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第十一届（2012）中国实证会计国际研讨会征文Association between Enterprise Resource Planning (ERP) Systems and Accounting Conservatism陈宋生赖娇（北京理工大学管理与经济学院100081）Abstract:In this study, we provide rare insight into the interaction between Enterprise Resources Planning (ERP) systems and financial reporting preparers‟ incentives for accountingconservatism. We examine this association for a sample of ERP adopters amongChinese publicly listed firms. We hypothesize and find that ERP adopters decreaseaccounting conservatism. Meanwhile, the relation between accounting conservatismand firm characteristics –market-to-book ratio, leverage, and size –is consistentbefore and after ERP implementation. It is misleading to assume that ERP systemsguarantee financial reporting quality, ignoring incentives. These results should be ofinterest to financial statement preparers initially adopting or implementing ERPsystems, auditors serving clients with ERP systems, and regulators overseeing thefinancial market and consolidation in ERP firms.Keywords: ERP systems; Accounting conservatism; Information asymmetry; FirmcharacteristicsData Availability: key data items used in this study were obtained from a proprietary source. All other sources of data are described in the study.I. IntroductionSince they emerged in the 1990s as one of the fastest growing and perhaps one of the most important developments in corporate use of information technology (Davenport 1998), Enterprise Resource Planning (ERP) systems have become popular in midsized and large firms throughout the world. These systems, which evolved from Material Requirements Planning (MRP) and Manufacturing Resource Planning (MRP-Ⅱ) systems (Umbel et al. 2003), consolidate into one common system all the back office information processing needs of a typical business, including accounting/finance, human resources, operations, supply chain, and customer information (Davenport 1998). As packaged business software systems, they allow a company to automate and integrate the majority of its business processes; share common data and practices across the entire enterprise; and produce and retrieve information in real time (Deloitte Consulting 1998). Potential advantages like these have made them the system of choice among many corporations (O‟Leary 2000; Bradford and Roberts 2001; Winters 2004; Brazel and Dang 2008).The pervasive organizational effects of ERP systems have been widely addressed in the popular literature (e.g., Poston and Grabski 2001; Hitt et al. 2002; Hunton et al. 2002; Hunton et al. 2003; Nicolaou 2004; Nicolaou and Bhattacharya 2006; Wier et al. 2007). However, there is a paucity of empirical research examining the impact of ERP system implementations on accounting quality, which is surprising considering that ERP systems replaced older legacy systems that often resulted in duplicate information being collected and stored in various departments, business units, geographic regions, factories, offices, etc. (O'Leary 2002). In contrast with older legacy systems, ERP systems use workflow automation to track information from sales order to cash collection, generating the necessary accounting transactions in the process (Hunton et al. 2004). They thus make timelier and higher quality accounting information available for management decision making at all levels of the organization almost continuously. Recently, scholars have called for empirical research into the effects of enterprise system implementations on information quality (Brazel and Dang 2008; Dorantes et al. 2011).Brazel and Dang (2008) investigated the effect of ERP system implementations on the quality of accounting information supplied to external users. They hypothesized and found that ERPsystem implementations led to increases in the absolute value of discretionary accruals (i.e., greater earnings management). Dorantes and colleagues (2011) investigated the effect of enterprise system implementations on internal information environments. In accord with their hypothesis that if enterprise systems improve management‟s access to decision-relevant internal information, management should be able to produce higher quality earnings forecasts, they found evidence that enterprise system implementations are subsequently associated with significant increases in the likelihood of management forecast issuance and the accuracy of the forecasts. They also executed robustness tests to rule out the alternative explanation that improvements in management forecasts are due to improvements in the firm‟s internal information environment rather than enhancements in management‟s ability to manage earnings.In the current study, we examine the same question set forth by Brazel and Dang (2008): do ERP systems affect the quality of accounting information supplied to external users? However, we examine a different, but complementary, criterion variable (accounting conservatism). Our study is motivated by several factors concerning the intersections between ERP system investments, financial reports, and the importance of accounting conservatism. First, ERP systems are increasingly popular technology investments in many worldwide organizations, and their implementation involves significant costs and risks (Hitt et al. 2002), yet there is debate over whether their contribution to firm performance is positive, negative, or nonexistent. Since ERP systems replaced older legacy systems and enabled accountants to record daily transactions and give managers timelier and more precise information, examining whether they also improve the quality of reports delivered to shareholders, lenders, and other outside investors is informative. Second, accounting conservatism has direct links to the firm‟s financial reports. Defined as “the accountant‟s tendency to require a higher degree of verification to recognize good news as gains than to recognize bad news as losses” (Basu 1997), accounting conservatism is an important attribute of financial reporting quality (Ball and Shivakumar 2005). Generally, accounting conservatism is positively related to the transparency of accounting disclosure. Third, conservative financial reporting has been hypothesized to facilitate efficient contracting between managers and shareholders in the presence of agency problems (Ball 2001; Watts 2003; LaFond and Roychowdhury 2007). Therefore, documenting the impact of one of a company‟s largest IT investments – ERP systems – on its level of accounting conservatism is informative to managers, market participants (e.g. shareholders, lenders), and researchers.ERP systems render all corporate information visible and financial information accessible not solely to accountants, and this poses challenges for managerial reporting and control (Kallunki et al. 2011). Previous studies propose that ERP systems improve internal accounting quality through (1) collecting and disseminating timely information to managers and thus improving their ability to process and analyze accounting information (Davenport 1998; Hitt et al. 2002); (2) providing management with a unified enterprise view of the firm‟s financial condition at all times (Dillon 1999); and (3) eliminating barriers between firm functions, thus allowing managers unprecedented access to accounting inf ormation (O‟Leary 2000). However, recent research has also shown that ERP implementation is accompanied by internal control weakness (Wright and Wright 2004), financial statement errors and inaccurate internal information (Wright and Wright 2004), reduced audit quality (Hunton et al. 2004; Brazel and Agoglia 2007), and increased earnings management (Brazel and Dang 2008). It is also suggested that firms implementing ERP systems may not take advantage of all the built-in control features, either for legitimate business reasons or because management wants to avoid the added transparency in order to manage (manipulate) earnings (Morris 2011). Given that managers have inherent incentives to switch welfare from shareholders and that ERP systems increase their access to and discretion over accounting information provided to external users (Brazel and Dang 2008), we hypothesize that ERP implementation could decrease accounting conservatism, which is an important indicator of financial reporting quality. This study also examines whether such a decrease reverses the direction in which accounting conservatism relates to specific firm characteristics, such as market-to-book ratio (MB), leverage (Lev), and size. Investigating accounting conservatism in four East Asian countries – Hong Kong, Malaysia, Singapore, and Thailand –Ball and colleagues (2003) suggest that accounting conservatism is oriented to incentives (demand) but not standards. In contrast to the advocacy of neutral accounting by the FASB, the conservative accounting of American firms also provides evidence for their argument. Given the significant effect of demand on accounting conservatism, we hypothesize that ERP systems may not change the direction in which accounting conservatismrelates to specific firm characteristics. In this study, we select three variables, market-to-book ratio, leverage, and size, to test this hypothesis. These three variables are those most often cited as capturing accounting conservatism, so it is informative to document the impact of ERP systems on them.To test our hypotheses, we obtained a sample of ERP implementation announcements from the annual financial reports of Chinese listed firms.1Following Khan and Watts (2009), we use C-Score as a proxy for accounting conservatism. We compare the pre- and post- implementation C-Score to test hypothesis 1. To test hypothesis 2, we first divide the sample into two subgroups according to the periods (pre- or post-implementation period) they falling into and then compare the overall direction between C-Score and firm characteristics of these two groups.The results of our study suggest that ERP system implementations allow firms more flexibility to manage accounting numbers and thus to provide external users poorer accounting information (i.e., to use less conservative accounting), but this impact does not reverse the direction of accounting conservatism in relation to specific firm characteristics.Our paper contributes to an ongoing literature stream in accounting, auditing, and information systems that addresses the impact of technology on a firm‟s accounting information. Our work supplements previous findings that while ERP systems increase managers‟ access to and discretion over accounting information, they enhance firms‟ opportunitie s to manage accounting numbers and thus weaken the quality of accounting information supplied to external users. The joint effects of ERP systems and financial statement preparers‟ incentives decrease the accounting conservatism of ERP users. Our findings should be of interest to financial statement users considering ERP adoption. Last, this study provides auditors with empirical data supporting concerns that ERP systems can potentially weaken the quality of financial statements.The remainder of this study is organized as follows. The next section discusses the background and related research and develops hypotheses. Section III discusses the sample selection and the research design. Section IV presents results, and section V offers robustness tests. Section VI concludes the study.II. Background and HypothesesStudies of ERP System Implementatio nAcademic research on ERP systems generally follows four research streams. The first line of research focuses primarily on key factors that lead to the success or failure of ERP system implementation. Nah and colleagues (2001) identified ERP team composition and changing management culture as critical to success, while Bradford and Florin (2003) credited the level of employee training in the ERP system and competitive pressure to adopt the system. Hong and Kim (2002), surveying 34 organizations, found that success significantly depended on the organizational fit of ERP and on certain implementation contingencies. Using a case study approach, Umble and colleagues (2003) identified ten categories of reasons why ERP implementations fail, for example unclear definition of strategic goals. These papers were mainly published in the early and middle 1990s.The second line of research uses archival accounting and financial data to measure changes in firm performance (measured by financial ratios such as ROA and ROI) associated with implementation of ERP systems. This research has generally yielded mixed results. Poston and Grabski (2001) used four traditional accounting measures to compare firm performance before and after ERP implementation and found a significant decrease in the ratio of employees and cost of goods sold to revenues but insignificant improvement in the ratio of selling, general, and administrative expenses to revenues or residual income. Hunton and colleagues (2003) compared four performance measures (ROA, ROS, ATO, and ROI) for firms that adopted ERP systems with those for firms that did not adopt ERP systems. They found that adopting firms showed little or no 1Following Brazel and Dang (2008), we do not employ a matched-pair design. A matched-pair design might include matched pairs that implemented another ERP vendor‟s system. This is highly likely given the preponderance (approximately 70 percent) of large, publicly traded firms that potentially implemented ERP systems during our sample period (Cerullo and Cerullo 2000). Attempts to match adopters with nonadopters severely reduced sample size because of the difficulty of finding a match (using conventional matching methods) that had not implemented some form of ERP system during the sample period.improvement in three of the four metrics (ROA, ATO, and ROI), while nonadopting firms showed decreases in these ratios. They also found significant interaction between size and health for three of the financial measures (ROA, ROI, and ROS). Using eight common ratios, Hitt and colleagues (2002) examined results for a group of firms that implemented SAP-R/3, the ERP system from SAP America, and found positive association between all of the ratios and ERP implementation except for return on equity. Also using eight performance measures to compare ERP adopters to nonadopters, Nicolaou (2004) found mixed results. Now that most public companies and medium firms have implemented ERP systems, their effect on performance seems to be a moot topic.The third line of research focuses primarily on the effect of ERP system announcement on firm value. Hayes and colleagues (2001) used an event-study method directed specifically at announcements about ERP systems. Their results, using standardized cumulative abnormal returns (SCAR), indicate that there is a generally favorable reaction to such announcements, and there is an interaction between firm size/health and reaction to announcements. Additionally, they conclude that ERP vendor size positively affects reaction to announcements. Hunton and colleagues (2002) used financial analysts‟ earnings forecasts as the dependent variable, rather than stock price, and found that forecasts made after the announcement were significantly higher than those made before it. Their results with respect to the two contextual factors, firm size and financial health, are similarly congruent with those of Hayes and colleagues. Ho and colleagues (2008) complemented the work of Hutton and colleagues (2002) by using archival data from the Institutional Brokers Estimate System (I/B/E/S) to show that financial analysts revised their three-year-ahead earnings forecasts significantly upward for firms that announce ERP implementations.The last line of research focuses primarily on the effect of ERP system implementation on accounting quality. This line can be further divided into two sub lines. The first line focuses on association between ERP system implementation and the internal information environment. The basic goal of an ERP system is to support and integrate all business functions, processes, and units of an organization and to create a system that can provide up-to-date and relevant information to decision makers, employees, and also business partners. Previous research generally provides positive evidence on this function. Conducted in the summer of 1998 by Benchmarking Partners, Inc., the Deloitte Consulting Second Wave survey consisted of in-depth interviews with 164 individuals at 62 Fortune 500 companies. Their results show that information/visibility (55%) and new/improved processes (24%) are among the most frequently cited intangible benefits realized from ERP programs. O‟Leary (2004) examined a database repository of information about changes in organizations due to the implementation of ERP systems that was obtained from Oracle Corporation‟s web site. He finds that information visibility (64%), integration (44%), and flexibility (40%) are the most frequently cited intangible benefits. More recently, as we note above, Dorantes and colleagues (2011) found that enterprise system implementations were associated with significant increases in the likelihood that management would issue a forecast and in the accuracy of the forecasts.The second sub line focuses on the relation between ERP system implementations and financial reporting quality supplied to external users. Brazel and Dang (2008) found that ERP system implementations increased the absolute value of discretionary accruals (i.e., earnings management). On the other hand, Morris (2011) found some limited evidence that implementation of ERP systems decreased earnings management, as measured by discretionary accruals, earnings quality, and the distribution of earnings (and earnings changes) near zero. Morris and Laksmana (2010) reported the same result. It is vital for stakeholders and external uses to understand whether ERP systems improve or reduce financial statement quality. Yet the results are mixed.To the best of our knowledge, there is no previous paper documenting the impact of ERP system implementation on accounting conservatism. If we can verify this impact, we can provide supplementary evidence on its effect on financial reporting quality.Accounting Conservatism and ERP System ImplementationTwo important reporting features of conservative accounting are asymmetric timeliness in recognition of accounting gains versus losses and systematic understatement of net assets (Givoly et al. 2007; Roychowdhury and Watts 2007). These two features result from accountants‟ predisposition to require a higher degree of verification and certainty for assets than for liabilities (Watts 2003a).The literature identifies two general kinds of accounting conservatism, unconditional and conditional. In unconditional (or ex ante or news independent) conservatism, the aspects of the accounting process determined at the inception of assets and liabilities yield expected unrecorded goodwill. In conditional (ex post or news dependent) conservatism – the type of conservatism we examine here –book values are written down under sufficiently adverse circumstances but not written up under favorable circumstances (Beaver and Ryan 2005). Ball and Shivakumar (2005) point out that conditional conservatism can enhance contracting efficiency because it more quickly triggers debt covenant violation that transfer decision rights to lenders, allowing lenders to restrict managers‟ action sooner after economic losses become apparent, while unconditional conservatism seems inefficient or at best neutral in contracting. Conditional conservatism is desired by shareholders, lenders, and other stakeholders because it gives them a clear view of the firm‟s strengths and weaknesses and helps them make correct judgments and investment choices (see Guay and Verrecchia 2007). Conditional conservatism therefore appears especially when high-quality accounting information is required, as when a firm issues equity and debt capital or is cross-listed on multiple exchanges, or when strong investor protection mechanisms are in place, for example in common-law countries (Ball, Kothari, and Robin 2000; Bushman and Piotroski 2006; Francis and Wang 2008). It follows that conditional conservatism should be related to accounting systems that are thought to affect information transparency – such as ERP.According to Morris and Laksmana (2010), ERP systems provide greater transparency across all operating units and, therefore, make it difficult for lower-level managers (agents) to make questionable adjustments (entries) in the reporting system without being noticed by their superiors (principals). Morris (2009) argues that ERP systems thus encourage agents to act in the interests of principals and not in their own. That is, ERP systems reduce the possibility of manipulating business transaction information by making it harder to conceal the modification of information from one business unit to another, or from internal managers to executives, or from executives to internal and external auditors (Dorantes et al. 2011). However, other studies suggest that ERP systems could increase flexibility and opportunities to manipulate accounting numbers. For example, Brazel and Dang (2008) proposed and empirically supported the notion that the combination of increased manager access and greater discretion over accounting information could enhance opportunities to manage earnings. Managers have incentives to expedite the recognition of good news when their bonuses and stock options are tied to reported earnings and have incentives to postpone or hide bad news when the recognition of bad news in earnings endangers their tenure. In those cases, ERP systems could help them to overstate earnings and hence decrease accounting conservatism.Although these arguments are mixed, we generally adopt the second line, for the following reasons. First, to the best of our knowledge, the notion that ERP systems increase transparency at each level in firms has not been empirically tested, while the opposite view has been verified with empirical data. Second, at a minimum, it is unlikely that managers would choose to adopt a system that would constrain their ability to manage earnings, given that meeting earnings expectations is considered the chief determinant of stock valuation (Berenson 2003). Third, as we note above, Ball and colleagues (2003) suggested and empirically tested that accounting conservatism responds to incentives (demand) but not standards. In sum, we posit that an ERP system is only an instrument, which has the potential to (1) collect and disseminate timely information to managers and thus improve their ability to process and analyze accounting information (Davenport 1998; Hitt et al. 2002); (2) provide management with a unified enterprise view of the firm‟s financial condition at all times (Dillon 1999); and (3) eliminate barriers between firm functions, allowing managers unprecedented access to accounting information (O‟Leary 2000). Identifying uncertain losses or incomes in a timely manner is an inherently subjective process and is affected by the interaction of E RP systems and managers‟ incentives. Given the significant effect of incentives on accounting conservatism proposed by Ball and colleagues (2003) and managers‟ inherent incentives to use their private information to attempt to transfer wealth from investors to themselves, managers will take advantage of the more timely, accurate, and complete information provided by ERP systems to raise their bonuses by overstating financial performance. Therefore, H1: ERP system implementations lead to less conservative accounting.Accounting Conservatism, Firm Characteristics, and ERP SystemImplementationsStudies documenting the relation between accounting conservatism and firm characteristics are prevalent, among which market-to-book value (MB), leverage and size are most often cited ones (see Ball 2001; Dichev and Skinner 2002; Efendi et al. 2007; Khan and Watts 2009; PAE et al. 2005; Roychowdhury and Watts 2007; Watts 2003a; Watts and Zimmerman 1986). For example, Khan and Watts (2009) argued that high market-to-book value firms are likely to have more volatile stock returns because a greater proportion of their market value is due to risky growth options, and firms with more volatile stock returns are more likely to have very large losses that trigger lawsuits, which in turn increase the demand for conservative accounting at high MB firms. Ball (2001) and Watts (2003a) indicated that conservatism results in “hard” or verifiable lower bounds for accounting numbers used in debt contracts, thereby constraining opportunistic diversion of resources and triggering debt covenant violations in a timely fashion. Khan and Watts (2009) argued that larger firms are likely to be more mature and to have richer information environments, reducing both overall uncertainty and information asymmetries relating to the reliability of projected gains and hence demand of accounting conservatism.In summary, the relations between firm MB, leverage, size and accounting conservatism are demand determined (lawsuit, debt contracts, information uncertainty etc.), in which managers‟ incentive is only one and non-leading factor. It follows that, other things equal, the change of managers‟ incentive induced by the implementation of ERP systems should not change the relation between accounting conservatism and MB, leverage and size. This is similar with the study of Hunton and colleagues (2002), who found that mean earnings forecast revisions in large and unhealthy firms were significantly greater than the mean forecast revisions in small and unhealthy ones, but their results also indicate that mean forecast in both pre- and post-announcement was higher in large and unhealthy firm conditions than in small and unhealthy firms.The impact of ERP system implementations on the relation between firm MB, leverage, size and accounting conservatism can also inferred through the different effect of ERP system on accounting conservatism in firms with different MB, leverage and size, respectively. Take firm size as an example. The effect of ERP system implementations on accounting conservatism in firms with relatively large and small size has three possibilities. First, firms with relatively large and small size are similarly affected. Second, firms with relatively large size are more seriously affected than smaller firms because larger firms generally have more resources and hence more increased information provided to managers through ERP systems. Third, smaller firms are more seriously affected than larger firms because smaller firms are paid less observation by analysts or auditors and hence managers in these firms have more opportunities to manipulate accounting numbers provided by ERP systems. Suppose larger firms adopt less conservative accounting than smaller firms.2Other things equal, in the first two cases, such relation will be the same. For the third case, which means the decrease of accounting conservatism due to the increased opportunities for managers to manipulate accounting numbers provided by ERP systems in smaller firms is larger than that in l arger firms, as long as other factors except managers‟ incentives impacting accounting conservatism still play a leading role, the relation will remain unchanged. To sum up, no matter how accounting conservatism in firms with relatively large size (MB, leverage) is affected comparing to firms with relatively small size (MB, leverage), the relation between firm size (MB, leverage) and accounting conservatism will not change after ERP system implementations. Our second hypothesis, stated in the alternative form, is as follows:H2a: The relation between firm MB and accounting conservatism before and after ERP implementation will be consistent.H2b: The relation between firm leverage and accounting conservatism before and after ERP implementation will be consistent.H2c: The relation between firm size and accounting conservatism before and after ERP implementation will be consistent.2The relation between firm size and accounting conservatism is mixed, but it doesn‟t affect our hypothesis since we focus on whether such relation is consistent in pre- and post-implementation periods.。