoint < with consul' cannot affo: great many lens solved The pr know no bou Search, eco are employe Scientific amPles of t Pendently c "prOblem SC 1° Fc 96 fellow professionals. Within organizations of this type, the professional is in the ”mainstream” and not a staff specialist located in some organizationally—remote section. From the standpoint of financial rewards, compensation is often greater with consulting-oriented service bureaus because most firms cannot afford to maintain such an array of talent. However, a great many firms can afford the expense of having special prob— lems solved by true professionals. The problems these ”think factories" can solve practically know no boundaries. Many disciplines such as operations re— search, economics, econometrics, mathematics, and statistics are employed in order to seek solutions to a full spectrum of scientific and commercial applications. The following are ex- amples of the capabilities of C—E—I—R, the largest of the inde— pendently owned service bureaus and one of the largest of the 'problem solvers:” 1. For the oil industry, C-E-I—R has helped in the develOpment, engineering and running of systems to assist top oil executives in scheduling re- fining, transportation, and distribution within their complex of refineries, tanker fleets, and distribution systems. 2. For the tobacco industry, C—E—I—R completed a com— prehensive study showing the impact of the industry upon other sectors of the economy in all 50 states. With this study, the tobacco industry was able to trace the contribution of tobacco sales to per— sonal consumption, employment, worker income and tax revenues. 30 For the Defense Department, C—E—I-R performed an w- "'""‘i03“'"‘-_ - , an: ant eX] C-l f0: str _._.__n.——- ——v—-- —.—.——.— . . _.... .-—~ .- 97 analytical and statistical study, by industry and by geographic area, of the impact of defense expenditures on the economy. In addition, C—E—I—R is providing continued support in the form of a large—scale statistical reliability study for the Polaris program. 4. C—E-I—R economists, market research analysts, and statisticians have worked closely with many city planning bodies, private investment groups, and transportation agencies concerned with metro- politan area problems. In conjunction with this, C—E—I—R has projected the size and composition of a major metrOpolitan area’s population and economy and the related mass transportation problems 10 to 25 years into the future. 5. C—E—I—R has made major progress toward developing compilers which will allow any technical expert to address a computer in the language of his own expertise, stating his problems as he prefers to state them, and concentrating on obtaining a solu— tion without attention to computer housekeeping and other extraneous factors. 6. C—E—I—R has a unique corps of statistical and data experts to assist clients in mobilizing apprOpriate data, and in designing statistical and accounting reporting systems for meaningful data processing.51 Full—line houses. Service bureaus referred to as "full—line" uses offer a wide range of services. However, relatively few fer the complete spectrum of services discussed earlier in is chapter; and, there are great differences between them 2h respect to the degree of emphasis placed and expertise nonstrated in each type of service. Many full—line houses 2 often referred to as a ”conventional service bureau" in 51”What if . . .," A descriptive brochure of C—E—I—R, Wash— ton. D. c., pp. 14—17. that the ty gram design ascribed to vice bureau projects no particular preparation bureaus may packages, t ahost of c m bureaus dii Offering v< in areas w} described“ embarked u] data Pr0ce Institute Offering t In additio service bu “problem 5 Part of it name for l 98 I L '1. hat the types of services rendered, such as systems and pro— ‘ ram design, and data processing, are the types most commonly scribed to a service bureau. Normally, the conventional ser— ice bureau does not undertake sophisticated problem solving rojects nor does it specialize in applications peculiar to a articular industry. Individual federal income tax return :eparation is similarly not Offered. However, such service 1reaus may offer some specialized industry systems, accountant's ickages, billing, payroll, inventory, production control, and a host of other applications. ”Jaimie-E .' .n' . . Other categories. In addition to the major types of service “a-..“ <‘i1.’ reaus differentiated by services rendered, there are some fering very specialized services. These services are often areas wholly unrelated to service bureau Operations as scribed. Of the latter, Computer Sciences Corporation has barked upon the manufacture Of special items of electronic ta processing equipment. C—E—I-R has acquired Automation stitute Of America, the oldest and largest organization fering training in the basic skills of business automation. addition, C—E-I—R has entered the field of franchising 'vice bureaus. Computer Usage Corporation, basically a 'oblem solver” and programming Specialist boasting a large t of its volume from computer manufacturers, has made a e for itself in the machine—time brokerage business. The firm rents them togeth to its clie A West ence servic bad debt ir subscribing: informatior traffic bil clear accor asingle C] of Shipmen- Whereby hor against an critique i bureauS ai Own 0n'Pre deemed adv A re] "informatj aqua‘n’ti’ta hated aftr toner 0r bureaus S 99 ' 1'? Firm rents the available computer time Of other companies, fits hem together into an overall schedule and subleases the time 0 its clients. A West Coast service bureau Offers a central credit refer— nce service. It categorizes individuals, on whom it obtains ad debt information, by driver“s license number. A merchant ubscribing to this service is assured of instantaneous credit nformation. In Ohio, a service bureau Offers a complete :affic billing service with which transportation companies .ear accounts with one another and pay all monthly bills with single check. It also aids in planning shipping routes, modes «fie». fshipment, etc. Another service bureau provides a service ereby home builders submit their project plans for comparison ainst an experience file of other builders. A detailed itique is then prepared Of the prOposed plan. Other service reaus aid customers by assisting them in selecting their n on—premise computer installations once such a move is emed advantageous. A relative newcomer to the service bureau industry is the nformation” or ”microfilm” service bureau. Information of {uantitative or qualitative nature is processed and dissemi~ :ed after being previously received directly from the cus- rer or indirectly from outside sources. These service “eaus store documents on microfilm and retrieve and reproduce them upon a statistical eral reques bureaus spe one such or treatment n drug inform vides a mer the Electr< installed 1 Purchasing Panies sup; is Selecte neering of kilowing vided: lOO . g them upon a customer's request. "The customer is provided with statistical and accounting reports, answers to specific or gen— 52 Often, these service eral requests, and organized files.” Dureaus specialize within a particular industry. For example, )ne such organization provides information on patient care and :reatment methods for hOspitals, while another supplies emergency lrug information for medical doctor subscribers. A third prO— 'ides a mechanized purchasing and procurement catalog file for he Electronics and AerO-space industries. Special equipment nstalled at each subscriber's location permits an engineer or vii-31;" : . urchasing agent to view microfilmed catalog pages of all com- anies supplying a particular product. When the desired product 3 selected, a listing of all of the vendors' sales and engi- eering offices can be flashed onto the viewing screen. The allowing is a typical example of the types of services pro— ided: A sheet metal fabricator. . .needs shop drawings for every part that goes through his shOp. His service center maintains a file Of drawings on microfilm. The day before a job is scheduled the production control clerk sends a list of the parts to be made to the service center. The center automatically locates the drawings, prints out blown up copies, and has them delivered in time for the start of the first shift.53 -_..._ 52Donald F. Blumberg, ”Role of the Service Bureau in Infor- tion Processing,” Proceedings Of the October 15, 1962, Manage— nt Symposium (Abington, Pennsylvania: Association of Data ocessing Service Organizations, 1962), p. 7. 53"A New Look at Data Processing Service Centersfl reprint om the December, 1963, issue of Modern Office Procedures. A desc of a “conve The materiz to service Service Bu: The 1 Suggest th tional lin tYpical ma finance fu PIOdUCtior costs of C Skilled p6 relatiVel3 an uncompj Closely-h, is more a: egllipmeht as in man Saks- 0r \ 54 Cerpol, ati Very j 101 Service Bureau Organization and Operation A description of the organization structure and operation ’ a ”conventional” service bureau is presented in this section. e material is general in nature, applicable in varying degrees service bureaus of all types.54 rvice Bureau Organization Structure The literature surveyed and the field interviews conducted ggest that a service bureau is usually organized along func— Dnal lines, resembling the organizational structure of a aical manufacturing firm. One exception to this is that the lance function does not share the importance of sales and >duction. While this may be surprising because of the high its of computer and peripheral equipment and the salaries Of .lled personnel, it can readily be explained in terms of a atively smaller and less complex scale Of operations, and uncomplicated capital structure characteristic Of many sely—held companies. However, the investment in equipment more apparent than real. Many service bureaus lease their ipment. In addition, there are no sizeable inventories and, in many service organizations, management tends to be either es— or production-oriented. 54This section draws heavily from material in the Burroughs ooration Manual, Service Center Organization and Control. I Iery indebted to Mr. Leonard J. Palmer, its author. Regan certain fur operating : and prograi stitute thr service bu Tor smalle all of the important 0f softwar zation st: 9r°SS revs tratiVe pr Can be re} The : Tanagerns ab‘llitya Ploit exi re°°mImend Package p Sales man effOrts E 102 Regardless of the size of a conventional service bureau, :ertain functions must be performed in order to attain acceptable )perating standards, including such functions as sales, systems 1nd programming, and production. Usually, these functions con- ;titute the first level of management below the president for :ervice bureaus with gross revenues of over $300,000 per year.55 Or smaller service bureaus, the owner—manager will Often manage ll Of these functions. In terms of staff functions, the most mportant is that associated with the research and develOpment f software applications. Figure III—l illustrates an organi— ation structure apprOpriate for service bureaus with annual ross revenues over $1 million. This size is chosen for illus— rative purposes in order that all functions and sub—functions an be represented separately. The first function examined is that of sales. The sales inager's duties include market definition and customer accept— ulity. In order to penetrate or dGKflOp new markets and ex— .oit existing ones, he conducts market research studies and commends areas for the research and development of software ckage programs and systems. For acceptable customers, the les manager prepares guidelines setting limits to sales forts and developmental expenses. He assists the efforts of 5 . . . Leonard J. Palmer, SerVice Center Organization and Con— gl (Detroit: Burroughs Corporation, 1964), pp. l—3. D .w m _ QHMBUIHOW —.CC.+ 4+ “Err Ith. 0. mQflUHHnN UENUHmTHm. THE“, memo? mgeommem mowemmezmomo Epsom. m0m>mmm .meom .meflm .HwQSm 9#00<. 9#00<. suuofl _ _ .owmm m .Uomm wwmmma Mommuomo . Hwfifimu Cum . . . , . HQEEMHmOHm J. a . mflsvm madam kuDmEOU. Mousmfioo m unmamcm unmamcd ; 7 l meumhm mfimpwhm Houpcoo ocwmmwooum Qucdmuhom Moflaow Hoflcom. huflamso mung _ w .i H _ i _i i , .ucoo Hos Hoom cwEmmHmm QMEmonm, [HobcH w HoQGOmHom HMOHHoHU mafiucdooo< FIIIIII1I|IIIIL |.I.. _I _ moamm moflfifimumosm p on .Hmz . o mEopmhm COHuowposm. .HmS .Hmz _|i . _ a D o m mofiuwfiwuwm mumsumom o goeofism _ unopened _ the sales campaigns, individual the sales coordinati department respect to sider the terms of t effort car of man~hor A Wes divided ‘11 in SYStem funCtion . range of pare SOlu cilstomer and diScu One Prima The \\ a 56Je % 104 ' p the sales force through training, advertising and promotional campaigns, and by reviewing the various proposals submitted by individual salesmen. Also, he evaluates the productivity Of the sales effort. One of his most important duties is that of coordinating sales activities with those Of the production department and the systems and programming department. With respect to the production department, the sales effort must con- sider the processing capacity and scheduled workload; and, in terms of the systems and programming department, the sales effort cannot exceed the available capacity expressed in terms >f man—hours. A West Coast service bureau has its sales department fivided into two groups.56 Sales representatives experienced n system design and analysis compose the first group. Their unction is to acquaint customers with the service bureau's ange of services and to analyze customer requirements and pre— are solutions along with cost estimates. The second group, ustomer service representatives, call on existing customers nd discuss any problems which may arise. Their function is me primarily of customer relations. They are also technically :ained in Operations and in systems and programming. The systems and programming department manager defines the 56James 0. Powell, ”What Makes a Service Center?,” Computer 1d Data Processing Management (December, 1964), p. 26. systems an the servic documentin step is an service bu department ment manac_ pricing a: his activi work group on-the-jo] COHSultim Customer; for the p, reSpectiv Specialis tems and The ment in a are the } proceSsir fur meetj \ 57 105 systems and program design concepts for all work processed by the service bureau. He defines and enforces standards for documenting programs and standardizing procedures. The latter step is an important part in the successful management of a service bureau.57 All Specifications submitted by the sales department are reviewed by the systems and programming depart- ment manager. He also exercises a degree of control over pricing and proposal techniques. Internally, he coordinates mis activity with the sales manager, assigns projects to his work groups, and develOps training programs, both formal and 3n—the—job, for his personnel. In addition, he supervises :Onsulting services such as the design and installation of a :ustomer's own computer system. Finally, he is reSponsible hr the productivity of his senior systems analysts and their espective teams consisting of programmers and equipment pecialists. These teams are the basic work group of the sys— ems and programming department. The production department is generally the largest depart- ent in a service bureau. Reporting to the production manager re the heads of the key punch, quality control, and data rocessing sections. The key punch section head is responsible 3r meeting the schedule requirements of his section by initiating ‘ 57J. W. Lewis, ”The Management of a Large Commercial Com— rter Bureau,” The Computer Journal (January, 1965), p. 255. and mainta closely th detection The qualit trol of cu are to red occur, to the qualii maintains and promol level. Tl Efficient data proof running t control a The proau these Sec tems and The the assun administl the Pric: may Cons; 106 and maintaining sound procedures which aid him in controlling closely the productivity of his section. Key punch error detection and follow—up action are also his responsibility. The quality control section chief is responsible for the con— trol of customer records. The objectives of quality control are to reduce error conditions, and because errors are bound to occur, to establish procedures for their correction. Therefore, the quality control section chief reviews all work processed, maintains control Of recurring work through account supervisors, and promotes close liaison with customers at the operating level. The data processing section chief is responsible for efficient computer utilization and productivity. It is the lata processing section head's duty to squeeze every second of 'unning time out of the computer by skillful work scheduling, ontrol and training of personnel, and equipment maintenance. he production department manager coordinates the duties Of hese sections among themselves and with the sales and sys— ems and programming departments. The staff functions common to most service bureaus Of ne assumed size and type discussed are represented by the iministrative, the software research and development, and 1e pricing and estimating departments. The first department 1y consist Of a clerical pool, a personnel section, and an :counting or bookkeeping section. The normal housekeeping i functions research a direction. which are tions. By the daily ment. Cor foundly ir departmeni the succe: oriented . "sharp" p quate inc for a fir re(illire ,3 tion- Pr may surf. with Com; eSPeCial] to (Mess Seqllentlj agement. \ 58 ceedin s tun. Pen 107 unctions are conducted here. The second department, software esearch and develOpment, is essential in giving an organization irection.58 This department selects areas for applications rich are potentially profitable and then designs the applica— _ons. By virtue Of its role as a staff, it is shielded from 1e daily pressures faced by the systems and programming depart— ent. Consequently, it devotes its time to projects which pro— iundly influence the long run well—being of the firm. The last partment, pricing and estimating, is also quite important to e success of the firm. However, its Objectives are more iented to present benefits. While jobs can be added through harp" pricing and estimating policies, all costs and an ade- ate increment of profit must be recovered from total revenues r a firm to be successful. Effective pricing and estimating {uire a thorough understanding of this very critical func- Dn. Pricing policies cannot be too competitive or profits 7 suffer; and a firm may acquire an undesirable reputation :h competitors and clients alike. Similarly, jOb estimating, >ecia11y with respect to program development, can degenerate guess work and can adversely affect pricing policies. Con— uently, this department must be closely supervised by man— ment. p 58Salvatore Parisi, ”Managing the Service Center," Pro- ggggs of the February 19, 1962, Management Symposium (Abing— h Pennsylvania: Association Of Data Processing Service nizations, 1962), p. 7. Service Bu Servi procedures a conventi Conte through ti are relat: the solut: 0f the ty] easily. 1 prOgrammi: 9Uideline for Price reviews 1; For SPeCial c equipment analySt V Such dOCL IEpOrtS' WhEI contact ‘ SUperviS‘ SeCti0n . 108 Service Bureau Operations Service bureau operations vary from firm to firm. The >rocedures described here are illustrative of the operations of .conventional type of service bureau. Contacts with prospective customers are generally made hrough the sales department. For prospects whose requirements re relatively uncomplicated, the sales representative provides he solution. Prospective package program users are an example f the type Of applications a sales representative handles asily. Here, he is bound by guidelines set by the systems and rogramming department with respect to system design and by the tidelines established by the pricing and estimating department rr price quotation purposes. Of course, the sales manager views the proposed application. For highly complex customer requirements, such as for ecial or one—time jobs or for designing a customer's own uipment installation, a systems analyst is available. The alyst will prepare the necessary system design complete with :h documentation as programs, card layouts, flow charts, ports, etc. When a prospect becomes a regular customer, his primary ltact with the service bureau is usually through an account >ervisor in the quality control section. The quality control rtion requests the support necessary to service recurring customers sales or : support f< research 1 work. Docu: arrive at are recei the contr machine-s Conversio forwarded Procedure The off‘line Ensemble the clier them in 1 Filter pm and Simuj In the or After pr. Permanen 0f the j 109 customers from the key punch and data processing sections. The sales or systems and programming department also requests such support for one—time or special engagements and the software research department will request support for its develOpmental work. Documents representing a customer's data to be processed arrive at the Service bureau in various forms. The documents are received, logged in, and verified by a receiving unit under :he control of the quality control section. Documents not in iachine—sensible form are sent to the key punch section for :onversion into punched cards. The punched cards are then Orwarded to the data processing section after various control rocedures are satisfied. The data processing section is usually divided into an ff-line area and on—line area. The Off—line area is used to ssemble and disassemble jobs. This step includes acquiring 1e client's permanent records from a security area and placing rem in running order with the newly received data. The com— 1ter processing run up—dates the client's permanent records rd Simultaneously processes the new data into a desired form. ,the on—line area, the proper program processes the data. ter processing, the quality control section examines the rmanent records and processed reports. At the completion ‘the job, the permanent records are returned to the security area and i Cont] system of various cl The logs I each Oper. volved. ' the basis emPloyees The Oil! econc COncomita Where it sary Star of the d5 differem most meal were dif: Finally, Operatio 0f the n 110 area and the reports are dispatched to the customer. Control is maintained throughout the service bureau by a system of strict procedures which include log entries and various checks as documents move from one section to another. The logs can be compared to employee time reports completed by each Operator showing the various jobs handled and the time in— volved. These reports serve multiple purpose: they represent the basis for billing customers, for fixing responsibility upon employees, and for assuring Optimal equipment utilization. Summary The service bureau industry iS a young, dynamic segment Of our economy with a brilliant future. Experiencing the problems :oncomitant with growth, the industry has matured to the point where it has formed a trade association to promote the neces— sary standards demanded by the services it renders. Because >f the diversity of firms composing the industry, several iifferent methods Of grouping are possible. The two considered ost meaningful were selected and the firms of the industry ere differentiated accordingly within these groupings. inally, a conventional service bureau's organization and Peration were described in order that a better understanding f the nature of such an entity could be conveyed. - .. _ . _ .‘WW -‘—~‘ Int a CPA. hi '7 review of service i an inforn Can mate: siderati< i ii Working V aSsertioI C933 and applicat. ful CPA, conclude disadVan Pri Of a Cli CHAPTER IV THE CERTIFIED PUBLIC ACCOUNTANT, HIS CLIENTS, AND SERVICE BUREAUS Introduction In this chapter, the potential working relationship between a CPA, his clients, and service bureaus is examined. Based on a review of the literature and personal interviews with CPAS and service bureaus working together actively, it is submitted that an informal working arrangement with a capable service bureau can materially benefit a CPA and his clients. Two general con— siderations and several possible approaches open to the CPA for orking with service bureaus are examined to demonstrate this assertion. Then a description Of a service bureau selection prO— :ess and of the steps involved in preparing for a service bureau application illustrates the importance of planning in a success— ful CPA, client, and service bureau relationship. The chapter :oncludes with a review of some of the possible advantages and lisadvantages inherent in service between applications. General Considerations Prior to selecting a service bureau application as a part f a client's information system, the CPA Should consider the following is but on formation working r bureaus . Serv1ce B Component The client's alternati slisten or CPA shou] sistem f( emce of , f0rmatio] this gap The “etessar Work flo changing and Free often of proPose] 112 following factors. The first is that the use Of service bureaus is but one automation alternative for a client's management in- formation system. The second is that the CPA must build a working relationship between himself, clients, and service bureaus. Service Bureaus as Alternative Components in Systems Design The decision tO use a service bureau as a component in a client's information syStem should come only after all feasible alternatives are examined. When the need for a new information system or the modification of an existing one is recognized, the u CPA Should make a careful study of the adequacy Of the existing fl system for meeting management's information needs. The exist— ‘ence of a material disparity between available and desired in— formation is the signal to begin devising a means to bridge this gap. The study may indicate that relatively minor changes are necessary. Simply by re—assigning responsibilities, re-routing ork flows, altering existing forms, adding or deleting reports, hanging the Office layout, or by modifying clerical routines nd procedures, the necessary information improvements are ften obtained. All too frequently, however, poorly conceived rOposals rush a client headlong into installing some form of utomation when the problem is quite minor and easily corrected without i does need the propo purchase capabilit ownership automated to inform secondary most crii utilized CatiQns. Thi: incorpor ment inf Service ‘ more SOp jUSt too on. are Clients It is ft industry Where 6} 113 without incurring large expenditures. Even when the client does need some form of automation in his information system, the proposed solutions often go no further than the equipment purchase or lease consideration. Allowing for the increased capability and decreased cost of small computers, computer ownership still has many problems. For that matter, owning automated equipment of any type is not always the best solution to information inadequacies. Equipment cost is frequently a secondary factor; attracting and keeping qualified personnel is most critical. In addition, the equipment is often under— utilized in terms of processing time and of imaginative appli- cations. This study seeks to expand the number Of alternatives for incorporating automation, if needed, into a client's manage— ment information system. It is submitted that data processing service bureaus are an alternative to which CPAS should direct more sophisticated attention: service bureaus are more than just tools for automating write-up work. In this respect, CPAS are just as guilty as many of their computer—owning clients who fail to utilize the full potential of the computer. It is further submitted that properly used, the service bureau industry is the vehicle which can propel the CPA to a state here electronic data processing will have the same beneficial ffect upon management services engagements that legislation has had 0 benefits cessing h the eyes from legi ion-r The that he j 0perati01 ance and Services the CPA ; it. or . Careful able to The appears fielu. require, nTitles. muniCate Studies 114 has had on audit and tax engagements. Furthermore, the pecuniary benefits to the profession stemming from electronic data pro— cessing have a readily identifiable economic justification in the eyes of clients, certainly in comparison to those derived from legislatively—created audit and tax engagements. The CPA—Client—Service Bureau Relationship The CPA enjoys a unique relationship with his clients in that he is often relied upon for advice related to internal operations. A professionally—motivated CPA accepts this reli— ance and uses it as leverage allowing him to provide better services. For example, if a new technique can benefit a client, the CPA Should use his influence to persuade the client to adOpt it. Of course, the CPA's recommendation would come after a careful study of the client's needs and the alternatives avail— able tO satisfy such needs. This example implies that: l. The CPA is abreast of advances in his field. 2. The CPA is a capable analyst. The CPA's ability as an analyst of his Clients' problems appears to be greater than his knowledge of advances in his field. All too Often, the practitioner is so burdened by daily equirements that he finds little time for evaluating new tech- iques. Then, too, some CPAs do not have the ability to com— unicate effectively. In this case, although the CPA thoroughly tudies a new technique and judges it beneficial to a client, 721.79“. a. fv-ch- .i"!..x .Ly . ~.-s:=yn,_ he may be It : keep infr Professir new devej orient a: the prof for indej dence. Unf to the e Conserve, used as emerging for the reaCtior the m0si niqu'es j future. Such a y when it Consi(lei In Same pl" 115 he may be unable to convince the client of its value. It should be noted that the true professional manages to keep informed of those developments which best aid his clients. Professional associations and their journals regularly report new developments; however their coverage is often designed to orient and direct the reader rather than to train him. Hence, the professionally—motivated practitioner must set aside time for independent research in order to deserve his Clients' confi— dence. Unfortunately, not all CPAS are professionally—motivated to the extent that they keep pace with progress. The careful, conservative approach to solving clients' problems is often used as an excuse for inactivity in seeking to learn of newly emerging develOpments. CPAS of this type are largely responsible for the charges leveled at the profession relating to its slow reaction to a changing environment. These same CPAS are among the most complacent: content with employing yesterday's tech- niques for today's problems while totally disregarding the future. Yet, clients continue to retain their esteem for them. Such a situation is a phenomenon worthy of a marketing study when it is considered that the CPA is restrained by ethical considerations from advertising. In contrast, service bureaus do not usually enjoy the same privileged position in a client's confidence as that enjoyed 1 firms, w the expr: very lim often de ation, m with CPA the indu Mak is acc , Vic l in cor his her to ant lor During 1 preSlde] ‘ till] all ' "2 \ lH “time 1965, A 2W M Vania: 1961) . 116 enjoyed by a CPA. Many business firms, especially smaller firms, will not consider dealing with a service bureau without the express approval Of their CPA. Frequently, the CPA has a very limited knowledge of service bureaus; yet, his opinion will often decide the fate of their proposals. Recognizing this situ— ation, many service bureaus actively seek working relationships with CPA firms. In an address before ADAPSO, an executive of the industry made the following comments: Make a point of finding out who the CPA or accountant is for each Of your customers. Arrange to meet the accountant and let him get to know you and your ser- vice. Oftentimes an accounting firm will specialize in a certain type of client, such as hospitals, or construction firms, or whatever. Each client Of his in the same field as your mutual client Should become a potential customer. Ask him for references to these clients. Again, I say, sell the accountant and the customer is half sold. Many businesses will look to their accountants for advice in this area.1 During the first ADAPSO Management Symposium, a service bureau president stated that with respect to prospective customers, . .where the accountants recommend us we have no problem at all."2 lH. John Shuster, "Marketing Data Processing Services to National CPA Firms," An unpublished paper presented to the May, 1965, ADAPSO Management Symposium. 2Walter Camenish, Comments in the Proceedings of the Janu— ary 20, 1961, ADAPSO Management Symposium (Abington, Pennsyle Vania: Association of Data Processing Service Organizations, 1961), p. 18. Each of the research phase c leged position 6 However, the int tion was frequer examples were ci of appreciation sing. The exam; firms serving re 0f business fir“ The literat bureaus permit t have been an aid Professim Stanc' bureaus. Many s fishers, formal] electronic data Prepare themselc agement informat CPAS seem not tc firm's fOrmer de succinctly when States have thei t | heir heads Out 117 Each of the service bureaus interviewed during the field search phase of this study were quite cognizant of the privi— ged position enjoyed by CPAS with respect to their clients. wever, the interviewees felt that the CPAS' privileged posi— on was frequently detrimental to clients. Many convincing amples were cited amply illustrating many CPAs' general lack appreciation for the capabilities of electronic data proces— ig. The examples primarily pertained to small-Sized local CPA 'ms serving relatively small—sized business firms, the kinds business firms many service bureaus actively solicit. The literature search and interviews with CPAS and service eauS permit the following generalization: service bureaus a - been an aid to countless business firms. In addition, the fession stands to benefit from cooperation with service aaus. Many service bureaus are willing to assist practi— lers, formally and informally, who wish to learn about :tronic data processing. Simultaneously, practitioners can tare themselves to serve as important links in improved man— ent information systems. Unfortunately, the majority of seem not to be aware of such benefits. A national CPA 's former data processing consultant enunciated the problem inctly when he commented that ”. . .CPA firms in the United as have their heads in the sand —- and they won't pull 7 heads out, to see their Opportunity in time to effectively participate in t It should l: field consult, c in order to perf cation is evider committed to act To do so implies lating to that 1 methods of applj Except to varyir solutiOn, In t} tent Service bur another, they as the finest manag considerations ‘ should be SUbje( Ass‘m‘ing t? POtential of Se, effective WOrki and SerVice bur depends uPom th manifeSts itsel role is not dif 3 ShuSter’ 118 .rticipate in the service bureau industry.”3 It should be noted that competent professionals in every eld consult, on a regularly recurring basis, with one another order to perform a given task more proficiently. The impli— tion is evident. A professional in every class of work is nmitted to achieving a high degree of excellence in that field. do so implies the utilization of the latest developments re- :ing to that field. All of these developments and their :hods of application cannot be known to one person or group, :ept to varying degrees. Consultation is the professional .ution. In the field of information technology, when a compe- ‘t service bureau and a progressive CPA consult with one ther, they assure themselves that mutual clients will receive finest management information systems possible. Ethical siderations which appear to preclude such an arrangement uld be subject to question. Assuming that the accounting profession recognizes the antial of service bureaus, a part of the distance to an active working relationship between CPAs, their Clients, service bureaus is quickly covered. The remaining distance ands upon the CPA prOperly performing a catalytic role which .fests itself as an effective three—member team. Such a r is not difficult to perform given the general attitude Of 3Shuster, op.cit. clients toward bureaus to coop counting profes bureaus . 92: The CPA fi vice bureau emp l. the au genera 2. the au 3. the au 4- the au Each succeeding category Such t and the most sc categOry re flec that Changes ir quire a Change Each succeeding on the Part of from the CPA a1 Prior to Q useful to eXam~ Wh en a serVice 119 an” ‘ nts toward CPAS and the desire of the majority of service aus to cooperate with CPAs. The key then is that the ac- cting profession must recognize the capabilities of service aus. Categories of Service Bureau Employment The CPA finds that there are four general categories of ser- bureau employment available for his clients. These are: l. the automation of the financial statements and general ledger 2. the automation of clerical functions 3. the automation of decision—making and control 4. the automation of the management information system succeeding category contains the elements of each preceding gory such that the fourth category is the most comprehensive the most sophisticated in its results. In addition, every ‘ gory reflects a stage in a particular client's growth, in changes in the size and complexity of his operations re- a a change in the category of service bureau employment. succeeding category assumes a greater need for information 1e part of the client and greater degrees of expertise the CPA and service bureau. Prior to examining each of these categories, it may be .1 to examine several general considerations the CPA faces a service bureau is employed to service clients. General Conside: The additir requires that t‘. l. the de 2. the CP. 3. the £0 4. the pr 5. the me These considera 1“ Practice, th jointly. plicatiOnS are Mmeages and sidered in the vice bureau aPE isticS of Packa clients, this J. hand, his Clier available pack; gram are freqi In order to re; pmgl‘ams ’ user: Catio a p; 120 .eral Considerations The addition of the service bureau to the CPA—client team uires that the CPA examine the following considerations: 1. the desirability of package programs 2. the CPA's place in the flow of data 3. the form of transmitted data 4. the preparer of machine—sensible data 5. the method of transporting data 3e considerations are separated for purposes of analysis only. ;ractice, their interaction requires them to be considered LtlY. The desirability of package programs. Package program ap— ations are commonly marketed by service bureaus and the ntages and limitations of such programs to them were con— red in the preceding chapter. To the CPA considering ser— bureau applications for his clients, the cost character— 25 of package programs are important. Indeed, for smaller ltS, this is frequently the sole determinant. On the other his clientsI existing systems may not be compatible with .able package programs, even though a variety of such pro— ; are frequently available for many types of applications. 'der to realize the cost benefits inherent in package 'ams, users must often adhere to the rather rigid specifi— ns of a particular application. Generally, this necessitates some systems ch their clients a field research practitioners h the package prc especially true tion, several 1: service bureau Clients' existi At some pc ible. This is aPproach the f( employment cite of Custom-desig Costs, % consideratiOn ‘ Place in the f In Some si’cuat it to the Sew directly from PA in a POSit COnstant C 3’ L 121 ome systems changes, many of them relatively minor. CPAS and heir clients are often critical of this inflexibility. However, ield research uncovered a number of examples where imaginative ractitioners had effectively overcome restrictions peculiar to me package programs with which they wereinvolved.4 This was specially true where smaller clients were concerned. In addi— Lon, several practitioners noted that the preparation for a ervice bureau application was fruitful in terms of refining .ients' existing systems and procedures. At some point, package program applications are not feas— le. This is certainly true as clients" information needs proach the fourth of the four categories of service bureau ployment cited earlier. By that time, the increased benefits custom~designed programs may far out—weigh their greater sts. The CPA's place in the flow of data. ’Another important asideration in service bureau applications is the CPA's ice in the flow of data. There are two basic approaches. some situations, the CPA collects data from a client, sends to the service bureau, and receives the finished information rectly from the service bureau. This arrangement places the x in a position of control and allows him to examine a 4 . . Constantine Konstans, "Partners in Profit,” The Michigan (March—April, 1965), pp. 25—26. client's data, ' eliminate unnec: for the service client's newly j tions and allow for strengtheni The approach de receive bookkee Another ap service bureau Because the CPA measure of cont the Controls ir tems_ Such che error COrrectic Customers, for correct custom transact-denso impossible if ‘ ngrams“) data flow to t racy 0f prOCes ation desCribe o . r deusiOmma 122 .ent's data, to ascertain its accuracy and clarity, and to .minate unnecessary communication and processing problems the service bureau. In addition, an examination of a ent"s newly processed information permits timely recommenda— ns and allows the CPA to devise his own checking procedures strengthening the reliability of the processed information. approach described is common where smaller-sized clients aive bookkeeping assistance from a CPA. Another approach finds clients sending the data to the lice bureau and receiving the processed information from it. ause the CPA is not acting as an intermediary, he loses some aure of control. Such a situation is rectified by checking controls in the service bureaus“ and in the Clients' sys— . Such checks may require a test of the service bureaus' r correction procedures for inaccurate data received from omers, for machine failure, or for failure to use the ect customersI permanent records while processing weekly sactions. (The latter type of error may be practically ssible if certain checks are built into the applicable rams.) For clients, their procedures for controlling the flow to the service bureaus and for verifying the accu- of processed records may be tested. Generally, the situ- 1 described is characteristic of clients receiving clerical Lcision—making and control assistance from service bureaus such as payroll Mas tion, closely a data is sent to available are s< tapes, listings cards, and elec with implicatio data into a par data to and fro Control, and se Common. For ex ViCe bureau, tr confidentiality while mOst COSt have been decre source dOCument or operators a: AlternatiVely’ tape is tramp, and SeCUr-lty i: tape can be 10 tion, tape‘to‘ service bul‘eau 123 :h as payroll and job scheduling. The form of transmitted data. Another important considera— >n, closely allied to the previous one, is the form in which :a is sent to the service bureau. The alternative data forms rilable are source documents, microfilms, adding machine >es, listings of transactions, punched paper tapes, punched 'ds, and electrical impulses. Each form has characteristics h implications relating to the equipment needed for preparing a into a particular form; the cost and ease of transporting a to and from the service bureau; and data confidentiality, trol, and security. Trade-offs between characteristics are non. For example, if source documents are sent to the ser— 3 bureau, transportation costs may be excessive, and data Eidentiality, control and security is minimal. In addition, Le most costs associated with electronic data processing been decreasing, the cost of preparing punched cards from ce documents has not. However, special items of equipment perators are unnecessary. The service bureau provides both. rnatively, data transmitted in the form of punched paper is transported cheaply, and data confidentiality, control security is greatly enhanced. For one thing, the punched can be lost without catastrophic consequences. In addi- tape—to—card converters are standard equipment in most I ice bureaus. This alternative eliminates the service bureau's person sensible form a equipment and o bureau to eithe The prepar sideration with who will prepar t0 the service the considerati For maximum dat for minimum tr; in that Order, by the Client ( IleCJeSSalrya Methods 0: input device a: opposed to Com] POrtaht faCtor adding machine that identify depresSing the the neCeSSar—y Prepare machrh adding machine 124 reau“s personnel from the role of preparing data into machine- nsible form and correspondingly strengthens control. However, uipment and operator requirements shift from the service reau to either the CPA or to his clients. The preparer ofppgchine-sensible data. A concomitant con— ieration with those previously described is that of determining D will prepare the data into machine-sensible form and send it the service bureau. Similar implications exist here as in a consideration relating to the form of the transmitted data. ' maximum data confidentiality, control and security, and ' minimum transportation problems, the client and the CPA, that order, should prepare the data. However, an investment the client or the CPA in some type of input device may be essary. Methods of data preparation which require some type of t device are widely employed by CPAs and their clients as sed to completely manual methods. Time—saving is an im— ant factor. The simplest such device is the ordinary ng machine. By using the non—add key to print numbers identify the client, the journal, and the account, and by essing the subtraction key for credits, the tape provides necessary information for service bureau personnel to are machine-sensible input. During the past few years, ng machines equipped with optical type font, Special shaped 0"," numerals which ment, have been a more publiciz the add-punch, add-punch is of or it can appee adding machine . elimination of input data. Additional and CPA, assumj sensible form, fect of a Spec; routine, Smal; yond an adding of Performing , prepdrer, be h. punch machines routine° Offi W to and frOm th services and m method has its D . mm; the pa: 125 merals which can be read by some items of electronic equip— nt, have been successfully develOped and marketed. However, ore publicized approach for source document preparation is add—punch, a perforated paper tape—producing machine. The ~punch is often electrically connected to an adding machine it can appear as a single item of equipment, a punched tape— ing machine. An advantage of the latter two devices is the mination of service bureau personnel in the preparation of ut data. Additional considerations which are germane for the client I CPA, assuming one of them prepares the data into machine- .sible form, are the availability of personnel and the ef— t of a specialized device such as an add—punch on the office tine. Small clients may not be able to justify devices be— d an adding machine and they may not have personnel capable erforming data preparation tasks. If the CPA acts as data arer, he has similar considerations. In addition, add— h machines are rather noisy and thus may disrupt the office ine. Office space considerations may also arise. The method of transporting data. Data may be transported nd from the service bureau by a variety of methods. Postal ices and messengers are the most common. Of course, each od has its own peculiar cost and security implications. ng the past few years, some interesting developments in vw' the use of com mission have ev cessing install office in Alexa Clients' recorc' New Jersey, by to a Dataphone . and processed 1' these are maile that the comple the CPA Via Dat being used for being transmitt It iS subn cm Venture in, bOunde 0f accor that the CPA m1 126 the use of commercial telephone lines as a method of trans— mission have evolved. For example, in 1965, Monroe Data Pro- :essing installed a data transmission device in an accountant's 5 office in Alexandria, Virginia. Data taken directly from :lients' records are transmitted to a service bureau in Orange, Jew Jersey, by means of a punched tape—adding machine attached :0 a Dataphone. At the service bureau, the data is compiled nd processed into various reports and analyses. Currently, hese are mailed to the CPA. In the future, it is expected hat the completed information will be transmitted back to he CPA via Dataphone. Similar data transmission devices are sing used for billing and payroll operations with the data sing transmitted by the client from his place of business.6 It is submitted that such developments demand that the A venture into areas previously not considered within the unds of accounting. From an audit standpoint, it appears at the CPA must comment on the reliability of the various :hods of data transmission employed by his clients. The prob- 1, then, is how does an auditor test a communications system? se are integral parts of information systems and they will even more important in the near future. 5”Remote Accounting,” Computer News (May, 1965), p. 6. 6David Coleman and Theodore Cohn, . Processing Centers," ber, 1965), pp. 48-49. ”Some Specialized Uses of Management Services (September- The Automatio_n_ Statements apdq The first employment avai the financial 5 common service clients. Gener package program Mtg-em t0 service burg drudgery assoc; PrOfit service ploy a bookkee] monthly, the a: and then prece. to the ledger, balance, the n Post-Closing t ments are Comp Out time for r Client' alSSumi are performed 127 The Automation of the Financial Statements and General Ledger The first of the four general categories of service bureau employment available for serving clients is the automation of :he financial statements and general ledger. This is a very :ommon service bureau application for relatively small-sized :lients. Generally, such an application is processed with a vackage program. Two approaches exist. Write-up work. The earliest accounting literature referring 0 service bureaus extolled their merits as an escape from the rudgery associated with write—up work, a high—volume low— rofit service many CPAS perform for clients too small to em— 1oy a bookkeeper. It usually follows this manual routine: anthly, the accountant obtains the client's source documents 1d then proceeds to make entries in the journals and postings r the ledger. At this point, he prepares the unadjusted trial lance, the necessary adjusting and closing entries, and the st—closing trial balance. By the time the financial state— nts are completed, the accountant often finds himself with— : time for rendering profitably additional services to the .ent, assuming the general case in which write—up services performed for a fixed, nominal fee. Often, the results a client who cannot fully appreciate the potential man- rial information in financial statements and an accountant does not eXperience a feeling of professional accomplishment with each compl In the lat success with ma financial state tential of this through service very often thrc tronic compute] PrOgrams. For each c package Program decide which 01 Compatible wit, are available a exclusively f0J ous optiOns ex; aration of Sim] For instanCe, l statements I an. course, the ex the program, t' exceed their c sitY of modify U 128 :h each completed engagement. In the late 1950's, service bureaus began having limited :cess with marketing package programs for general ledger and lancial statement preparation. Many CPAS recognized the po— rtial of this situation and began servicing write—up clients tough service bureaus. Today, the same service is available, 'y often through service bureaus employing the latest elec— lnic computers and featuring improved and expanded package »grams. For each client, CPAs must often choose from among several kage programs, and from within a selected program they must ide which options to select. For example, general packages patible with the requirements of firms in several industries available as well as specialized package programs designed usively for a particular industry. Within a program, vari— Options exist which may provide services beyond the prep- ion of simple financial statements and the general ledger. instance, percentages, year—to—date figures, comparative ements, and various subsidiary ledgers are available. Of se, the extras often are more expensive. As in selecting program, the CPA will select those Options whose values ed their cost. One of the costs considered is the neces— of modifying a satisfactory system in order to be able to a package program. - 33:233. 2?. periodi least a as to t a non-c termed typical write-r practic 01 ULO’TOQP“ ing a cOunt. lined Tape. 129 Periodic noncertified reports. The practice of preparing riodic financial statements for smaller clients employing at ast a one—man bookkeeping staff, without rendering an opinion to the fairness of such statements, is often referred to as non—Opinion audit. In more formal terms, this practice is rmed a periodic,usually monthly, non-certified report. The pical client receiving this service is larger than the typical Lte—up client. Non—Opinion audits have been described by a acticing CPA in the following manner: Our practice is made up predominantly of monthly noncertified reports, where the client's personnel have written up the books of original entry, and our function, aside from our normal accounting procedures, verification, and typing in of various control accounts, consisted of the following semi— skilled functions: 1. Posting books of original entry to a general ledger 2. Taking off a trial balance 3. Preparing pencil copy of balance sheet and profit and loss statement monthly (with occasional percentage analysis) 4. Typing balance sheet and profit and loss state— ment monthly.7 The approach taken by this practitioner's firm for employ— a service bureau is to continue to perform the usual ac— [ting procedures, verifications, etc., but to eliminate the essity of doing any of the four semiskilled functions out— :d above. The procedure, which varies with client, industry, 7 Erwin Bud Wittus, ”A CPA Firm's Experience With Punched ” The Journal of Accountancy (September, 1961), p. 65. I 130 :omplexity, internal control, etc., employs "pick—off sheets” :0 recapitulate books of original entry and "tie—in sheets” to reconcile various details to controls. As emphasized by the firm, the basic difference between the procedures employed for :ervicing write-up clients and for preparing noncertified re- orts is that the client journalizes the books of original entry nd posts to the general ledger. i There are a number of advantages to this approach, economic d professional. In the first place, because the client main— fins his own journals, thus summarizing his accounting trans— ttions, the service bureau's processing fee is less than in ituations where each transaction is handled separately. There :e fewer line items to record because the column total of a >urnal is treated as one line item. However, this saving is Ften more apparent than real. The cost of manually preparing e journals may more than Off—set the higher processing fee. condly, the time taken in the CPA's office to transform source ta into machine—sensible form is reduced as Opposed to per— rming write—up work. The practitioner referred to earlier :imated a ten minute preparation time per client.8 Finally, .s approach allows the CPA time for performing other services his clients. A disadvantage Of this approach is that added steps must undertaken if machine analyses of sales, purchases, etc., 8 . Ibid., p. 67. 131 are desired. Such steps are unnecessary if financial statement preparation is the only service bureau output desired. Clients receiving noncertified reports Often find that financial state— ments are adequate managerial information. Furthermore, the cost of various analyses may exceed their value. For instance where financial statements need to be supplemented with various analyses, but where the service bureau processing costs are pro— hibitive, manual devices such as key—sort cards and peg—boards may be feasible alternatives. The Automation of Clerical Functions The automation of clerical functions is particularly impor— tant in periods when skilled employees are in short supply. ‘Rather than permit proficient Office personnel to perform such time consuming functions as payroll preparation, customer bill- ing and the preparation of ancillary records, service bureaus may advantageously fill the need. First, office personnel can e used to perform a higher level of work, often increasing their satisfaction and the Office's productivity. Secondly, ervice bureau applications Of this type provide a wealth of nalytical information in addition to the basic documents and ecords. For example, payroll processing can produce the hecks, the check register, separate employee earning records, ax information, labor distribution, and analyses of labor costs. imilarly from a processing run of receivables the logical next "i 132 step is the preparation of customer statements and various sales analyses. Prepared manually, these documents and records con— sume a great amount Of time which could be put to more produc— tive uses. Most firms using a service bureau without going through :heir CPA generally obtain clerical processing assistance. Ap— alications of this type appear to benefit only those firms whose :lerical work volume is large enough to justify their own book- :eeping or accounting staffs. But this is not always the case. Jne service bureau interviewee related an example of a CPA who 'rouped the payrolls of a number of relatively small—sized lients, prepared the data into machine—sensible form, and had he payroll processed by a service bureau. By grouping several irms' records and processing them as one, he was able to justify he cost of processing. At the most SOphisticated end of this category, several ervice bureau package systems, as Opposed to programs, are Jailable. Package systems, a group Of related programs capa- 1e of processing financial statements, general ledger, and rious clerical requirements, are available in conjunction th small scale equipment.9 One such complete system, the rroughs Basic Record Control System, combines journal posting 9 See Vance Genzlinger, ”Package Systems and the Automobile aler," Data Processing Magazine (August, 1965), pp. 40—41. 133 and document preparation by the client on a Burroughs posting machine, with financial statements, general ledger, and analyti— cal reports processing by the service bureau. The machine pro- duces a by—product punched paper tape which is the input to the service bureau. The Automation of Decision- making and Control Functions At some point, a client reaches the stage where operations :ontain so many variables that it becomes difficult to make even aasic decisions. For example, as a firm's inventory grows in lbsolute size, in turnover, and in the number of different line ,tems, inventory control becomes correspondingly critical. Re— rder points, recorder quantities, lead times, holding costs, rdering costs and other critical variables pertaining to in— entory decisions are difficult to organize and control. Similar roblems exist in production scheduling, procurement, freight outing, etc. For this category of service bureau employment, a number f package programs are available. For example, the Service 1reau Corporation has a package program for automobile dealer's arts departments. The program automatically prepares pur— lase orders based on the consideration of such factors as onomic order quantity and Optimal reorder point, which in rn are derived from a consideration of lead time, holding l34 and order costs, stock out costs, and a factor for parts turn— over. The program also prepares an exception report which high— lights slow moving items. Similarly, there are package PERT programs useful to contractors or firms involved in complex projects with many interrelated, although organizationally separate, functions. In addition, linear programming, simula— tion, market analysis, and transportation analysis package pro— grams are available to aid decision—making and control; and more are being planned for scientific, mathematical, technical, and Operations research applications.10 This particular category of service bureau employment de— mands a high level of expertise on the part of the CPA providing management services for his clients. It is important that the CPA recognize situations where such applications can be used. Furthermore, he should assist the client in selecting a suitable package program or aid him in preparing meaningful specifica— tions for a custom—designed program. Custom—designed programs are quite common in this category Of service bureau employment especially when it is desirable to effectively integrate al— ready interdependent areas such as procurement, production and inventory. An additional Observation is in order. A management 0 Laura Tatham, "British Bureaux in Demand,“ Data and Con— trol (October, 1964), p. 30. l35 interested first in the high—speed solution to decision—making problems is confronted with an interesting paradox: it will probably enjoy the greatest long—term benefits a computer can offer, but it will probably be among the last to have a machine 3f its own. Because such applications are difficult to pro— gram yet typically require few machine hours to solve, a com- puter may be underutilized. ”To those who give priority to programming the decision—making problems first, the service aureau is a natural ally."12 The Copputerization of the danagement Information Sy§tem The final category of service bureau employment is not nearly as important today as it will be within the next few years hen new developments in communications equipment, computers, eripheral equipment, and software transpire and receive in— reased attention. In Chapter VI, the implications Of these evelopments are examined in greater detail. As a firm's Operation size and complexity increase, but by urrent standards not enough for an on-premise computer in- tallation, the complete automation of integrated financial ecords, clerical functions, decision models, control tech— iques, etc., Often becomes desirable. At the present time, 11Charles S. Abbott, ”Buy, Lease, Share a Computer — Or ilize a Service Bureau?," Computers and Automation (February, 60). p. 15. lZIbid. 136 very little, if anything, is being done through service bureaus as far as establishing a completely computerized management in- formation system of the type described in Chapter II. Communica— tions equipment and software considerations, among others, pre— sent limitations. However, partially—computerized management information systems through a service bureau are a distinct pos- sibility and a reality, given custom—designed programs and the available communications equipment. It is submitted that this category of service bureau employ- ment is the one to which the public accounting profession must address itself. This, too, is an area where the challenge of information technology will be quite evident. The implications for management services and auditing engagements are staggering. Within the next few years, the profession will see demands made 1pon it which can only be successfully met by information tech- 1ologists. The rewards and penalties are great. One way for .he individual practitioner to prepare himself for a share of he rewards is through the experience gained from service ureau applications, especially from the more sophisticated ones. Selecting a Service Bureau CPAs are traditionally careful about embarking upon new ntures which may substantially modify their existing methods operation. While the reasons cited for this attitude are :en couched in theoretical or ethical terms, it is submitted 15g 137 3 that pragmatic factors receive their share of consideration. Adherence to tried and tested practices, it is felt, retains clients, whereas the unfavorable outcome of an innovative prac— tice may have undesirable repercussions. An attitude of care with respect to new undertakings is admirable if it does not undermine progress. With respect to selecting a service bureau, an attitude of care is essential be— cause of the disparity in their levels of competence. Selection begins with an identification of problem areas in a system which could be aided by a service bureau application. Then, an analy- h } sis of alternative aids is in order. Finally, assuming that a service bureau application is chosen, selection criteria should be developed to aid in selecting a competent organization. Situations For Service Bureau Appligations Situations in which a client could use a service bureau fall into several categories. A functional method of differ— entiation based on usage is selected to describe certain cate- gories which supplement the four levels of service bureau usage discussed earlier. Branch office processing. The continued advances in com— munications allow service bureaus to be linked together by data transmission networks thus enabling them to transfer data from one another and to use each others facilities.13 For clients l3Reprint of ”A New Look at Data Processing Service Centers," Odern Office Procedures (December, 1963), p. 2. 1 38 with distant divisions, sales offices, plants, and warehouses, a service bureau located near such installations processes the data applicable to overall company operations and then trans— nits it to the central service bureau. The central service bureau compiles the data from the various locations into manage- ment reports, records, etc. Service bureaus at the distant in— stallations process such items as the local payroll or provide assistance in setting up the shop schedule for the following day. The latter application may be affected by considerations trans— mitted from the home office via the central service bureau. In effect, such a system is comparable to a company—owned central processor maintaining communications with its branch operations. One-time or occasional applications. Often, clients with heir own data processing installations have Specialized com— ercial or scientific problems which require special equipment, pecially—trained personnel, and very SOphisticated programs. or example, many scientific problems are better suited for nalog computers rather than digital computers. A systems de- ign problem which may require the modification of an existing ystem may be better handled by a service bureau's systems nalyst. In addition, service bureaus have libraries of special rograms which would be prohibitive, in terms of cost, for most 'rms to develOp and to maintain. Peak-load elimination. Many clients with their own auto— ted data processing installations find it expedient and 139 economical to use a service bureau for eliminating regularly— recurring peak working demands. The limitations of an installa— tion"s capacity may be especially evident at period-end or at payroll—preparation time. The majority of these limitations are clerically—oriented, placing great demands on the input and out- put capabilities of a system. In the case of a computerized system, such a condition represents a significant under—utiliza— tion of the computer's computational capabilities. Rather than accept late exception reports, shop loading plans, etc., because of payroll, billing or some other clerical requirements, many companies send the “dirty work” to a service bureau. Unexpected overloads. Clients with their own installation can be directed to service bureaus for aid in the elimination of temporary overload conditions caused by equipment failure, employee absenteeism, and employee turnover. In addition, special requirements such as mailing advertising material, pre— paring a special price catalogue, etc., may disrupt the estab— lished routine. Again, the service bureau can be called upon to render assistance. An important advantage of this kind of application is that costly overtime hours are kept to a minimum. Clients installing computers. Clients installing their own computers or tabulating equipment can receive assistance from a service bureau. The operation of equipment configura— tions similar to those being considered for installation can 140 be observed and evaluated and trial runs of Clients' data can be processed. When the equipment has been selected, the CPA may suggest that the client's personnel undergo a training period at the service bureau while the equipment is on order. The ser— vice bureau may also provide personnel to assist in designing the new system. In addition, when the equipment arrives, the service bureau can be used as a parallel operation until such time as the client's installation has passed certain tests. The Selection Process Detailed procedural lists often mislead rather than en— lighten if their purpose is misconstrued.l Being general is nature, check lists should be modified when used for a Specific purpose to reflect the conditions associated with that purpose. This section lists and describes some of the basic considera— tions in selecting a service bureau. Problem definition. Prior to contacting a service bureau, the problem area and its specifications should be defined as explicitly as possible. The CPA has a very important contri- bution to make because of his intimate knowledge of a client's existing system and future requirements. A part of his con— tribution will be to supply detailed answers to such questions as the following: 14This Section was suggested by Arnold P. Smith, ”Choosing a Service Bureau," Computers and Automation (December, 1964), pp. 23-24. 141 1. Which type of information or data processing is required? 2. What will be the disposition of such information or data processing? 3. Which is the desired form of the data to be sent to the service bureau? 4. Which is the desired form of the work received from the service bureau? 5. How frequently must the information or processing be available? 6. Will a period of parallel operations be necessary? Without exception, defining the problem is the most important step in the entire selection process. Too often, a client ap— proaches the service bureau without a clear statement of the problem. The service bureau finds itself in the awkward posi— tion of attempting to provide a service without having adequate guidelines. The result often is an application costing more than it Should while concurrently providing few benefits. Thus, service bureaus gain a critic, and the client and the CPA lapse into an unreasonable mistrust of electronic data processing. A well planned problem definition will almost always re— sult in a successful application. From such a definition, a competent and reputable service bureau can decide whether or not an application can be undertaken which will meet a client's expectations. In addition to the problem definition, the ser— Vice bureau should be provided with a description of the client's existing system and underlying procedures as an aid 142 in understanding the problem definition. Requirements placgd on the servicp bureap. A related step to that of problem definition is the determination of the require— ments placed on the service bureau in terms of its performance, responsibility, and integration into a client's system. If the service bureau application is for management decision—making and control, this step is especially critical; however, for most clerical applications, the requirements placed upon a service bureau are relatively minor. For the former type of application, the service bureau be— comes an integral part of a client's management information sys— tem. It operates in a similar manner, with respect to the client, as would a large corporation's central processor serving many remote divisions or departments. Under such circumstances, ; the service bureau is expected to make certain commitments for delivering information on a timely basis, processing a reason— able amount of special requirements, assuring a suitable degree of accuracy, and guaranteeing the confidentiality of a client's records. In addition, adequate controls over processing and over a client's records maintained by the service bureau are essential. Of course, there are other requirements which will Vary from application to application. These must be determined in advance of the actual engagement. For financial records and clerical applications, many of 143 f the same requirements exist. However, the degree of importance for certain requirements will not be the same. For example, timeliness may not be critical, although it is important. On the other hand, the requirement for confidentiality will not differ. Obtain competitive bids. The names of local service bureaus can be secured from the classified directory of the telephone book, and from other CPAS dealing with service bureaus. In addi— tion, ADAPSO publishes an annual directory of members. Several 3. .9:§22¥‘:u';l _ . trade periodicals publish annual issues containing the names I», .4; and locations of various service bureaus. One of the periodicals 3. even gives a description of the services offered by firms re— sponding to its questionnaire. The best sources of referral are often CPAS with service bureau experience. The point is that service bureaus are different in terms of personnel, equip— ment, Specialties, competence, dependability, reputability, and, of course, price. Form a selection committee. A selection committee should be formed composed of a representative from each of the func— tional areas to be affected by the service bureau application, other interested parties within the firm, and the CPA. After investigating a number of service bureaus, this group selects certain ones to submit proposals based on the problem definition. During the investigation phase, the committee should find 144 answers to the following questions: 1. How successful has the service bureau been with similar proposals in the past? 2. How well capitalized is the organization? Will financial difficulty preclude it from processing the client's needs in the foreseeable future? 3. If future changes in the client's requirements were made, could the service bureau accommodate them? 4. IS the service bureau noted for being aware of new developments in its field and incorporating them where applicable? 5. What kind of a reputation for cooperation does it have? 6. Does it employ an effective system of controls which will satisfy an auditor? Evaluate the service bureau proposals. At this point, the service bureau proposals requested Should be subjected to a care— ful analysis, Operational as well as financial. Such factors as each prOposal's technical competence, completeness, price, etc., should be carefully reviewed. Again, it must be emphasized that the quality of a service bureau's prOposal is dependent upon the problem definition submitted by the client. The service bureau's completed proposal Should be quite com— prehensive. For decision—making and control applications, the proposal may contain suggestions for the modification of input media, completed reports, and the client‘s existing system and pro— cedures. Suggestions for additional information or the deletion Of certain reports or parts thereof may be made. The prOposal up: .‘a. in 145 4 may go so far as to recommend the acquisition of equipment, such as a bookkeeping machine or dataphone communications, in order to make the service bureau and client more compatible. In addi— tion to the modifications mentioned, the service bureau's pro— posal should delineate its responsibility to the client. This would include the following responsibilities, some of which were considered earlier: 1. To study future requirements when requested by the customer and to make recommendations. 2. To design, develOp, and thoroughly test the best possible system, given its cost, and to handle the customer's processing. 5'; : Wfi‘A- 1. “u- 1,. 3. To arrange and maintain a realistic delivery schedule. 4. To set up every necessary control to insure the accuracy of the customer's reports. 5. To guarantee that all the customer's work is handled in the strictest confidence. 6. To guarantee against the loss or damage of the customer's documents.15 A detailed cost breakdown, with limits stated where uncertainty exists, Should be included. The service bureau should present a statement, again for guidance on control applications, which States specific goals for the completion of the job. A measure of control can be exercised over the production schedule by Comparing the statement against future invoices for services 15 . ‘ G. J. Corcoran, "The Use of a Computer Service Bureau by Small Corporations," National Office Management Association Management Bulletin (December, 1962), p. 12. 146 rendered as of a certain date. The proposal for financial record or clerical applications is often similar in general content but shorter and less detailed than a proposal for a control application. Its main concern will be the delivery schedule, the controls of processing, and the confidentiality of data. Because proposals of this type are often quite similar between service bureaus, the main selection criterion will probably be price, assuming that the competence and reputation of each submitter are equal. An important financial consideration to remember when evalu— ating service bureaus' prOposals is that they include almost all costs. By comparison, the costs of alternatives to using a service bureau, including the existing system, often exclude certain less obvious costs. For example, the costs of personnel, supplies, maintenance, Space, repairs, air conditioning units, electricity, heat, insurance, taxes, etc., should be added to an equipment manufacturer's equipment rental charges in order that that alternative is comparable to the use of a service bureau.l6 However, certain costs should also be added to a service bureau's prOposal. On the objective side, the cost Of messenger services or of a communications link to the service bureau must be considered. Similar treatment should be accorded l . 6”Should You Use a Data Center?," The Systemation Letter; No. 171, 1965, p. 2. 147 subjective costs such as the late delivery of information or the potential loss of documents, at least to the extent that such costs exceed the similar costs of other alternatives. Additional Considerations Concurrent with the selection of a service bureau, the CPA Should examine several related considerations. Among these are the types of contracts and methods of charging, processing con— trols, protection of Clients' records, and provisions for a periodic systems review. Types of contracts and methods of charging. There are three common types of contracts provided by service bureaus. These are fixed price, time and materials, and cost—plus—fixed—fee or percentage.17 An important factor to remember is that because there are incompetent organizations in the service bureau in— dustry as in other industries, all contracts should provide a means for cancellation or withdrawal if the client is not satis— fied. A good service bureau will be willing to do this. The estimation of some service costs is an industry—wide problem. This fact should influence which type of contract the client selects for a given application. Costs associated with using a package program are usually easily estimated while the costs of develOping a custom-designed program or even a complete system are difficult to determine. For package l7Smith, op.cit., p. 24. FIIII:—_________________________________________________________________________________I‘==::Ti g 148 applications, running time is easily estimated and program K development costs are known. A standard rate charged seeks to recover the costs of development and processing and an increment of profit. In terms of custom—designed applications, program— mers cannot be judged by efficiency standards used for the pro— duction line. In addition to the uncertainty shrouding its preparation, there is the difficult task of estimating a non- existent program's processing time. The problem becomes more complex if the service bureau is undercapitalized because it cannot accept losses on many jobs. Consequently, the tendency may be to underplay the complexity of a problem hoping that once the contract is signed, the neces— sary funds will come forth to complete the job.18 One way that the CPA can protect the client is to ascertain that the problem definition contains few, if any, areas subject to more than one interpretation. In addition, the CPA should meet the people who will design the application and determine their standard job titles and salary rates.19 This knowledge serves as a future check against the adverse effects of personnel turnover. Above all, the CPA should require parallel documentation for Clients' programs in the developmental stage to protect against such effects. In addition, the contract should unequivocably 18Robert L. Patrick, "Contracting for Computer Services," Datamation (February, 1962), p. 21. 19Ibid., p. 22. 149 state the ownership of the program, specification sheets, card layouts, flow charts, and other underlying documentation. In general, fixed price contracts are best suited for the relatively easy jobs which use package programs. For custom- designed applications, one of the other two contract types is usually superior. For example, if by chance one or both parties fail to recognize a real problem area, the quality of the project may suffer. Consequently, a time and materials or cost-plus— fixed—fee contract is best and it should cover such aspects, among others, as partial payments, acceptance, and final com- pletion. The contract should also provide for necessary modi- fications to the original work, if desirable, at some point in the future. In terms of rate structure, some service bureaus' charges include that for central processor and off—line equipment usage, the latter at no extra cost up to some reasonable amount. In other cases, there is a separate charge for both. The charge for supplies may also vary. Programming time is, of course, always extra as may be the cost of an extensive systems pro— Posal. Furthermore, there are often premium charges for pri- ority, convenience, and first shift processing.20 In terms of the range of charges, The Service Bureau Cor- poration reports that some customers pay as little as $15 per 20 Ibid. 150 month while others are charged as much as $20,000 per month.21 Coleman and Cohn cite a number of cases where clients receive some combination of SOphisticated management reports and clerical processing for charges of between $165 to $375 per month.22 MAP 18 describes the following billing rates which apply to write-up type applications as of 1963:23 1. Set up charges ranging from $5 to $25. 2. Fixed charges for each report period (varies according to the amount of machine time, labor and overhead). 3. Charges for each descriptive item requiring words to be printed on financial statements, including captions and account titles. 4. Charges for each balance carried forward in an account from the close of the previous period including balances of zero. 5. Charges varying from 1% to 7 cents per transaction during the current period. 6. Miscellaneous charges for correcting errors, making changes in the chart of accounts, providing extra c0pies of ledgers and statements, filing cards for subsequent reruns and supplemental statements, etc. One possible way to reduce rates is to have the client pre- pare the data into machine—sensible form, preferably as a by— product of the recorded event. While the service bureau's pro— cessing costs have declined with technological progress, the cost of key—punching has not. 21Letter from James C. Reilly, The Service Bureau Corpo— ration, New York, March 15, 1966. 22Coleman and Cohn, loc.cit. 23Management of an Accounting Practice: MAP 18 (New York: American Institute of Certified Public Accountants, 1963), pp. 15—16. 151 Processing controls.24 The CPA should be familiar with the error detection and control devices designed into a computer's circuitry and into the programs employed. This is an important audit consideration when rendering services to clients with their own computer installation. However, when a client's re— ports and records are completely or partially processed off— premise, additional steps are necessary to protect the auditor and the client. Where the computer is located at a service bu- reau, control over certain aspects of the processing are diffi— cult. Examples of these are: l. deviations by Operators from the standard instructions 2. inclusion of extraneous input data, 3. conditions not provided for in the instructions, 4. errors in input data cards or tapes where prepared by the bureau, and 5. print out errors.25 In addition, records sent to the service bureau or the client's files maintained by the service bureau in the form of magnetic tapes, discs, or punched cards can be lost, misplaced, or altered. It is the client's reSponsibility to ascertain that prior to initial processing, the files maintained by the service bu- reau are printed out and compared to the original records. The 24This section draws heavily from Electronic Data Processing: V - The Use of Computer Service Bureaux (London: The Association Of Certified and Corporate Accountants, 1964), pp. 14—17. 25Ibid., p. 14. 152 service bureau then should be responsible for maintaining strict control of these files. The nature of the control must be out— lined to the CPA. At the start of an application, there Should always be a period of parallel operation long enough to assure that the new system is operating properly. In conjunction with the processing, the service bureau must supply the CPA a detailed narrative de— scription or flow-chart of the client's application as it moves through the service bureau. The flow chart or description Should show the various control points in the service bureau's proces— sing system. This includes action from the receipt of the client's data to the receipt of the finished job by the client. Considered therein would be the procedures and controls employed in preparing a job for processing to include key—punching and machine room preparation, processing either by the computer or peripheral equipment, and preparing the job in the form desired by the client. Each step of the way must evidence a standard- ized, orderly work flow with written procedures in force for ordinary as well as exception routines. Such a document should be a part of the client's permanent file maintained by the CPA. Any changes must have some pre-planned method of being reported to the CPA. In addition to being concerned with the programs used for Processing his clients, the controls designed into these programs 153 and the processing routine, CPA must be concerned with the physi- cal safeguarding of these programs. Programs are a part of the system and as such must be examined and safeguarded regardless of the fact that the computer is not on the client's premises. In fact, this is all the more reason why the programs, the con— trols designed into them, and the physical control exercised over them should be examined. Standard procedures for writing programs should also be evident, especially if a client is having custom programs prepared. ”These procedures should include standard methods of performing particular operations which would facilitate the reading of the programs for amendment and revi- sion purposes at a later date and also for insertion of stand- ard checks which may be considered, bearing in mind the design of the machine."26 Such documentation is essential but often nonexistent. Documentation permits a universal understanding of a programmer's work and allows another to complete the work if need be. Although the CPA should maintain a COpy of the programs used by his clients, service bureaus often hesitate to make package programs available to outsiders. In such instances, the CPA should recognize that package programs represent a large outlay by the service bureau. Such programs are Similar to Specialized fixed assets whose costs are partially recovered 26 Ibid., p. 15. 154 each time a sale is made. The service bureau must be convinced that the CPA will maintain the confidentiality of such programs. In the case of custom-designed programs, the ownership of the program usually is with the client. Changes to programs used by clients must be authorized by a designated person and the CPA should be given a copy of such changes. The checks designed into programs used by clients are im— portant to an auditor in his examination of a client's system. Ideally, a schedule of such checks and their location in the pro— gram should be compiled and made available to the CPA. Record counts, hash totals, proof figures, reverse multiplication, limit checks, cross-footing balance—checks, check points, self- checking numbers, sequence checks, and other such control mea- sures enable him to carry out his job more effectively. While warnings are often stated about the processing and programming time wasted by an auditor's overcontrol, the internal speeds of second and third generation computers are such as to lessen appreciably the importance of these warnings. Finally, all pertinent matters relative to processing controls Should be clearly specified in the contract. Protection of client records. The protection of client records has several aspects, among these are the protection from theft and destruction, the maintenance of their confi— dentiality, and the assurance of their accuracy. Physical 155 protection from theft Should be evidenced in the internal pro— cedures of the service bureau. For example, entrance into the record storage and processing areas should be restricted. Pro— grams should be maintained and controlled in a library. Records should receive a similar measure of control. Documents arriving for processing and which will be returned to a customer should be logged in and controlled throughout their stay in the service bureau. I Fire resistant cabinets and safes should be available for Clients' records and a system for designating the degree of im— portance of records Should be in force. Such a system would aid in determining the types of safe—keeping devices to use. For vital records which would be all but impossible to reproduce, duplicate c0pies could be maintained at another location. For other records, reproducable but at considerable cost or incon— venience, cabinets which are tested at 20000 F. for four hours with their inside temperature not exceeding 3500 F. are avail— able.27 Fire is an even greater hazard because magnetic tape, an increasingly popular method of storing records, is combusti— ble at 1500 F. Here, too, the CPA must ascertain the degree Of protection his client is afforded. The confidentiality of data depends greatly on the type 27J. A. Cross, "Protecting Client Records,“ Proceedings of the May 23—24 Management Sypposium (Abington, Pennsylvania: Association of Data Processing Service Organizations, 1964), p. 48. of personnel the service bureau employs. A reputation for vio— lating confidentiality makes itself known. The service bureau can protect itself and the client through fidelity bonds to a certain extent. However, a better method is for the client's documents to arrive at the service bureau in machine—sensible form, preferably identified only by a customer number. Of course, the key to customer numbers must be controlled. Where required for utmost security, the client or the CPA can monitor the processing of data and its complete movement through the service bureau.28 A further aid would be the speedy, controlled return of processed data to the customer. The longer finished reports remain at the service bureau, the probability of some— thing undesirable happening to them increases. Finally, the means of moving data between the customer and service bureau should be subject to adequate control. Again, such controls should be specified in the contract. The processing controls discussed earlier are an effective means of assuring accuracy. Inaccuracies due to machine failure Or personnel error must be guarded against. A knowledge of the internal machine checks and their coordination with program checks aids in attaining a high degree of accuracy. Personnel training is important in this respect as are good supervision, 28 Joseph W. Fischbach, "Service Center Data Processing for the Business Community,” California Management Review (Fall, 1961). p. 40. _*J 157 adherence to standardized procedures, and operable error detec— tion and correction routines. It has been suggested that larger service bureaus employ a trained internal auditor for overall protection of records and for processing control.29 Assigned to the quality control de— partment or to the administrative department, he can be an effective aid in improving the service bureau's system of in— ternal control. The internal auditor can also inject the cus- tomers' points of view into a service bureau‘s operations.3O Are job costs in line with their benefits? Is there a better and less expensive way to achieve the same benefits? Are the CPA'S control requests unrealistic or are there better ways to solve his requirements? These and many other related questions can be solved with advantages to all concerned. Smaller ser- vice bureaus can obtain similar benefits by engaging, on an intermittent basis, the services of CPA firms active in data processing. Clients' reSponsibilities. Clients owe the service bureaus they employ certain responsibilities, some of which have been mentioned. When unreproducible documents are sent to the ser— Vice bureau, duplicates should be retained to guard against the loss or destruction of originals. The problem definition 29 H. John Shuster, op.cit., p. 14. 3OIbid. 158 has been stressed, yet this is a responsibility that the majority of service bureau customers neglect. The period of parallel pro- cessing has also been mentioned. Here again, some customers may be so anxious to switch over to their new systems that they neg— lect this important precaution. Computer programs provide bur- dens in addition to those created by a new system. All possible exceptions are difficult to foresee and thus are not included in a problem definition. These inevitably arise during the transi— tion period. "Debugging" such a system is a must as anyone familiar with electronics will attest. In computer terminology there is the phrase, "garbage in —- garbage out,” which is descriptive of the data some clients send to service bureaus. Clients must establish controls even if it is only by such a simple technique as an adding machine tape of a group of documents' balances. In addition, clients must deliver their data in readable or processable form, accurately prepared, and at the time designated in their contracts with service bureaus. Provisions for review. Periodically, the CPA should assist his clients by reviewing their existing systems. At these times, improvements to the systems can be considered. In addition, it is an excellent time for reviewing the service bureaus' per— formance, the desirability of the reports generated, and other related matters. The following kinds of questions should be 159 raised for each client's application: 1. Is the service bureau meeting the client's deadlines? 2. How effective has the service bureau's error control proved? 3. Are extra charges being billed which were not in the original contract. 4. Is the client satisfied with the new reports and procedures? 5. Could the contract be renewed at a lower fee now that the job has been "debugged?" 6. Should service bureau usage be expanded? An Example of a Service Buregp Rating Schedule A formal service bureau rating schedule, prepared by the Research Institute of America, is included as a selection guide (see Figure IV—l). Of special interest in this particular rating schedule are the relative weights placed on various factors.31 The importance of a service bureau's prOposal is paramount. Cost is second in relative importance, signifying that service considerations Should take precedence over cost. The service bureau's experience and certain communication considerations are next in importance. However, the relative importance assigned to control considerations may surprise an auditor. As emphasized earlier, schedules or check lists are only guides and are certainly not substitutes for judgment. 31“How to Choose and Use an Outside Service Bureau," Management Report File 32, op.cit., p. 8. 160 How to Rate a Data Processing Center Below are nine factors to consider in selecting an EDP center. To decide which one of two or more firms is best for your needs, simply mark the appropriate box next to each factor. Then add the numbers next to the boxes you’ve checked and compare the totals. (The numbers give greater weight to the more important features, such as cost.) Other things being equal, high score wins. FACILITY A FACILITY B FACTORS OK So-So Weak OK So-So Weak 1. Nature of the proposal-how well it 12 1:] 6 E] 0 [1 12 E] 6 E] 0 [j suits your needs; improves over present methods. 2. Cost—hourly rate, over-all charge, or 10 D 5 D 0 [j 10 [j 5 [j 0 E] per transaction. 3. Reputation or recommendation. 6 El 3 D 0 Cl 8 Cl 3 Cl 0 El 4. The sales representative—(Does he know 4 [j 2 1:] 0 D 4 E] 2 D 0 C] his business? Is he clear on costs, serv- ices, etc?) 5- Experience of other users. 6 Cl 3 D 0 Cl 6 Cl 3 D 0 El 3. Past experience in your industry or with 8 [j 4 E] 0 Cl 3 Cl 4 El 0 D your problem. 7- Appearance of physical facilities —or- 6 [:l 3 El 0 Cl 6 Cl 3 Cl 0 Cl derly, clean, etc., geared to do a job. 3- Geographic proximity, convenience of 8 E] 4 Cl 0 U 3 D 4 Cl 0 Cl working with firm. 9. Security and control, degree of responsi— 6 [I 3 Cl 0 Cl 6 Cl 3 El 0 D bility for protecting your records, etc. Total ........................ Total ....................... FIGURE IV—l Reprinted by permission of the Research Institute of America, Management Report, "How to Choose and Use an Out- side EDP Center,“ Copyright 1963 by the Research Institute of America. ' 161 Advantages and Disadvpptages of Service Bureau Employpent There are a number of possible advantages and disadvantages inherent in the employment of a service bureau which may affect both the client and the CPA. Most of these have been mentioned. A few of each are noted in this section. Advantages of Service Bureau Employment The potential of service bureaus can be realized to varying degrees by clients. In addition to decision—making and control applications which can assist a client in locating a new plant, evaluating bids, forecasting sales, and selecting economical transportation routes, the following day—to—day advantages are reported: 1. Generally faster and more reliable reports. Elimination of turnover and absentee problems along with the elimination of supervision, training and overtime costs, particularly among clerical personnel. 2. 3. Peak workloads during report—preparing time can be assumed by the Service Center. Use of the Service Center as a training ground by firms considering a computer installation. Closer control over processing costs because the Service Center charges vary directly with usage. Transfer of the risks of equipment obsolescence to the Service Center. Availability of the Service Center as a stand-by for the firm's own computer installation.32 32Konstans, Op.cit., p. 23. 162 The biggest advantage is the availability of trained Specialists. This advantage serves as the basis for any other positive claims the service bureau can make. The availability of trained specialists assures maximum machine utilization while "most private installations are getting a 40% to 60% week rather than the conventional 40 hours because of imprOper utili— zation of equipment. A good center gets two hours more than there are in a week.”33 For the CPA, the following advantages have been noted: 1. The use of service agencies can relieve the staff of a CPA firm of many time—consuming calculations. The use of an agency may enable the CPA's staff to present detailed information breakdowns of a Client's data which are often far too laborious and costly to perform in the usual manner. 2. With the exception of possibly acquiring one small piece of equipment, there is usually little invest- ment required other than the time it takes to learn the necessary Operations. If the service is found to be uneconomical, equipment rentals can be terminated and the previous client— handling procedures can be resumed. (Agencies fre— quently recommend that the original method of handling a client should be maintained in parallel with the EDP system for a short time until initial skepticism and misunderstanding are overcome.) 5. AS a rule, service agencies provide a CPA with an EDP capability at a relatively low cost as compared with what he might pay to develop the same capability him- self. 33Leonard J. Palmer, ”A Seller's Market for Data Processing Services," Proceedings of the January 21, 1963 Management Sym— posium (Abington, Pennsylvania: Association Of Data Processing Service Organizations, 1963), p. 8. 163 6. They allow the CPA to become acquainted with data processing with a minimum commitment on his part. There is also no need for the CPA to invest in expensive equipment, to acquire and train personnel or to wait a long time before obtaining benefits. Serving a CPA's client through an agency can lead to an expansion of the services provided by the CPA to his clients.34 Disadvantages of Service Bureau Employment During the January, 1963,ADAPSO management symposium, the results were presented of a state CPA society's survey evaluating . . . 35 . . . member experiences Wlth serv1ce bureaus. It is interesting to note that half of the experiences were unfavorable. The important reasons given were: 1. Lack of timeliness. 2. Misunderstanding among service bureau, client, and accountant. 3. Inflexibility inherent in data processing Operations. 4. Insufficient knowledge of CPA and client regarding the technicalities in handling work. Lack of planning, particularly where client deals directly with the Service Center.36 An interview with a partner of a small CPA firm that had installed its own data processing equipment revealed another 34ComputerVR-gsearch Study NO. 3: Computer Applications to Accounting Operations (New York: The American Institute of Certified Public ACCOuntants, 1966), pp. 13—14. 35Stanley Davis, ”A Client Looks at a Service Bureau,” Proceedings of the January 21. 1963, Management Symposium (Abing— ton, Pennsylvania: Association of Data Processing Service Or— ganizations, 1963), pp. 12—16. 36Ibid. , p. 13. 164 disadvantage. The firm would not have set up its own installa— tion had its experience with service bureaus been satisfactory. The major criticism centered around the general lack of account— ing orientation of service bureaus. This was particularly evi— 'dent in audit trails which were generally inadequate for year— end work. In addition, the controls designed into the proces— sing system could not be relied upon from an auditor's point of View. Another important disadvantage which must be noted is that the shortage of trained personnel, while directly affecting the service bureau industry, plays havoc with clients. There appears to be no immediate solution except that the CPA must train him— self to a level where he can differentiate between quality work and rubbish. In a recent survey by the AICPA, some additional dis— advantages peculiar to the CPA were noted. Among these are the following: 1. Use of a service agency introduces a third party into the CPA's dealings with his client. This may have the following disadvantages: (a) In some cases clients of the CPA submit or receive data directly through the agency. This may run counter to what the accountant feels is a desirable relationship to maintain with his client. (b) Records are usually maintained by the service agency which represent a cumulative history of a client's data. These are used to prepare comparative financial statements, to perform :. i 165 tax analyses, or any of several other management services. Unless duplicate records are maintained by the CPA, he must rely on the agency for prOper maintenance and protection of this valuable data. (c) The fact that a client's data is in the hands of a third party may be considered a violation of the CPA's code of ethics. (d) Unless checks are made on the completeness and accuracy of the outputs produced by the agencies, the CPA may not have the personal assurance he gets when the work is done in his own office by his staff. 2. Computers do make mistakes, and when they do, it may be difficult to detect and correct them unless adequate checks and procedures are established to COpe with them. For this reason, the CPA must perform his own checks on the data he submits and gets back from an agency. Furthermore, he should scrutinize, understand, and evaluate the internal checks of the agency, Since much of their "automated” processing involves manual data preparation not unlike that of a CPA's own opera— tions. 3. An additional cost is incurred by the CPA in order to deal with a service agency. In the case of relatively simple preprogrammed functions, the agency charges can be accurately estimated. However, for custom—designed programs, the cost of development and operation of a special computer application may be underestimated at the start and increase unexpectedly. Programmers very often underestimate the time it takes to write and test a program. 4. Another factor in relation to cost is that the price an agency places on the development of the exact pro— gram Specified by the CPA may be uneconomical. The CPA then has to choose between a different (perhaps noncomputerized) solution to the problem or to com— promise some of the requirements in order to simplify (and thus reduce the cost) of the desired computer program.37 37Computer Research Study No. 3: Copputer Applicgtions to Accounting Operations (New York: The American Institute of Certified Public Accountants, 1966), pp. 14-15. 166 Summary In this chapter, the relationship of the CPA, his clients, and service bureaus was examined in depth. It is submitted that the CPA can, through an active role in providing his clients with more and better information, firmly establish himself as his Clients' information specialist. The employment of service bureaus, at the suggestion of the CPA, is an example of one way in which such a position can be attained and maintained. Several categories of service bureau employment were con— sidered as well as certain related considerations. Then, the service bureau selection process, beginning with the all important problem definition, was described and was found to require a great measure of competence on the part of the CPA. In addi— tion, a number of important matters, several of which had con— trol implications, were examined. Finally, summary lists of advantages and disadvantages inherent in service bureau employ— ment were presented. CHAPTER V THE EFFECTS OF DATA PROCESSING SERVICE BUREAUS ON THE PRACTICE OF PUBLIC ACCOUNTING IN MICHIGAN Introduction The potential benefits from service bureau relationships for CPAS were examined in the preceding chapter. Based pri— marily upon a review of the literature and intervieWS with CPAs and service bureaus working together successfully, Chapter IV may represent a biased vieWpoint. Successful service bureau applications create enthusiasm and inspire articles; average or poor experiences elicit relatively little interest and publicity. For that reason, surveys based on mailed questionnaires were undertaken to evaluate the extent of service bureau usage and the service bureau relationships of a sample of Michigan CPA firms. In effect, the following hypotheses were being tested: 1. Differences exist between CPA firms involved and those not involved with service bureaus. 2. Differencesexist between categories of CPA firms involved in various ways with service bureaus. The differences may be in staff composition, client character— istics, attitudes, services rendered, and other such factors. In this chapter, the population sampled, the evaluation 167 IIIIIIIIII:—_________________________________________________________________________::::Q 168 of the responses to each survey, and the conclusions draWn from the questionnaires are examined. The Population Sampled The study consists of two surveys based upon the responses to three separate questionnaires.. The major group surveyed was the member firms of the Michigan Association of Certified Public Accountants (MACPA). As of February, 1966, the MACPA membership lists of resident managing partners and sole practitioners numbered 564, representing approximately 87 percent Of all CPA 4 firms practicing in Michigan.1 The other groups surveyed jointly were 64 service bureaus and 50 commercial banks located in Michi- gan. The service bureaus surveyed were selected from the 1965 telephone directory Yellow Pages of all Michigan cities with more than 10,000 inhabitants during the 1960 census. The 50 largest Michigan banks, in terms of financial resources, were selected from the February, 1966, Michigan Manufacturer and Financial Record.2 CPA Post Card Questionnaire A two—part post card was sent to all member firms of the MACPA in February of 1966 (see Appendix A). Preprinted on the 1Interview with William Ludwig, Executive Director of the Michigan Association of Certified Public Accountants, February 16, 1966. 2Based upon the estimates of computer manufacturers' local representatives, the vast majority of computerized Michigan banks fall well within the resource limit established by the fiftieth largest bank. 169 return portion of each post card were four descriptive cate— gories and the name and address of a firm's resident managing partner or that of a sole practitioner. The purpose of this post card questionnaire was to deter— mine the nature of each firm's relationship with service bureaus and hence the extent of service bureau usage by Michigan.CPAs. By checking one or a combination of the four descriptive categories, 448 respondents, approximately 80 percent of the MACPA'S member firms, identified themselves and provided the solicited infor— mation. The results of the post card questionnaire appear in Table V—l.3 TABLE V-l SERVICE BUREAU RELATIONSHIPS OF A SAMPLE OF MICHIGAN CPA FIRMS ‘RespondingfiFirmS Category Number Percent I — Firms not involved with service bureaus 252 56.2% II — Firms with clients directly using service bureaus 120 26.8 III ~ Firms using outside service bureaus to service clients 38 8.5 IV — Firms in both categories II and III 27 6.0 V - Firms with their own service bureaus 11 2.5 Total 48 100.0% 3A second mailing was necessary to increase the response from 60 percent of the population to the 80 percent attained. — '. 170 Several noteworthy considerations appear in Table V-l. Foremost is the large number and proportion of CPA firms without any type of service bureau relationship. Even though the sta— tistics may obscure factors influencing service bureau usage, the number and proportion of non—users seem too great for the computer age. Implications such as the following may be valid: 1. CPA firms generally do not adequately understand automation nor prOperly weigh its value as opposed to its cost. 2. Clients of many CPAS are at a competitive disadvan— tagelnrbeing denied benefits obtainable from service bureaus. 3. Professional associations face a tremendous task dedicated to upgrading their members' understanding of automation. A second consideration relates to the number of CPA firms using service bureaus to serve clients as Opposed to the number of CPA firms with clients directly using service bureaus. I There are three times as many in the latter category as in the former. However, it seems this relationship should be reversed. It appears that small—sized businesses without accounting staffs or with very small ones comprise the largest proportion of the total number of businesses. Further, it is reasonable to as— sume that many of these businesses Obtain bookkeeping assistance from CPA firms and that the majority of CPA firms service clients of this type. Consequently, if CPA firms providing such services do in fact recognize the benefits of automation, it is expected that a greater number of them would use Service —: :i 171 j bureaus to process the bookkeeping services they render. There- fore, it may be that: 1. CPA firms are performing a disproportionate amount of routine manual work. 2. The publicity devoted to the success of some CPA firms in automating write—up work has had limited effect upon the profession as a whole. A third consideration is that eleven of the responding firms use their own service bureau or one in which their firm has a financial interest. (Three additional CPA firms reported they 21L... ' will acquire computers during 1966.) These firms stand in '35:; sharp contrast to the firms described earlier. Although the ethical implications of service bureau ownership by a CPA firm are substantially unresolved, equipment ownership mpy represent a positive approach to rendering clients improved services and to providing staff training in electronic data processing. It is restated that any inferences drawn are subject to qualifications because numerous underlying factors not ex- plicitly identified undoubtedly affect Table V—l. In general, it appears that wide divergence exists in the practices employed by Michigan CPA firms to meet the challenges posed by infor— mation technology and that a disprOportionate number may be relatively uninformed of the benefits from automation. CPA Detailed Multi—Part Questionnaire A detailed multi—part questionnaire mailed in April of 1966 172 served as the second phase of the CPA survey (see Appendix B). The 448 respondents to the post card questionnaire were sent the part or parts of the detailed questionnaire appropriate to their reported service bureau relationships. Firms which indi— cated that they operate their own service bureaus were considered a separate category regardless of any other service bureau rela- tionships. A total of 123 firms reSponded, representing 27.5 percent of the post card questionnaire respondents or 21.8 per— cent of the MACPA'S member firms (see Table V—2).4 The follow— ing analyses of the responses to the detailed multi—part ques— tionnaire test the hypotheses previously stated. TABLE V—2 RESPONSE DISTRIBUTION TO THE SECOND PHASE OF THE CPA SURVEY Category Responding Firms Number Percent I — Firms not involved with service bureaus 62 50.4% II — Firms with clients directly using service bureaus 27 22.0 III — Firms using outside service bureaus to service clients 10 8.1 IV - Firms in both Categories II and III 16 13.0 V — Firms with their own service bureaus 8 6.5 Total 123 100.0% 4PeCuniary considerations dictated that follow—up letters would be sent to certain categories of involved firms only. Their initial response was low relative to their prOportion of the population. This action partially accounts for the compara— tively skewed response distribution of the second phase of the survey as Opposed to the response distribution of the first phase. .1" z 2 :57:an r, x. . 173 Differppces Between CPA Firms Involved and Those Not Involved with Service Bureaus The hypothesis that differences exist between CPA firms in— volved and those not involved with service bureaus appears valid. The differences are examined below. Where necessary, statistical measures supporting the hypothesis are employed (see Appendix D). It must be stressed that the differences are between groups of firms, classified either as being involved in various ways with service bureaus or as not being involved in any way. Conse- quently, significant individual differences may be obscured in group data. Office classification. Insofar as office classification is concerned, significant differences appear not to exist between firms involved and those not involved with service bureaus. The proportion of involved and non—involved firms in each office classification, is similar (see Table V—3). Therefore, office classification (one-office or multi—office) and service bureau usage appear unrelated. TABLE V-3 OFFICE CLASSIFICATION OF RESPONDING CPA FIRMS Office Classification One Service Bureau Home Office Number Relationship Office Branch Firm Responding Involved 10 9 42 61 Non—involved _2 _§_ 31 61 Total ;2 lg §2 122 ll FIIII[::::————————————————————————————————————————————————————————————tttttttt —__:.§ 174 City size. The distribution of the involved firms over classes representing the size of the nearest large city does not differ significantly from the corresponding distribution of the non—involved firms.5 The following inference, reflected in Table V-4, is statistically sound: proximity to cities large enough to support service bureaus is not a factor exerting strong 6 It should influence over a CPA firm's relationship with them. be noted, however, that substantial distances from cities large enough to support service bureaus may adversely affect a CPA— service bureau relationship. In fact, ten percent of the non- involved firms are located in or near cities with fewer than hr.“ 1:. 1;.Emrlm , . 10,000 inhabitants; but, distance apparently has not dissuaded several of the respondents from using service bureaus located hundreds of miles away. Many service bureaus specializing in accountants' packages customarily deal with geographically distant customers. Of the 122 respondents to a question asking if the firm knew of a service bureau located within 20 miles, 25 firms indi— cated that they either did not know of one or that they were uncertain. Twenty of the 25 are non—involved firms, represent— ing over 32 percent of all non—involved firms. Of the 20, one— 5The following question was asked: "Please indicate the size of the largest City within 20 miles of your office or the size of the city in which your office is located, whichever is larger." 6See Appendix D for explanation of statistical measures used. 175 half are located in or within 20 miles from cities with over 120,000 inhabitants, cities which have service bureaus. Nine of the 10 firms are located in or near cities with over 200,000 in— habitants. TABLE V—4 RESPONDENT'S CITY SIZE OR SIZE OF LARGEST CITY WITHIN TWENTY MILES Service Number of Inhabitants in Thousands Bureau Under 10— 20— 40— 80- 120— Over Number Relationship 10 20 40 80 120 200 200 Responding -’:¢l§§g%,s .fif . ‘ Involved O 2 1 6 7 4 41 61 Non—involved _§ _1 _g ._§ _§ _2 42 62 Total _§ .1 _3. .2 19 _§ .89. 123 . Measures of size. Generally, the involved firms are larger than the non—involved firms by such measures as clients served, gross annual billings, and professional staff size.7 In 1965, approximately 60 percent of the involved firms served more than 100 clients while over 80 percent of the non—involved firms served less than 100 clients (see Table V—5). Similarly, almost 80 percent of the involved firms earned more than $50,000 while nearly two—thirds of the non-involved firms earned less than 7For clients served, D = .462; for gross annual billings, D = .476; for staff Size, D = .636; hence, all imply that the distribution for the non—involved firms is stochastically larger. See Appendix D. 176 $50,000 (see Table V-6). Table V—7 contains certain measures of central tendency indicating that significant differences exist in professional staff size between the two categories of firms. Although significant size differences exist between the two categories of firms, it should not be inferred that a service bureau relationship is a characteristic peculiar to larger firms only. In two measures of Size employed, involved firms are found in classes representing the smallest of firms (see Tables V—5 and V—6). In the third measure, the distribution formed by the involved firms is very positively skewed, reflecting the strong influence of several very large firms (see Table V—7). Consequently, smaller firm size and service bureau involvement are not mutually exclusive. TABLE V—5 DISTRIBUTION OF RESPONDENTS BY THE NUMBER OF CLIENTS SERVED IN 1965 Service Clients Served Number Bureau Under 10— 31— 51- 101— 151— 201— 251- Over Respond— Relationship 10 30 50 100 150 200 250 300 300 ing Involved 1 4 8 10 14 6 5 0 13 61 Non—involved _§ lg lg l; _§_ _g ._l _9 _Q 62 Total :1. _2.2_ .22 22 29 _9_ _§ _9 .12 123 H 177 TABLE V-6 DISTRIBUTION OF RESPONDENTS BY 1965 BILLINGS Billings in Thousands Service Less Bureau than $12— $25- $50— $100— Over Number Rplationship $12 $25 $50 $100 $250 $250 Responding Involved l 4 7 16 15 18 61 Non-involved _2 12 lg pp _3 _Q 62 Total n 2_3_ 21 12. l? l§ 1.23 TABLE V—7 CENTRAL TENDENCY MEASURES OF PROFESSIONAL STAFF SIZE Measure Involved Non—Involved Firms Firms Mean 17.1 2.4 Medium 6 2 Mode 4 1 Number responding 60 61 Professional staff characteristics. Some significant differences in staff characteristics exist between the two cate— gories of firms studied. Expressed as a percent of firms in a category, involved firms have staffs of higher quality in terms of the following characteristics than have the non—involved firms (see Table V—8): 178 1. staff members spending half-time or more in manage— ment services8 2. staff members receiving 80 hours or more of formal electronic data processing (EDP) training 3. staff members gaining systems and procedures experience In addition, a larger prOportion of involved firms than those non—involved had college graduates on their staffs. This edu— cational factor may well influence the characteristics enumer- ated above which are related to management services capabilities. Education, combined with experience, assists a CPA in attaining competence in the management services area. TABLE V—8 PERCENTAGE OF FIRMS IN EACH CATEGORY EXHIBITING SELECTED STAFF CHARACTERISTICS Staff characteristics Serv1celBureau Relationship iInvolved Non—Involved, With college degrees 85.0% 71.8% Half—time or more in management Services 21.7 4.9 Eighty hours or more of formal EDP training 20.0 3.3 Systems and procedures experience 65-0 36.1 Number reSponding 6O 61 8 . . . . See Appendix B for the definition of management services employed in the study. 9See Appendix B for the definition of systems and proce— dures employed in the study. 179 gligpt characteristics. Involved firms appear to render a different type of service than do the non—involved firms. Al- though the proportion of non—opinion audit clients appears ap— proximately equal between the two categories of firms, involved firms have a larger prOportion of clients preparing their own financial statements and a smaller prOportion of write—up clients than have the non—involved firms (see Table V—9). In fact, 50 percent or more of the clients served by one—half of the non— involved firms represent bookkeeping engagements. The measures in Table V-9 relating to non—opinion audit clients indicate that a rather substantial area of commonality exists between the practices of involved and non—involved firms. Almost 43 percent of the respondents, 24 involved and 28 non— involved firms, report non—Opinion audit clients compose 45 percent or more of total clients served. However, of the non— involved firms in this group, One—third report they are not familiar with the capabilities and limitations of service bu— reaus. Therefore, it appears that non-involved firms whose practices resemble those of a large portion of involved firms cannot argue that their lack of a service bureau relationship stems from differences in the types of clients served between the two categories of firms. A more convincing argument re— lates to an apparent lack of knowledge concerning service bureaus. 180 TABLE V-9 CENTRAL TENDENCY MEASURES OF CERTAIN CLIENT CHARACTERISTICS EXPRESSED AS A PERCENTAGE OF TOTAL CLIENTS Service Bureau Relationship Characteristics Involved Non—Involved Mean Median Mode Mean Median Mode CPA performs write—up 25% 10% 10% 47% 50% 20% Client performs book— keeping and CPA pre— pares statements 37% 25% 10% 39% 33% 50% Client prepares statements 38% 20% 0 14% 0 0 Total 100% 100% Number responding 60 61 Management services activity. Management services activity is greater for the involved firms than for those non—involved.lo More than one-half of the involved firms report management ser— vices billings constituted over 11 percent or more of 1965 gross billings; and, more than one—third of these indicate management services billings exceeded 20 percent of gross billings (see Table V—10). In contrast, almost 20 percent of the non—involved firms did not receive revenues from management services engage— ments in 1965 and an added 45 percent note that management ser— vices billings accounted for less than 5 percent of gross bill— ings. 10D = .438 which implies that the distribution for the non— involved firms is stochastically larger. See Appendix D. 181 TABLE V—lO BILLINGS FROM MANAGEMENT SERVICES ENGAGEMENTS AS A PERCENTAGE OF 1965 GROSS BILLINGS Service Percentage of Gross Billings Bureau Under 6— ll— 16— 21- 26— Over Number Relationship ane 5% 10% 15% 20% 25% 30% 30% Responding Involved 1 12 15 10 14 6 l 1 6O Non—involved 12 38 ll_ _4 _l _2 _l_ _2 61 Total 1; 9.2 lé .ll 1: _§ _2 .2 121 ll Although statistically unsupported, it appears that manage- ment services engagements are becoming increasingly more impor— tant to involved firms than to their non—involved counterparts. Considering involved firms only, Table V—ll indicates that a larger prOportion of these firms reports a relatively faster rate of increase in management services billings as compared to billings from all other services combined while a smaller pro- portion reports a comparatively slower rate of increase. This relationship is reversed for the non-involved firms. Involved firms appear to receive more client requests for services related to EDP, such as computer feasibility studies and equipment selection, than do non—involved firms (see Table V—12).ll Furthermore, these firms tend to service such 11D _ — .487 which implies that the distribution for the non— involved firms is stochastically larger. See Appendix D. i. 182 TABLE V—11 RATE OF CHANGE DURING RECENT YEARS OF MANAGEMENT SERVICES BILLINGS RELATIVE TO CHANGES IN BILLINGS FROM ALL OTHER SERVICES COMBINED Service Bureau R tCompaiative Number 1 t' . a e o ncrease . Re a lonShlp Faster Slower Equal ReSponding Involved 21 4 33 58 Non—involved _§ 1; pg 50 Total gg 12 pg 108 TABLE V—12 NUMBER OF CLIENT REQUESTS FOR SERVICES RELATED TO ELECTRONIC DATA PROCESSING . t . Seryice Bureau Number QEIBEQE§§‘§7 Over Number Relationship None 1 2 3 4-15 15 Responding Involved 18 14 5 3 14 6 6O Non—involved fig _§ ._£ ._l _9 _9. _RA Total pp 22 _2 _£ 14 _§ 121 H H requests themselves as compared with the non—involved firms (see Table V—l3). Non—involved firms receiving EDP requests generally refer these to third parties. Effects of electronic data processing. Involved firms dis- Play a more positive opinion with respect to the future effects Of EDP, as compared to the effects to date, than do the non— involved firms. AS shown in Table V—l4, a numerically and ‘If‘t‘j‘t‘ 009'! 183 TABLE V—13 DISPOSITION OF CLIENT REQUESTS FOR SERVICES RELATED TO ELECTRONIC DATA PROCESSING (l) (2) (2) -‘: (1) Number Number Service Bureau Receiving Servicing Request Relationship EDP Request Themselves Involved 42 34 80.9% Non—involved l3 7 53.8% proportionately larger group of involved firms expect "much greater” relative future effects. Being involved to some extent with service bureaus, these firms may be in a better position to evaluate the future effects of EDP upon the profession than are the non—involved firms. Assuming that the non—involved firms 1 are not as knowledgeable in these matters as are those involved, an example of self—deception may be contained in these statistics. TABLE V—14 OPINIONS RELATING TO THE FUTURE EFFECT OF ELECTRONIC DATA PROCESSING UPON THE ACCOUNTING PROFESSION AS COMPARED TO THE EFFECTS TO DATE Service Opinions Bureau About Number Relation— Much the Much ReSpond— EPAP Greater Greatgp_ggmgpp Less Less None ing Involved 32 22 7 0 O O 61 Non-involved 12_ 2; l}_ _l. _l .3 ._8l 55 19 _l _l_ _g 122 Total 33 184 Sources of knowledge. Non—involved firms tend to acquire knowledge of service bureaus exclusively from secondary sources such as accounting literature and educational programs. Almost 88 percent of the non—involved firms did so as compared to less than 17 percent of the involved firms. This condition implies that secondary sources may be ineffective means of inspiring action compared to primary sources such as discussions with CPA users and service bureau representatives. Expected effects of service bureau usage upon billings. Non-involved firms appear more pessimistic and unsure of the ex— pected effects of service bureau usage upon gross billings.12 It is shown in Table V—15 that over 40 percent of the non—in— volved firms fall into these categories as opposed to only 15 percent of the involved firms. TABLE V-15 OPINIONS RELATED TO THE TENDENCY OF SERVICE BUREAU USAGE TO REDUCE GROSS BILLINGS Opinions Service Bureau Will Will not Number Relationship Reduce Uncertain Reduce Responding Involved 5 4 52 61 Non-involved _§ 11_ §1_ 62 Total 1; g; g; 123 12 A Chi—square test was employed using the data contained in Table V—lS. Chi—square = 10.31 with the probability of getting such a value less than .01. 185 Of the non—involved firms which believe that service bureau usage tends to reduce gross billings, 87.5 percent obtained their knowledge of such organizations from secondary sources only. Table V—16 illustrates this fact. This implies that secondary sources of information may foster relatively inaccurate impres— sions of service bureau costs and benefits as compared with pri— mary sources . TABLE V—16 EXCLUSIVE SOURCES OF SERVICE BUREAU KNOWLEDGE FOR NON—INVOLVED FIRMS, BY OPINION RELATING TO THE EFFECTS OF SERVICE BUREAU USAGE UPON BILLINGS Source of Oplhinnq Knowledge Will Will not , _ Not Number Rednop Reduce Sure Responding Primary 1 27 7 35 Secondary 7 7 8 22 No response _9_ _; _g_ _g Total is s1 _l.7_ _o_2 Differences Between Categories of CPA Firms Involved in Various Ways with Service Bureaus The second hypothesis states that differences exist between categories of firms involved in various ways with service bu— reaus. Because of factors related to the number and the distri— bution of responses, the survey data does not lend itself to a 186 statistical testing of the hypothesis° Although statistical tests were not used, the data is examined because it suggests the existence of some differences and it enables the development of a descriptive profile of various categories of firms. The dif- ferences suggested and profiles developed relate only to cate- gories composed of respondents to the detailed questionnaire. The following categories of firms, hereafter referred to by their category number, are examined: Category II — CPA firms with clients directly using service bureaus Category III — CPA firms using outside service bureaus to service clients Category IV — CPA firms in both Categories II and III Category V — CPA firms using their own equipment to service clients Office classification, It is suggested in Table V-l7 that for some categories, office classification and the category of service bureau usage may be related. For example, 80 percent of the firms in Category III are one—office organizations. This is a reasonable condition because CPA firms directly using service bureaus are often small one-office firms auto— mating their write—up and non-opinion audit engagements. In comparison, at least four of the eleven Category V firms are multi-office organizations. (Eight Category V firms responded to the detailed questionnaire while eleven did so for the post card questionnaire.) Hence the data reasonably suggests that 187. large size, implied by multi—office status, and equipment owner- ship are related. One fact is quite clear: if one—office status implies a relatively small-sized firm, small size does not pre— clude a service bureau relationship° TABLE V-l7 OFFICE CLASSIFICATION OF RESPONDING CPA FIRMS INVOLVED IN VARIOUS WAYS WITH SERVICE BUREAUS Office Classification Category Home One-office Number Office Branch Firm Responding II 3 5 19 27 III 2 O 8 10 IV 2 3 ll 16 V .3. __1 Ji 3 Total lg _2 £3 él City size, Being located in or near a large city may influ— ence the nature of a CPA firm's service bureau relationship. Category IV and V firms, who by definition seem more intensely involved with service bureaus, are found exclusively in cities with over 80,000 inhabitants (see Table V—l8). The former may employ more approaches to service bureau usage because of the availability of a number of service bureaus in larger cities. Category V firms may acquire equipment to service clients for some of the same reasons that service bureaus tend to concentrate in larger cities, i.e., the demand for such services is probably 188 greater in larger cities than in smaller ones. TABLE V-18 INVOLVED RESPONDENT'S CITY SIZE OR SIZE OF LARGEST CITY WITHIN TWENTY MILES Population in Thousands Category Under 40- 80— 120— Over Number 40 80 120 200 200 Responding II 3 2 l 2 19 27 III 0 4 l O 5 10 IV 0 O 2 2 12 16 V _9 J.) .2 .2 .2 _§ Total _; _§ .1 .l 3.1. _6_1_ Measures of size. Notable differences exist between some categories of firms for certain measures of size. Considering the number of clients served during 1965, firms in Categories IV and V serving more than 300 Clients account for 31.3 percent and 50 percent of their respective categories. In addition, at least one—half of the firms in each of these categories served more than 150 clients. Conversely, 62.9 percent of all firms in Category II and 90 percent of the firms in Category III served less than 150 clients for the same period (see Table V-l9). In 1965, 62.5 percent of all Category IV firms grossed more than $250,000. Category II and IV firms billing more than $250,000 accounted for 37.5 percent and 25.9 percent of their 189 ST TABLE v—19 NUMBER OF CLIENTS SERVED BY INVOLVED FIRMS, 1965 Number of Clients Category Under 51— 101— 151- 201— Over Number 50 100 150 200 300 300 Responding II 5 6 6 4 2 4 27 III 4 O 5 O l O 10 IV 2 3 3 l 2 5 16 V ._E .l. .9. .l .9 .3 .§ Total l3. lo a _o _5 l; 21. respective categories. In comparison, 60 percent of all firms in Category III earned less than $100,000 while at least 50 per— cent of the firms in the other categories earned more than $100,000 (see Table V—20). TABLE V—20 GROSS BILLINGS OF INVOLVED FIRMS, 1965 1965 Gross Rillings in Thgugangs Category Under $25— $50— $100— Over Number $25 $50 $100 $250 $250 Responding II 2 3 8 7 7 27 III 1 3 2 4 o 10 1v 0 1 5 4 6 16 V ..2 .9 .l .9 .2. .§ Total .2 .1. l9 l2 lg 31 “ A1921 190 Differences in staff size appear to vary insignificantly between Category II and IV firms. Category V firms tend to be slightly larger than Category II and IV firms. Category III firms are the smallest (see Table V—21). TABLE V—21 MEASURES OF CENTRAL TENDENCY RELATING TO STAFF SIZES OF INVOLVED FIRMS Measure Number Category Mean Median Responding II 18.1 6 27 III 5.6 6 9 IV 20.7 . 8 16 V 22.9 18 _§ fl Professional staff characteristics. Striking staff differ- ences appear to exist between some categories of firms. Cate— gory IV contains a greater proportion of firms with full-time management services staffs (see Table V—22). In addition, Cate— gories IV and V are similar and considerably different than the other categories in terms of staff members spending half—time or more in management services. Considering only staff members with over 80 hours of formal EDP training, Category V firms represent the highest proportion of firms per category. This condition reflects a fringe benefit of equipment ownership. . «Malayan 191 TABLE V—22 PERCENTAGE OF FIRMS IN EACH USER CATEGORY EXHIBITING SELECTED STAFF CHARACTERISTICS Staff Characteristics Category II III IV V Full—time in management services 15.4% — 25.0% 12.5% Half—time or more in management services 15.4% 11.1% 31.3% 37.5% Eighty hours or more of formal EDP training 15.4% — 18.8% 62.5% Systems and procedures experience 57.7% 55.5% 81.3% 75.0% Number responding H“ 0‘ mo H“ (D lloo Categories IV and V contain a greater proportion of firms with systems and procedures experience as compared to Categories II and III even though the latter categories have a sizeable pro— portion of firms with such capabilities. However, it appears that, based on staff training, Category V firms as a group may be more competent than others to render assistance in conjunc— tion with EDP systems. Client characteristics. Write-up clients account for 10 percent or less of the number of clients served by 58 percent Of all firms in Categories II, IV, and V; however, the prac— tices of one—half of the firms in Category III are composed 0f 50 percent or more of such accounts (see Table V—23). For non—opinion audit clients and for clients preparing their own . W’W.§/fag 192 TABLE V—23 DISTRIBUTION OF WRITE—UP CLIENTS AS A PERCENTAGE OF TOTAL CLIENTS Percentage of Total Clients Category 10% or 11— 31— 51— Over Number less 30% 50% 70% 70% Responding II 17 6 l 2 1 27 III 3 O 2 l 4 10 IV 9 3 2 1 1 16 V .‘l .3 _0 _0_ _l _7 Total 33 11 _5 _£ 2; £9 .— statements, it is observed in Tables V—24 and V-25 that Category II and IV firms are fairly well distributed over the entire range. Category V firms generally serve a small prOportion of write—up and non—Opinion audit clients while Category III firms appear to concentrate their services upon these types of clients. Table V-26 illustrates these differences in terms of the mean percentage for each user category. The data imply that in terms of professional interest the engagements of firms in Categories II, IV, and V are similar and generally of a different type than those of firms in Cate— gory III. However, there appears to be a rather substantial area of similarity pertaining to non—opinion audit clients among firms in Categories II, III, and IV. r:fo.~>uz“a—fl 193 TABLE V-24 DISTRIBUTION OF NON-OPINION AUDIT CLIENTS AS A PERCENTAGE OF TOTAL CLIENTS Percentage of Total Clients Category 10% or 11— 31— 51- Over Number less 30% 50% 70% 70% Responding II 9 5 2 2 9 27 III 5 O 2 l 2 10 IV 6 l 4 3 2 16 V _.4_ _l _0 _l_ ._1_ _7 Total 2.3 =7 =8 =7 l= so. It TABLE V—25 , DISTRIBUTION OF CLIENTS PREPARING THEIR OWN FINANCIAL STATEMENTS AS A PERCENTAGE OF TOTAL CLIENTS Percentage of Total Clients Category 10% or 11— 31— EI:’"—_6?ZE Number less 30% 50% 70% 70% Responding II 10 4 l 3 9 27 III 7 2 1 O O 10 IV 7 3 1 O 5 16 V .2 _l .9 _l _3_ _7 Total _2__6_ _1_Q :3- __;4_ _l_;7_ £40 .3“ .. 194 TABLE V-26 MEAN OF SELECTED CLIENT CHARACTERISTICS EXPRESSED AS A PERCENTAGE OF TOTAL CLIENTS FOR EACH CATEGORY OF FIRMS Client Characteristics Category II III IV V CPA performs write—up 16% 54% 24% 23% Client posts and journalizes but CPA prepares statements 40 35 38 26 Client prepares statements 44 11 38 51 Total 100% 100% 100% 100% I: Number responding 27 lg _le _1 Cl Managemept services activities. Category IV firms as a group receive a larger prOportion of their total billings from management services engagements than do other categories of firms. Almost two—thirds of the firms in Category IV report management services billings accounted for 16 percent or more of 1965 gross billings (see Table V—27). Proportionately half as many firms in Category II fall into this range; however, Category II firms dominate the 21 percent to 25 percent range while Category IV firms are concentrated in the 16 percent to 20 percent range. Management services billings appear some- what less important to Category V firms and negligible to most firms in Category III. 195 TABLE V—27 BILLINGS FROM MANAGEMENT SERVICES AS A PERCENTAGE OF 1965 GROSS BILLINGS Percentage of Gross Billings Category Under 6— ll— 16— 21— Over Number NOne 5% 10% 15% 20% 25% 25% Responding II 0 4 9 4 4 5 l 27 III 1 6 O 2 l O O 10 IV 0 2 O 4 9 O l 16 v .0 .2 .6. .2 .9 .l. .9 .7 Total .1 .13 .12 m E .2 .2 op. More than 62 percent of Category IV firms report a faster rate of increase in management services billings relative to billings from all other services combined (see Table V-28). These firms represent almost one—half of all firms answering in this manner. In addition, not one firm in Category IV reported a slower rate of increase in management services billings as compared to billings from all other services combined. Category IV firms are contacted more frequently by their clients than are other categories of firms for assistance re- lated to EDP (see Table V-29). It is surprising to find Cate- gory V firms less frequently approached, given their apparent staff training and experience in EDP-related matters. In response to a question inquiring into the most frequent approach taken for disposing of such client requests, over 70 percent of 196 TABLE V—28 RATE OF INCREASE DURING RECENT YEARS OF MANAGE- MENT SERVICES BILLINGS RELATIVE TO INCREASES IN BILLINGS FROM ALL OTHER SERVICES COMBINED Comparative Rate of Increase Number Category Faster Equal Slower Responding II 6 18 3 27 III 2 6 l 9 IV 10 6 O 16 V _3 .9: .Q .Q Total El 2; .4 as TABLE V-29 NUMBER OF CLIENT REQUESTS FOR SERVICES RELATED TO ELECTRONIC DATA PROCESSING Ngmber of Reguests Over Number Category None 1—2 3—5 6-15 15 Responding II 6 ll 6 2 2 27 III 8 l l O O 10 IV 2 5 4 1 4 16 V .2. ._2 .2. .l .0. _7 Total E3. 2 .1; .4. .6. 5n the firms in Category IV receiving such requests report their firm performed the service alone. In contrast, 50 percent or more of each of the other categories of firms receiving such requests turned to outside sources for assistance. Category III 197 firms receive very few EDP—related service requests, reflecting in part the large portion of smaller—sized clients apparently served by these firms. Firms with cliepts directly using service bureaus. All firms in Categories II and IV and some firms in Category V have clients directly using service bureaus without the CPA acting as an intermediary in the data flow. (By definition, Category III firms are without clients directly using service bureaus.) As developed in Chapter IV, direct client usage of service bureaus generally assumes that the client maintains a bookkeeping or accounting staff and that one or both of the following condi- tions exist: 1. Clerical applications are automated and useful analyses are obtained as by—products. 2. Control applications for such areas as inventory or production are automated. Table V—30 contains the distribution of applications sought by clients directly using service bureaus. Clients of Category IV firms appear to dominate each type of application, often numerically and, with one exception, in prOportion to the number of firms responding in each category. In addition, the number of Category IV firms with clients in each of the more sophisticated applications classes is impres- sive, especially considering that these CPA firms were, with one exception, either singularly responsible or shared - ~.- neuralgia . area-.4 m .H a... .30. m1 a: a! > 0 .v m >H m H N HH \IIIIIIIIIIII .IIIIIIIIII, mo mo ;;.@CH.‘ mcHHHHm HHOH mummpoq mommamcm mGOflbmHomo monspooosm msHE who u upcommmm name new msoanm> wo com lamnwoum Hwflfisz pamfiwbmum Hospcoo mEmpmmm Hafiocmcam chflumwflaacs mpmmm,msws wasommHo 02343 2.530 .6 camp 9205533... mo mamas O m I> magma”. llIIIlIIIIIIIIIIIIIIIIIIIIIIIIIII-I------- 199 responsibility with other parties for Clients' decisions to use service bureaus. In comparison, Category II firms seem less actively involved as a group with Clients' service bureau usage: over 37 percent of these firms indicate that they were not re- sponsible for Clients‘ decisions to use service bureaus. Three of the four Category V firms contributing to the contents of Table V—3O report they were responsible, at least in part, for Clients' decisions pertaining to service bureau usage. A measure of the importance direct client usage of service bureaus has for the responding CPA firms appears in Tables V—3l and V—32. Generally, there are no significant differences be- tween categories of firms. However, several Category II firms have a fairly large proportion of clients using service bureaus and receive a sizeable portion of gross billings from such clients. An approximation of the productivity attributable to clients directly using service bureaus appears in Tables V—3l and V—32. Eleven respondents report that the proportion of billings is greater than the proportion of clients. Only four firms find the reverse to be true. The respondents were asked if systems and procedures modi— fications were necessary for any clients using service bureaus prior to beginning such usage. Twenty-eight responded affirma- tively (see Table V-33). Of these firms, almost one—half per— formed all of the work themselves (see Table V-34). Numerically, 200 TABLE V-3l NUMBER OF CLIENTS DIRECTLY USING SERVICE BUREAUS AS A PERCENTAGE OF TOTAL CLIENTS Perceptage of Cliepts Under 6— ll— 16— 21— Number Category 5% 10% 15% 20% 25% Responding II 14 4 2 1 22 IV 8 4 O O O 12 V .2 .2 _0 _0 .2 _5 Total 27. .2 .2 .l. _l 22 TABLE V-32 BILLINGS FROM CLIENTS DIRECTLY USING SERVICE BUREAUS AS A PERCENTAGE OF TOTAL BILLINGS Percentage of Clients Under 6— ll- 16— Over Number Category 5% 10% 15% 20% 20% Reeponding II 14 2 2 O 4 22 IV 7 4 1 O O 12 V .2. _l_ .2 .2 .2 ..3. Total 2.3. .1 .2 .2 .2 _3.7 TABLE V—33 RESPONSES OF CPA FIRMS REPORTING ON THE NEED OF SYSTEMS AND PROCEDURES MODIFICATIONS CAUSED BY CLIENTS' SERVICE BUREAU USAGE Responses Category Needed Not Needed Not Sure No Response II 13 6 3 5 IV 12 O O 4 v .2 .2 .1 .2 Total 28 _Q _4 13 II II 201 TABLE V-34 DISPOSITION OF THE MODIFICATIONS NEEDED Portion of Modifications Performed by the CPA Firm Approximately Less than QEEESOEX. All Half Half II 3 3 2 IV 7 1 4 v _3 .o .2 Total _l_3 :4 Le Category IV firms appear most active; however, all of the Cate- ? gory V firms aware of the need for modifications performed the work themselves. CPA firme servicing clients through serviee bureaus. All firms in Categories III, IV, and V service clients through ser— vice bureaus, either an outside organization or one in which the CPA firm has a financial interest. Table V—35 presents the types of applications used by the 27 firms volunteering such information. The great majority use service bureaus for pre— paring financial statements and general ledgers. Except for payroll processing, it appears that analytical applications are next important in terms of use while control applications seem to be least important. If it is assumed that analyses are obtainable from processing related to clerical functions, then it appears not all firms are taking advantage of such a condition. 202 H "I III I. II |.I. “ u ”I“ “Nu Magnum—H. .N m a N1 an a! NI . N. 3 .N a l l I Ilil Ill- ! 1| Ilull .‘|I. III.‘ wl“ > a N N N N m o N m m o S o o o N o N N N m m HHH lllIlIIliii‘llllllll‘llilll‘l‘“! was maoup msfl wuou soHuSQ coauSQ wcHSEmm mcfimm mfimwamsm Haon Hmmpmq whommu U Iowomm Isoo IHHNm Iso>sH renumfln INnumNo xme moans mmamm uhmm Hmnocmo . m cam oHQm Hoamq I>fl®o®m new 02 Hmmw Ihmm mpcmfiopoum ameocmcflm ,Illlllllllillllllll chHumoflaccm . llIIIHHHHHHHHHHHHHHHHHHHHHH mbflflfibm MOH>mmm mwbommB mEZMHQU GZHUH>mmm mom mEMHm 4&0 km Qmmb mZOHB¢UHQmm< D4mMDm MUH>mmm QMBOMQmm mMI> mgmdfi xIlIIIIIIIIIIIIIIIIIIIIllllllI--------- 203 With 15 firms using payroll applications, it is expected that an equal number should obtain labor distributions. In terms of the overall sophistication of applications, Category V firms apparently out—perform all other categories. Category III firms concentrate upon clerically—oriented opera- tions and very little upon analyses. Category IV firms cover the entire range of applications but apparently concentrate to a much lesser degree upon controls and analyses applications. The importance of clients serviced through service bureaus for firms in Categories III, IV, and V is illustrated in Tables V—36 and V-37. Category III firms are heavily involved in ser- vicing arrangements of this type. The productivity of these engagements for Category III firms is unmistakable: clients serviced in this way, expressed as a percentage range of total clients are always equal or less than billings expressed as a percentage range of total billings. One-third of the respond— ents from Categories III, IV, and V report the proportion of billings greater than the prOportion of clients while only 11.1 percent indicate the reverse to be true. Effects of electronic data processing. More than two— thirds of all Category IV firms express the belief that the effects of EDP upon the accounting profession over the next five years will be “much greater” than the effects to date. Category V firms seem similarly impressed with the future impact 204 TABLE V-36 NUMBER OF CLIENTS BEING SERVICED THROUGH A SERVICE BUREAU AS A PERCENTAGE OF TOTAL CLIENTS Percentage of Clients Less than 6— ll— 16- Category 5% 10% 15% 20% Number 21— 26— 31— 41- Over Respond- 25% 30% 40% 50% 50% ing III 5 0 O 1 0 l 1 1 l 10 IV 5 2 l l l 0 0 O l 11 V .l .2 .l .l _0 .2 .2 _0_ .l .6. Total n .2 .2 .3. .l. .l .1 .l .2 2.7 TABLE V—37 BILLINGS FROM CLIENTS SERVICED THROUGH A SERVICE BUREAU AS A PERCENTAGE OF TOTAL BILLINGS Percentage of Billings Less Number than 6— ll— 16— 21— 26— 31— 41— Over Respond— Categorv 5% 10% 15% 20% 25% 30% 40% 50% 50% ing III 5 0 O O O O O l 4 10 IV 3 4 2 O 0 O 0 0 2 11 V .2 __3 _2 .l .2 _1 .0. .2 .l .2 Total .8 _7 .2 .l .2 _l .2 _l _7 21 of EDP. Because these categories of firms appear more heavily involved with some form of EDP than other categories, their opinions reflect, in part at least, past decisions related to 205 their present commitments (see Table V—38). It should be added that three Category IV firms report computers on order. Although no reasons were given for this course of action, it appears rea— sonable to assume that their experiences with service bureaus has had some effect on their decision. TABLE V—38 OPINIONS RELATING TO THE FUTURE EFFECT OF ELECTRONIC DATA PROCESSING UPON THE ACCOUNTING PROFESSION AS COMPARED TO THE EFFECTS TO DATE 1 Opinion é v Much About the Number Q: Category Greater Greater Same Responding I 11 12 11 4 27 '5‘ III 4 n 4 2 10 IV 11 4 1 16 v .2 .2 .0 _8 Total 22 2 .1 .61 Years of experience and benefits. Category IV firms lead all others in years of experiences with service bureaus. As a group, these firms report an average of approximately five and One-half years of experience in serving clients directly using service bureaus and in servicing clients through such organiza— tions (see Tables V-39 and V—40). Considering this experience factor, it is noteworthy that Category IV firms report greater benefits from service bureau relationships than do other 206 TABLE V—39 MEASURES OF THE NUMBER OF YEARS CLIENTS HAVE BEEN DIRECTLY USING SERVICE BUREAUS Measuresl Number Category Mean Median Responding II 3.7 4 10 IV 5.6 6 11 V 3.6 4 7 lIf clients had used service bureaus for over eight years, they were arbitrarily assumed to have used them for nine years. Only one Category III firm is affected by this assumption. TABLE V—4O MEASURES OF THE NUMBER OF YEARS CLIENTS HAVE BEEN SERVICED THROUGH SERVICE BUREAUS Measuresl Number Category Mean Median Responding III 4.1 3 22 IV 5.4 5 10 V 3.0 3 4 lIf CPA firms had used service bureaus for over eight years, they were arbitrarily assumed to have used them for nine years. Three Category II and four Category III firms are affected by this assumption. categories of firms. As shown in Tables V—4l and V—42, Category IV firms often account for the largest number of responses per benefit and for the largest prOportion of firms per category reporting benefits. 207 TABLE V-4l SELECTED BENEFITS REPORTED BY FIRMS WITH CLIENTS DIRECTLY USING SERVICE BUREAUS, BY CATEGORY Number of Firms Reporting Benefits Reported II IV V Expanded services 0 5 3 Increased gross billings O O 1 Acquired more clients because of increased EDP proficiency O 3 1 Number responding 21 10 4 TABLE V-42 SELECTED BENEFITS REPORTED BY FIRMS USING SERVICE BUREAUS TO SERVICE CLIENTS, BY CATEGORY Number of Firms Reporting Benefits Reported III IV V Staff trained in EDP 2 5 3 Increased number of clients 4 2 5 Fee structure higher 2 3 3 Work pace less hectic 6 5 4 Number responding 10 11 7 Service Bureau — Commercial Bank Questionnaire The questionnaire sent to service bureaus and to certain commercial banks located in Michigan obtained information related to their activities and Opinions (see Appendix C). The service —.. i 208 bureaus were instructed in a cover letter to respond only if they offered commercial, as opposed to scientific, data proces— sing services. Similarly, the banks were asked to respond only if they offered data processing services of the type clients of CPAS or CPAs themselves would find attractive (see Appendix C). Table V—43 presents the distribution of responses. TABLE V—43 PARTICIPATION IN THE SERVICE BUREAU - COMMERCIAL BANK SURVEY ensue.-.fi Number Number Percent Surveyed Responding Responding E‘ Service bureaus 64 23 35.9% 9 Commercial banks _gg .lp 32.0% Total 114 33 34.2% The number of responses to the survey should be evaluated in light of the instructions contained in the cover letters. Then, too, the method employed for selecting the service bureaus to be surveyed may well have included some organizations not offering commercial data processing services. In addition, service bureaus primarily performing commercial services such as the direct mailing of circulars may not have responded. In addition, not all of the 50 largest banks in Michigan are come puterized and furthermore, of those that are, not all offer ———. ‘7‘"? l} 209 service bureau-type services.13 For these reasons, all infer— ences drawn from the sample data are assumed to apply reliably to the population. The equipment used by the respondents is summarized in Table V—44. The two banks not responding to the question which TABLE V—44 EQUIPMENT OPERATED BY THE RESPONDING SERVICE BUREAUS AND COMMERCIAL BANKS Eguipment Operated No On- Number Tab Computer Premise Respond— Computer Equipment and Tab Eguipment ing Service bureaus 9 3 ll 0 23 Commercial banks _§ .9 .2 _i 22 Total l.7. .2 12 _l n pertained to equipment ownership substantiate the earlier as— sertion that not all of the 50 largest Michigan commercial banks are computerized. However, one of these reported that by Novem- ber of 1966 it would be equipped with an NCR 315 and would offer, at that time, data processing services for customers. Neither bank offers computerized customer services through the facilities of a correspondent bank or service bureau and for that reason they are eliminated from further reference. 13A survey conducted by the Lansing sales office of IBM found 17 computerized banks in Michigan offering service bureau— type services. .2- ” " “r «r 210 Servicing activities, in terms of the number of customers served, vary significantly between service bureaus and banks. In 1965, almost one-half of the responding service bureaus served more than 100 customers while, for the same period, almost 80 percent of the banks served fewer than 100 customers (see Table V—45). Nine banks had fewer than 50 customers while two banks reported servicing more than 500 customers- TABLE V-45 CUSTOMERS SERVICED IN 1965 Customers Serviced Number Under 10— 26— 51— 101- 201— 301— 401- Over Respond— 10 25 50 100 200 300 400 500 500 ing Service bureaus 2 4 2 4 5 2 O O 4 23 Commercial banks .5 .1 .2 .2 .2 .0. _o .2 .2 12 Total .7. .2 .5 .6 .2 _2 _o .0. _6 E Only seven service bureaus and three banks reported that direct CPA users were numerically important (over 20 percent of total customers served). Of these, three service bureaus and two banks served more than 50 customers. One of the service bureaus indicated that more than 40 percent of its 500 customers were direct CPA users. This particular organization specializes in accountants' packages on a national basis. A substantial ] ark ’ Woes, 211 number of respondents in both classes do not have direct CPA users while almost one-half of the service bureaus reported CPAs constituted 15 percent or less of their total number of customers (see Table V—46). TABLE V—46 DIRECT CPA USERS AS A PERCENTAGE OF THE NUMBER OF CUSTOMERS SERVED Percentage Direct CPA Ueers Less than 6— 11— 16— 21— 26- 31— Over , ane 5% 10% 15% 20% 25% 30% 40% 40% Total 3 ts: Service i bureaus 4 7 4 1 O l 0 1 5 23 Commercial banks .5. .2 .2 .1 .0 .0 .1 .2 .2 .2 Total .2 ._7 .2 .2. .2 .1 _l _l .1 22. CPA referrals appear to be an insignificant proportion of the total customers served by the respondents (see Table V-47). This was especially true among banks. It may be that service bureaus and banks rely mainly upon their own marketing efforts. Further, it may reflect the extent of CPA firms' non-involve— ment with servicing organizations and a tendency on the part of service bureaus and banks to ignore CPA firms' close rela- tionships with clients. There were some notable exceptions however. Two banks, each with between 51 and 100 customers, i .m Wflt 212 reported that from 16 to 20 percent of their customers were CPA referrals. One of these banks had a substantial number of direct CPA users and offered a variety of data processing applications. Two service bureaus each serving more than 50 customers also re— ported a sizeable number of CPA referrals. These organizations also offered a wide variety of applications. TABLE V—47 CPA REFERRALS AS A PERCENTAGE OF THE NUMBER OF CUSTOMERS SERVED Pergeptage CPA Referrals id Less 5* than 6- ll— l6- 21- 26— 31- Over None 5% 10% 15% 20% 23% 30% 40%» 40% Total Service bureaus 6 9 4 l O 0 1 0 1 22 Commercial banks .. _3 .0 .0. .2 2 .0 .0 .0 E Total 1.4. E .4 _.l _2 .2 .l. _0 _l 2 Almost 57 percent of the service bureaus and approximately 77 percent of the banks noted that the CPAS in each respondent‘s immediate marketing area were neither adequately apprised of nor knew how to use the data processing services offered by the respondents (see Table V—48). Several of these respondents had a number of CPA users or referrals as customers. Involved as they are with CPAs, these respondents may be aware of a great untapped and possibly uninformed market for their services. _: .1... .4 213 Seven other respondents were in a sense more critical, indi- cating that CPAS were apprised of the services offered but did not know how to use them. Six service bureaus responding in this manner provided a rather wide selection of applications, especially the kind a CPA would recommend to a client needing a relatively sophisticated automated information system. This fact lends added reliability to their responses for the follow— ing reason: by marketing a variety of services, these respond- ents may have a better knowledge of their potential market than if they marketed a limited number of services only. fl: TABLE V-48 RESPONDENTS'EVALUATION OF THE EXTENT TO WHICH CPAS ARE APPRISED OF AND KNOW HOW TO USE DATA PROCESSING SERVICES Respondents' Evaluations Yes, Yes, Apprised of but Number Very Fairly Don't Don't Know Respond- Much So So No Know How to Use ing Service bureaus O 2 13 2 6 23 Commercial banks _2 _J; A). _l_ .i E Total _0 _3_ 23 _3 :7 g From Table V—49 it appears that CPA firms receive little of the potentially lucrative systems set-up fees. Systems work is 214 generally the only professionally-interesting aspect of a ser- vice bureau involvement for most applications. The processing after the completion of the systems work usually requires rela— tively little expertise from the CPA. TABLE V-49 PERFORMANCE OF MOST OF THE SYSTEMS WORK ASSOCIATED WITH A DATA PROCESSING APPLICATION Performance of the Systems Work Respond— CPAS Divided Evenly ents Per— Between CPAs Other Perform form and Respondents Sources Total Service bureaus l7 3 2 l 23 Commercial banks _2 _o _l _0 i9 Total & _3 .2 _i Q The CPA's reputation as a systems expert is subject to challenge (see Table V-50)° Over 43 percent of the respondents who ventured an opinion were unflattering. Several of these had substantial contact with CPAs or with CPA referrals in terms of numbers or as a percentage of total customers. Most of these reSpondents offered a wide variety of services, The respondents expressing more flattering opinions had similar characteristics in terms of number of clients served, CPA users and referrals, and services offeredo we weal-u: 215 TABLE V-50 RESPONDENTS' OPINIONS OF THE CPA's PROFICIENCY AS A SYSTEMS MAN Proficiengy Rating Number Very They Don't Re- Profi- Very Don't Perform Sys— spond- cient Good Fair Poor Poor -Know tems Work ing Service bureaus 2 5 4 l 2 5 4 23 Commercial banks 0 l l l 2 _1 z 2 Total 3 9 2 2 2 2 E a An indication of the extent CPAs are involved in systems work is revealed in the responses to the question ”does your firm follow the practice of consulting with a customer's CPA firm for the first—time applications or modifications of existing ones?” The replies of the three respondents indicating that they never consult a CPA may be subject to question because they had relatively very few CPAS or CPA referrals as customers (see Table V-Sl). In addition, the three offer limited services. The remaining responses may indicate that CPAs are not uniformly involved in systems work and possibly involved to a lesser de- gree than is commonly thought° Furthermore, certain negative control implications arise, assuming that some of the CPA re— ferrals are Opinion—audit clients, if in fact the CPA is not ”2‘7 3,“ ‘V '51 11151 216 contacted when a client's system is modified. TABLE V-Sl THE EXTENT TO WHICH A CUSTOMER'S CPA FIRM IS CONTACTED FOR A NEW APPLICATION OR A MODIFICATION OF AN EXISTING APPLICATION Extent CPA Contacted Some— Number Always Usually times Rarely Never Responding Service bureaus 2 5 10 3 l 21 Commercial banks _l _3 .2 __2 .2 Q Total _3_ _§ 2 _5 _3_ n Similar unfavorable inferences may be drawn from the re— sponses shown in Table V—52 to the question ”do first—time CPA users of your services, or CPAS whose audit Clients use your services for the first—time, approach you about the controls in your processing prior to such use?" The respondents which indi- cated that they were never approached about controls dealt with a numerically small number of CPAs or CPA referrals and offered a limited range of services. However, the respondents who re- ported that "very few” or "some“ CPAs approached them had sub- stantial CPA contacts and offered a wide range of services, On the other hand, the respondents indicating that "all” CPAs approached them for information on internal controls had limited 217 contacts with CPAS or CPA referrals and offered a limited range of services. TABLE V—52 PROPORTION OF CPAS REQUIRING INFORMATION ON SERVICE BUREAU PROCESSING CONTROLS Proportion Question Very Never All Most Some Few Arose Total Service bureaus 2 8 6 4 3 23 Commercial banks ._1 _g _3_ _g _Q 12 Total _2 .9. _8 _8 _o 3_5_ It appears in Table V—53 that relatively few service bureaus or commercial banks offer formal training for their customers. However, informal assistance seems readily available. TABLE V-53 TYPE OF ASSISTANCE OR TRAINING SERVICES OFFERED CUSTOMERS Type of Services Offered Formal Informal Training and Training Assistance Assistance None Total Service bureaus 3 l4 3 2 22 Commercial banks _; _Q _Q _Q .ll Total _4. 2_o _3 _1 34 218 The services offered by service bureaus and commercial banks are shown in Table V-54. The most p0pular service bureau applications appear to be payroll and various analyses followed closely by billing, various control applications, custom-designed systems, and programming. As expected, banks heavily favor pay— roll applications. However, one—half of them provide analytical applications and billing services. It is noteworthy that several banks offer programming assistance, custom—designed systems, Mb? 2' ‘ 5:5: ‘1 a .31; and control applications. TABLE V—54 SERVICES OFFERED BY RESPONDENTS Service Bureaus Commercial Banks Services Offered Number Percent Number Percent Offering of Class Offering of class Equipment usage 10 43.5% 3 21.1% Programming 19 82.6 5 35.7 Custom systems design and installation 20 87.0 5 35.7 General ledger and finan— cial statements 19 82.6 2 14.3 Tax returns 7 30.0 0 —— Payroll 19 82.6 12 85.7 Various analyses (sales, receivables aging, eth 21 91.3 7 50.0 Various control applica— tions (production, in- ventory, etc.) 19 82.6 6 42.9 Billing 19 82.6 7 50.0 Operation research 8 34.8 1 7.1 Scientific applications 7 30.0 0 —— Number responding 23 14. 219 Of special interest to CPAS is the fact that fourteen re- spondents, six service bureaus and eight banks, provide many of the services listed in Table V—54 to non-computerized banks who in turn offer these to their customers. The majority of these respondents provided a wide selection of services. The impli- cation is that CPAs concerned about the competitive effects of‘ customer services rendered by computerized banks should also consider the data processing capabilities of non—computerized banks with computerized correspondents or with neighboring ser— vice bureaus. Conclusions Given the information provided by the post card question— naire and the number of CPA firms practicing in Michigan, the most optimistic measure indicates that approximately 40 percent of all practicing Michigan CPA firms are not involved with ser— vice bureaus. The most pessimistic measure places the prOpor— tion of non—involved firms to over 55 percent of the total. Al— though service bureaus are not of uniform quality and of uni— versal applicability or without suitable alternatives, these organizations represent a versatile tool if properly selected, applied, and controlled. Hence, the statistics reflecting the non—involvement of CPA firms create concern because the pro— fession in general may be ignoring a useful alternative for providing better services to many clients. 220 The data from the detailed questionnaire suggests CPA firms‘ service bureau involvements are substantially unaffected by such factors as single—pp0rtunity, the Association has invested time and funds into this study. However, .ts value to you in this respect will be determined by your assistance. Please return he questionnaire by May 15, 1966- INKS/mg BnCS . k you agai William R. Shaw, President INSTRUCTIONS FOR COMPLETING QUESTIONNAIRE Firms having mOre than one office should COmplete the questionnaire only for the Office to which the questiOnnaire is addressed. The following are samples of the two main types of questions encountered. Sam 1e QuestiOn 1. Are you a member of The Michigan Association of CPAS? N0, but No, and do not M plan to be plan to be Answer Category Yes Circle only One answer ® 2 3 4 Assuming that yOu are a member of the Assoeiation, you w0uld have circled 1 in response to this questiOn which corresponds, in this questiOn, to a “Yes” response. Sam le Que stiOn 2. If you are a member of The Michigan AssociatiOn 0f CPAS, please indicate by checking in the column provided the reaSOns for being a member. Check Answer Category herej . Feel it is a professional responsibility X T . Feel it will aid professional development x I . BelOng Only because the firm expects it . Other (please specify) 9400‘!» The apprOpriate reasons for an assumed respondent have been entered. Note that if there was a reaSOn other than One of those specified, space is provided for the reSpondent to insert, in brief form, the reasonts). 3. Definitions Business Client — A proprietorship, partnership, corporation, estate or nOn—profit institutiOn for whom you perform professional services. Exclude clients for whom only a personal 1040 tax return is prepared. Management Services - Engagements other than ”Write-Up, " audit and tax. Includes such services as budgets and f0recasts; cOst system design; work simplification studies; reporting system modification; EDP feasibility studies; cash budgeting, operations research application,etc. fiystems and Procedures - Pertains to design or modification of a client’s It is a facet of Management Services reporting (infOrmation) system. work concerned with procedures, methods and other considerations relevant to the collectiOn, processing and presentation of informatiOn. 4: Please place the finished questiOnnaire into the self-addressed envelOpe and return to the Association. Make any comments yOu wish relevant to the study, individual questions, etc., on the back of this page. Thank you. .MAC‘PAg-sTj-UQYQF THE EFFECTSOE SERVICE BUREAUS :ON Tris: ACCOUNTING PROFESSION PART I 1. Office classification p‘ One Office Answer Category Home Branch firm Circle only One answer 1 2 3 A 5 2. Please indicate the size of the largest city within 20 miles of your office or size of city in which your office is located, whichever is larger. Answer Under 1,000- 5,001-10,001-20,00l-40,001- 80,001-120,001— Over Category 1,000 5,000 10, 000 20,000 40,099 80,000 120, 000 200,000 200, 000 Circle only One answer 1 Z 3 4 5 6 7 8 9 6 3. Please indicate the total number of business clients (see definition on instructions page) served in calendar year 1965. Answer Under 11- 31- 9'51- 101- 151- 201- 251- Over ELLE 19 3'0 5__0 III) 29 an In 9_0_0 _ng Circle only one answer 1 2 3 4 5 6 7 8 9 7 4. Please estimate your gross billings for 1965. Answer Less than 12, 000- 25, 000- 50, 000- 100, 000- Over. (new name. 24. 999 49. 999 we w w Circle Only Ode answer 1 2 3 4 5 6 8 I 5. Please estimate the percent Of gross billings derived from Management Services (see definition On instructions page) engagements in 1965. Answer Less‘than 6- 11- 16— .219- 26- 31- Over M None - 5% 10% 15% 20% 25% 39% 35% 35% Cl'rcle only ' _ - __ one answer 1 2 3 - 4 5 6 7 8 9 9 Simmmm INSTRUCTIONS FOR QUESTION 6: I Answer the following questiOn Elly if the answer to question 5 was other than I "none”. PART I - Page 2 — Cont’d. 6. For the past few years, have billings from Management Services engagements increased at a relatively faster rate than billings from all other services combined? Answer NO, NO, about Category Yes slower the same Circle plly " “_— one answer 1 2 3 7. Professional Personnel Characteristics -- include partners but exclude clerical and administrative help. Insert the apprOpriate figures in the right hand column of the table provided. - nswer in Answer Category this column a. Number with primary training in accounting b. Number with primary training other than in accounting C. TOtal staff (a + b) d. Number Of CPAS e. Number Of college graduates f. Number Of staff in a separate Management Services section g. Number of staff who spend over 50% of their time on Management Services work h. Number of staff with over 80 hours in formal EDP training i. Number Of staff performing systems and procedures work (see definitiOn on instructions Page) I 8. Characteristics Of Business Clients -- Please estimate the percent Of the tOtal number of business clients in each Of the following categOries. Answer Category.- __ _ , % (if bus. c ients a.. Clients for whom jOurnals and ledgers are prepared and posted in additiOn to preparing monthly or quarterly statements b. Clients for whom you prepare monthly or quarterly statements _b_1_1_t_who journalize and post their mtransactions c. Clients who prepare their own financial statements TOTAL BUSINESS CLIENTS (a + b + c = 1.00%) 100% (1. Percent of business clients using their Own or leased computer and/or tab equipment 10 11 l4 17 20 22 25 27 29 31 33 35 37 39 PART I — Page 3 — Cont'd. I 9. In 1965, approximately how many business clients or potential clients requested such EDP services as feasibility studies, COmputer selection, and EDP facility expansion or reduction"? Answer Over Category None 1— _2_ 3_ 4i 6—7 8~9 10-15 15 Circle 0_nly One answer 1 2. 3 4 5 6 7 8 9 SPECIAL INSTRUCTIONS FOR QUESTION 10: Answer the following question Only if the answer to question 9 was other than ”none". 10. If the answer to question 9 was other than “nOne“, indicate in terms of frequency your dispOsitiOn 0f the request. (The most frequent dispOsition will be marked ”1", the next mOst frequent "2", etc.) Answer Category Ranking a. Our firm performed the service alone b. We received assistance from another CPA firm c. We received assistance from a computer manufacturer's representative d. Client turned to an Outside nOn—CPA COnsultant e. Other (please specify) 11. COmpared to the effect EDP has had to date on the practice of public accounting, what do yOu believe will be the effect in five years? Answer Much About Much Category greater Greater the same Less less None Circle 2n_ly One answer 1 Z 3 4 5 6 12. Do yOu feel that Other CPA firms with which yOu are acquainted are well informed on the services data processing service bureaus Offer? Answer Not CategOry Yes sure N0 Circle only One answer 1 2 3 41 42 43 44 45 46 47 48 PART I - Page 4 - Cont'd. 13. Is yOur Office, or one in which yOur firm has a financial interest, currently using its own electronic computer or tabulating equipment to service business clients? No, but NO, but Yes, Answer computer tabrequip. Yes, Yes, combin. CategOry I_\I_O On order on Order com uter tab equip. of 4 8: 5 Circle O_nly One answer 1 2 3 4 5 6 14. Does your office use an outside service bureau to service business clients or do some of yOur clients use a service bureau directly? Answer Office Clients Combination Category NO uses use of 2 and 3 Circle Only One answer 1 2 3 4 15. From which source(s) did yOur Office acquire its knowledge of service; bureaus? (Place a check mark next to the appropriate category or categories in wthecniumn pnOvided. ) Che ck Answer Category h ere . Discussion with a CPA using service bureaus . Staff member formerly with a service bureau . Service bureau representative Computer manufacturer's representative EDP trade magazine AccOunting literature MACPA educational prOgram or literature . Other (please specify) D‘mrhOOOUm 49 50 51 53 54 55 56 58 PA] A C- c .2 . Page 5 - COnt‘d. Wh1ch of the following answer categories are reasons why, in your op1n1on, some CPA firms have not acquired a knowledge of service bureaus? Check Answe r CategOry here a. Insufficient professional literature on the subject . Lack of service bureau selling effort Have no clients that COuld benefit from EDP . Fear too many EDP—accOunting problems . Not interested Other (please specify) hmaoo‘ DOes yOur Office believe that service bureau applications will tend to reduce gross billings? Not Yes No sure {y ___ :r l 2 3 INSTRUCTIONS FOR QUESTION 18‘: wer the following questIOn Only if your office does fluse service bureaus ervice business clients and/or doesiio_t recommend service bureau usage usiness clients for their direct usage. If your office does not use service bureaus to service business cligints and/or does nOt recommend service bureaus to business clients fOr their direct use, what are yOur reasons? Answer Category Check here a. Service bureaus have received poor publicity b. Poor past experiences with recommendations c. CommunicatiOn difficult with service bureaus d. Not familiar with their capabilities and limitations e. Fear loss of data control f. Feel that results not worth the effort g. Have no clients that could benefit frOm service bureaus h. They are incompetent to render services i. It is unethical j. Fear loss of clients k. Other (please specify) 59 60 61 62 63 64 65 66 67 68 69 7O 71 72 73 74 B5 Page 6 - Cont'd. Does your staff know of any service bureaus located within 20 miles Of your Office? Not Yes sure No IL __ 3r 1 2 3 6 Please indicate which category 2}; categories best describe your Office. Check Answer Category h ere a. Our Office no longer uses its 23933 electronic computer or tab equipment in servicing clients 7 b. Our Office no longer uses an outside service . bureau(s) in servicing clients 8 c. Our firm is apt in a_ny_ of the above categories 9 iNSTRUCTIONS FOR QUESTION 21: wer the following question only if you checked category a. and/or b. uestion 20. Please state briefly your reason(s) for your answer in question 20. Have you lost engagements or business clients to a service bureau? Ye s , Ye s , C Ombination engagements clients of l 8: 2 NO ._y r l 2 3 4 10 — Page 7 - Cont'd. 3. If yes, please indicate the type(s) of service bureau(s) involved. Check Answer Category h ere 1. Bank 2. CPA-owned 3. Independent 4. Computer manufacturer-owned 5. Other (please specify) .. Please indicate the type(s) Of engagement(s) inVOlved. Check Answer Category h ere l. JOurnalize and post transactions and prepare financial statements Prepare financial statements Tax returns Management services Systems and procedures Other (please specify) O\U‘|II>-UJN I. Please indicate the number Of engagements or business clients lost, Whicheve r is large r . Over I 2 3 4 _5_ 6-10 llr-15 l6--20 20 er 1 2 3 4 5 6 7 8 9 22 I*23. \9 “A; I‘ II - Page 2 - Cont'd. 25 A. Type of service bureau most frequently used or most important in terms 25 C. 25 E. of client billings derived from its use. A client's Equip. CPA idle Mfgr. Our Another computer machine Sub. Independent Bank own CPAS Co—op time Other 1 2 3 4 5 6 7 8 Type of equipment utilized by the service bureau referred to in question 25 A. Stored program Combination Tab computer of l and 2 l 2 3 Type of program generally utilized by that service bureau for servicing your needs. Package with modifications Package when needed Custom 1 2 3 Miles distance between your office and that service bureau. Under 11- 21- 31— 51— 101- 301- 501— Over 10 miles 20 3O 40 100 300- 500— 800 800 mi. Does that service bureau offer formal training or orientation programs to familiarize users with its capabilities and limitations? Yes N0 32 33 34 35 36 II - Page 3 = Cont’d.. 25 F. Does that service bureau adequately train or familiarize your office with the particular jobs it is processing for you? r _Il Y e S No le - l 2 AL INSTRUCTIONS FOR QUESTION 26: inswer the following question only if your office uses more than one ervice bureau. 6. If your office uses more than one service bureau, what are your reasons? Check Answer Category here a. Prior practice of using only one service bureau proved risky because service bureau went out of business b. Feel one source of service risky c. Gives us more flexibility in servicing clients because of differing service bureau capabilities d. Currently phasing over to one service bureau e. Other (please specify) 7. What are some of the problems your office encountered in using a service bureau to service clients? Check Answer Category here . Time delays and scheduling problems . Poor CPAeservice bureau communication Clients' chart of accounts altered Clientsp reports altered Clientsv fear of loss of business documents Service bureau attempts to replace CPA in systems and procedures Work g. Other (please specify) E'HO $1.0 C‘LU 37 38 39 40 41 42 43 44 45 47 48 49 [I — Page 4 - Cont'd. 8. |~< What serv1ces do you receive from the service bureau(s) you currently utilize? Check Answer Category here . General ledger and financial statements . Tax returns 7 I. , . . Payroll . Labor distribution Receivables aging Payables distribution Sales analysis Control application, i. e. production, inventory, etc, Yeareend inventory run Billing . Other (please specify) W‘f‘r'f-i‘qorioaoo‘m For which type of service has the service bureau generally proved most effective? Results similar General ledger for all and financial Tax Labor dist. Payables applications statements returns 8: payroll Dist. 1 2 3 4 5 Billings 8: Year-end receivables Some control Some inventory aging function analysis run 6 7 8 9 Generally, who prepares the Clients' business documents into machine - readable form? Service Other Combination CPA firm Client bureau source of l 8: 2 1 Z 3 4 5 Combination Combination Some other of l 8: 3 'L of 2 8: 3 combination 61 62 [' II -= Page 5 - Cont'd. 31. 32. Generally, in what form is data sent to the service bureau? Punched paper tape Source Some combo Punched documents of 3 thru 8 cards__ Microfilm l 2 3 4 Optical Worksheet Dataphone font tape listings Other 6 7 8 9 Has using your own or an outside service bureau affected any of following? Answer Category Check here espsarrrr- Professional staff increased Professional staff decreased Non-professional staff increased Non-professional staff decreased Staff trained in EDP Have added persons with EDP experience Are seeking people with EDP experience Reduced need for traditionally trained accountants Have a different mix of engagements Number of business clients have increased Fee structure higher Fee structure lower . Staff (pro and non-pro) total compensation higher Staff (pro and non—pro) total compensation lower Have more time for staff development program Work pace less hectic Other (please specify) D‘qqrhpdoo‘m ’ 63 T II - Page 6 — Cont'd. 33. rer goryt le one :ory :ory What provisions does your office make to ascertain the integrity of the service bureau's processing? Require info. Examine the Question Using own on in—house processing never arose installation controls procedure 1 2 3. 4 Examine Obtaining flow charts processing and description of Examine procedure processing to include program and program program 5 6 7 What provisions does your office make to assure the integrity of data moving between your office and a service bureau regardless of the medium of transfer; i. e. messenger, mail, dataphone, etc. ? Require info. Test the Use our None Question on transfer transfer own necessary never arose system system installation 1 Z 3 4 5 For approximately how many years has your firm used an outside service bureau and/ or your own service bureau to service clients? Over lyr. 2' yrs. 3yrs. 4yrs. 5yrs. 6yrs. 7yrs. 8yrs. 8yrs. —___.—___————.———.————————__.—_—-_ ll 35 A. 35 B. #7. MACPA STUDY - SERVICE BUREAUS (Concluded) (If question numbering is not consecutive, omission of questions 23 through 34 is intentional) PART III Please estimate the percent of the total number of business clients directly utilizing the facilities of a service bureau. Under Over 5% 6—10 11-15 16-20 21-25 26-30 31-35 36-40 40% l 2 3 4 5 6 7 8 9 Approximately what percent of your gross billings does this represent? Under Over 5% 6-10 11-15 16-20 21-25 26—30 31-40 41—50 50% l 2 3 4 5 6 7 8 9 What factors prompted your clients to use a service bureau? Che ck Answer Category here Clients} staff suggested Service bureau contacted clients Recommended by our firm Recommended by an outside consultant Recommended by Clients' business acquaintances Recommended by Clients' trade association Other (pleas e Specify) qqrhodoo‘m Did utilizing a service bureau cause initial and subsequent systems and procedures modifications for any clients? Yes No Not sure C13 14 15 16 17 18 19 20 21 22 II - Page 2 - Cont'd. 3 & INSTRUCTIONS FOR QUESTION .38: nswer the following question only if your answer to question 37 was ”Yes". 3. If the answer to the previous question was "Yes", who performed the systems and procedures work for these clients? Check Answer Category here a. Our office did for almost all of the cases 1 23 b. Our office did for approximately 50% of the cases i 214 G. Our office did for less than 50% of the cases 1 25 d. Clients' staff ‘ 26 e. Service bureau ; 27. f. Outside consultant 4 28 g. Another CPA firm 5 29 h. Other (please specify) ? '39 LINSTRUCTIONS FOR QUESTION 39: nswer the following question only if your office recommends the use of lecific service bureaus to clients. If your office recommends the use of specific service bureaus to clients, what are the reasons? Check Answer Category here a. Good in~house processing and Control 31: b. Communicates and cooperates well with our firm 32 c. Timely service 33 d. Reasonable fee structure 34 e. Actual fees in line with quoted fees 35 f. Excellent systems and programming help 36 g. Equipment adequate to service our Clients' needs 37 h. Consults with us on client systems and procedure changes 38 i. Other (please specify) 39 [I - Page 3 - Cont'd. l. For the present and for one year ago, rank the different types of serv1ce bureaus from 1 thru 5 in terms of the number of clients using a particular type. (Please mark the type most clients are using with the number "1". Rank in Service Bureau Types descending order of usage Present ”Year ago a. Bank 41 b. Other CPA's installation 43 c. Equipment manufacturer's subsidiary .- or division 45 d. Independent 47 e. Other (please specify) 49 Indicate the reasons why in question 40, the service bureau in first place under the ”Present" column is so ranked. Check Answer Category here a. Proximity to client 50 b. Service bureau selling effort 51 c. Reflects timely processing service 52 d. Reflects competitive fee structure 53 ‘ e. Reflects systems and procedures capabilities 5.4 f. Reflects programming capabilities 55. g. Reflects ability to communicate accounting—wise 56 h. Reflects extra services at little or no cost 57 i. Reflects availability of capital for equipment and personnel 58 j. Other (please specify) 59 PART III—— Page 4 — Cont'd. SPECIAL INSTRUCTIONS FOR QUESTION 42: Answer the following question only if some of your clients use more than one service bureau. 42. 43. 44. Answer Category Circle only one fiver If some clients use more than one service bureau, what are their reasons? Answer Category Check here . Don't know . Price considerations . Expand variety of services available Maintain flexibility by having other service source Recommended by our firm Other (please specify) 1'th 9.0 0‘s» What types of services are Clients' obtaining from service bureaus? 4 Answer Category Check here Clients“ personnel use service bureau equipment Programming assistance Systems and procedures assistance Billings Various analyses Control applications, i.e. production, inventory, etc. Using as a transition to their own EDP installation . Financial statements and general ledger processing Payroll Back—up and peak—load assistance for Clients' EDP installation ' . Scientific applications Other (please specify) ‘r'r'n‘qurhfomoo‘m PW What types of equipment to the majority of service bureaus used by your clients utilize ? Stored-program Combination Tab computer of l & 2 Don't know 1 2 3 4 inc—C 0.a . i. , PART III - 45. Answer Category Circle only one Ewe; 46. Answer Category Circle only one answer 47. Answer Category Circle only one answer 48. Answer Category Circle only one answer Page 5 - Cont'd. With what types of programs are the majority of your clients using service bureaus having most of their work processed? Package Custom Don't know What provisions does your office make to ascertain the integrity of a service bureau's processing? Re quire info. Examine the Question Using own on in-house processing never arose installation controls procedure 1 2 3 4 Obtain flow charts and description of Examine processing Examine processing to include procedure and program programs program 5 6 7 What provisions does your office make to assure the integrity of data moving between your client and a service bureau regardless of the medium of transfer, i. e. messenger, mail, dataphone, etc. ? Require info. Test the Use our None Question '.on transfer transfer own necessary never arose system system installation 1 2 3 4 5 For opinion audit clients starting to use service bureaus, are there generally any substantial changes in the audit program? No, but there are some minor No clients in Yes No changes this category 1 Z 3 4 10 ll PART III - Page 6 - Cont'd. 49,. What effect did client usage of service bureaus have on your firm? _ . Check . Answer Category . _ 7 here a.. None J - y 1.2 b. Enabled us to expand our services to clients 13 c. Created a demand for more proficient staff 14 d. Was a factor in our increased gross billings 15 e. Enabled us to acquire more clients because of increased proficiency in EDP matters 1.6 f. Other (please specify) 17 50. For approximately how many years have your clients been using service bureaus ? Answer Over Category 1 yr. 2 yrs. 3 yrs. 4 yrs. 5 yrs. 6 yrs. 7 yrs. 8 yrs. 8 yrs. Circle only one am... 1 2 3 4 5 6 7 8 9 18 APPENDIX C SERVICE BUREAU-COMMERCIAL BANK QUESTIONNAIRE 304 WILLIAM R. SHAW, Presidem DETROIT ‘rHE MICHIGAN ASSOCIATION or: “CERTIFIED PUBLIC ACCOUNTANTS 4‘ B. KENNETH SANDEN, Vice President DETROIT RALPH J. KLIBER, Treasurer DETROIT OHAUNCEY A. NORTON, Secretary DETROIT 2119 .IJIME BUILDING - DEIRUII, MICHIGAN 48226 Wheeler IEIEPHUNE SEI-EIEI—AIII 313 March 17, 1966 Dear Sir: The Michigan Association of Certified Public Accountants is currently under- taking a research project to determine the effects electronic data processing is having on the accounting profession in Michigan. In conjunction therewith, we would appreciate your cooperation in completing the enclosed questionnaire only if your bank offers data processing services for customers of the type clients of CPAS or CPAS themselves would find attractive. The questions are'all objective in nature, requiring that you circle an appropri- ate number corresponding to your intended response or that you check certain applicable categories. Your reSponse will be completely anonymous and the questionnaire requiresfrless than ten minutes to complete. Please help us in helping our members recognize the potential benefits inherent in their direct use and in their Clients' use of your services. We are preparing a directory of banks offering these services for our members; therefore you may sign the questionnaire or you may write to us under separate cover if you wish to be included on this list along with a brief description of your services. Please use the envelope enclosed for your convenience in return- ing the questionnaire to us. Thank you. Ve truly you , William R. Shaw President WRS/nm encs. jIrMm-Nl WILLIAM R. SHAW, President DETROIT THE MICHIGAN ASSOCIATION OF I“ ' CERTIFIED PUBLIC ACCOUNTANTS“ B. KENNETH SANDEN, Vice President DETROIT RALPH J. KLIBER, Treasurer DETROIT CHAUNCEY A. NORTON, Secretary DETROIT 2IIG .IJIME BUILDING . IIEIRGII, MIGHIGIN 48226 mirmm IELEPHIINI 961-5457—AIIEA 3I3 March 17, 1966 Dear Sir: The Michigan Association of Certified Public Accountants is currently undertaking a research project in order to determine the effects elec- tronic data processing is having on the accounting profession in Michi- gan. In conjunction therewith, we would appreciate your cooperation in completing the enclosed questionnaire only if you offer commercial, as opposed to scientific, data processing services. The questions are all objective in nature, requiring only that you circle an appropriate number corresponding to your intended response or that you check certain applicable categories. .Trial runs undertaken by a group of your Associates averaged less than ten minutes for completing this questionnaire. Your response will be completgy anonymous. . Please help us in helping our members recognize the potential benefits inherent in their direct use and in their Clients' use of your services. We are preparing a directory of service bureaus offering these services for our members; therefore you may Sign the questionnaire or you may write to us under separate cover if you wish to be included on this list along with a brief description of your services. The Computer Age is upon us and only through cooperation will we all benefit. A return envelope is enclosed for your convenience in returning the questionnaire to us. ( Thank you. V y truly you , William R. Shaw President WRS/nm encs. 111.1ll'lllllllll THE MICHIGAN ASSOCIATION OF CERTIFIED PUBLIC ACCOUNTANTS DATA PROCESSING SERVICES STUDY NOTE: If you are a multi-branch Operation, answer only for your branch. 1. Do you operate a stored-program computer or tabulating equipment which you either own or lease? Yes, Answer stored-program Yes, Combination Category computer tab of'1 gg 2 No Circle only _ one answer 1 2 3 4 2. How many customers did you serve in 1965? Answer Under Over Category 10 10-25 26—50 51-100 101-200 201-300 301-400 401-500 500 Circle only one answer 1 2 3 4 5 6 7 8 9 3. What percent of the number of customers were direct CPA users? Answe r Unde r Ove r M None 5% 6-10 11-15 16-20 21—25 26—30 31—40 40% Circle only one answer 1 2 3 4 5 6 7 8 9 4. What percent of the number of customers were referred by CPAS? Answer Under ‘ _ p _ Over Category None 5% 6-10 11—15 16-20 21—25 26-30 31-40 40% Circle only one answer 1 2 3 4 5 6 7 8 9 5. Do you feel that the majority of CPAS in your marketing area are adequately appraised of and know how to use the services your offer? Appraised of services Answer Yes, very Yes, fairly but don't know how Category much so 1 so No Don't know to use _ Circle only 5 one answer 1 2 3 4 6. For customers who are also clients of CPAS, who performs most of the systems work, in terms of the number of applications, assoc1ated with setting up an application? Divided almost Sources Answer CPAS evenly between other than Category We do do us and CPAS us or CPAS Circle only 4 one answer 1 2 3 (2 7. How proficient are the majority of CPAS you deal with in respect to installing systems? A They don't nswer V6.1")? _ 7‘ Very Don't perform Category prof1c1ent Good Fair Poor poor know systems work Circle only one answer 1 2 3 4 5 6 7 8. Does your firm follow the practice of consulting with a customer's CPA firm for first-time applications, or modifications of existing ones? Answer __ 7 Category Always Usually Sometimes Rarely Never Circle only one answer 1 2 3 4 5 9. Do first-time CPA users of your services, or CPAS whose audit clients use your services for "the first-time, approach you about the controls in your processing prior to such use? Question Aflswer All Most Some Very few never Category do do do do arose Circle only“- one answer 1 2 3 4 5 10. Do you offer formal training or informal assistance for CPA users or for CPAS whose clients use your services? Answer Yes, formal Yes, informal Combination Em training " " assiétance ' of l’and"2 .1219_ Circle only " — One answer 1 2 3 4 11. Which of the following services do you offer? (Please check those offered.) Check Answer Category here a. Equipment usage by customers' personnel b. Programming assistance c. Custom systems design and installation d. General ledger and financial statements e. Tax returns f. Payroll g. Various analyses such as sales and receivables aging h. Various control applications such as production and inventory control i. Billing Operations research ap Scientific applications Other (please indicate) plications such as PERT L—lo O 1" W (3 12, Do you also offer customer services of the type indicated in question 11 to banks which do not maintain their own data processing installation ppt who in turn offer the se services to their customers? Answer Category Yep _N_o Circle only one answer 1 2 THANK YOU FOR YOUR ASSISTANCE — ADD ANY COMMENTS YOU WISH ON THE BACK OF THIS QUESTIONNAIRE. APPENDIX D STATISTICAL MEASURES EMPLOYED 310 A... 311 APPENDIX D1 The Kolmogorov—Smirnov two-sample test is sensitive to many differences in distributions from Which samples are drawn. In particular, it may be used to test the null hypothesis that the distributions do not differ against the alternative that one distribution is stochastically larger, i.e. that more Observa- tions fall in the lower categories of one distribution than of the other. Although the Kolmogorov—Smirnov test assumes con— tinuously distributed random variables, failure to meet this assumption results in a conservative test.3 For large samples (Nl>.40, N2>.40), the test statistic is a function of the maxi— mum difference, D, (in the hypothesized direction) between the cumulative sample distributions. This function of D is dis- tributed as Chi—square with two degrees of freedom. Values of D sufficient for rejection of the null hypothesis are given below for three probabilities of type I error (erroneous rejec— tion of the null hypothesis). Marginals P<<.001 P<:.01 P< .05 60.61 .34 .28 .23 61.62 .34 .28 - .23 1These measures of significance merely indicate that the inferences drawn from the survey data can be acCepted as mean- ingful and statistically supportable. 2. . . .. 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