The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

Evaluating the impact of Internal Control in ERP Environment on Competitive Advantages :With an application to Egyptian Post Sector

Mohammed Ali Wahdan

Ahmed Ragab Ahmed Nassar

Assistant Professor of Accounting & Auditing, Faculty of Commerce , Menoufia University,[email protected]

ERP Consultant ,Master in Business Sciences Faculty of Commerce , Menoufia University [email protected]

Submitted to The First Cairo University International Conference On Accounting CUICA 2015 12th & 13th September 2015

2015

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

Evaluating the impact of Internal Control in ERP Environment on Competitive Advantages :With an application to Egyptian Post Sector

Abstract Recently, Internal controls received a considerable attention from internal auditors on all activities and disciplines in enterprises and companies . in addition, we notice growing interest of internal controls by many regulatory bodies and professional organizations, in particular all business systems that need to review and develop internal control. Furthermore, because of the critical importance of the internal control systems in companies, we need to examine and assess the expected development from the newest highly complex and development of technological systems such as ERP systems. This paper aims at trying to shed light on evaluating the impact of internal control in ERP systems environment on creating new competitive advantages . To achieve this goal, the questionnaire was conducted on ( 23) companies selected in the Egyptian postal sector , It consists of several sets of questions about the role and the impact of internal control ERP environment on increasing competitive advantages. The results of the study indicated that Internal Control system in ERP environment has a significant relationship with achieving competitive advantages. Furthermore, Internal Control system has been affected after using ERP.Moreover, Competitive Advantages have been affected after using ERP. Key Words : Internal Control, Enterprise Resource Planning (ERP) ,CompetitiveAdvantages

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

I.

Introduction

In a constantly changing international business environment, firms have to continually expand their capabilities and sharpen their competitive edge. To achieve this goal, an increasing number of organizations are turning to Enterprise Resource Planning (ERP) systems. An ERP system uses various kinds of informationprocessing capabilities and places the collected data into a single database. Thus, an ERP system is often considered to be a vital element in organizational infrastructure for enhanced visibility and improved performance. (Hwang, 2011, p. 301) . The need to improve information flow in organizations, reduce costs, streamline business processes, establish linkages with suppliers, satisfy customers, and reduce response time to customer needs and expectations are some reasons behind the implementation of ERP systems in most organizations. Organizations require information technology such as ERP, in order to remain successful and retain their competitiveness. ERP systems may be the most important development in the corporate use of information technology. Thus, many organizations are planning to improve their competitive position by implementing ERP systems (Zaglago, et al ., 2013, p.1). It was noted that with the trend toward the use of ERP system, it has led to a significant change on all existing business processes in all companies , Moreover, it has led to many effects on internal control environment, making it different from what it was before, and although the ERP system was beginning just a subsidiary of the accounting information system, relying only on running and monitoring accounting operations, but in today's world it has become difficult to deal with market risks. So the new generations of ERP systems to match the change in the business world are developed. Therefore the aim of this paper is to demonstrate the impact of ERP systems on the internal control system, and determine the steps and procedures for checking the internal control system in ERP environment. However, what happens to the competitive advantage from implementing ERP systems? some organizations consider ERPs as a necessity for conducting business, others want to exploit them to outperform their competitors. In the last few years, researchers have begun to study the link between ERP systems and competitive advantage. This link will be the focus of this paper too. The outline of the paper is as follows. Section 2 presents an overview of the related literature (including the impact of ERP system on internal controls, the impact of ERP system on Competitive Advantages, the phases of evaluating internal controls in ERP Environment. Section 3 presents research methodology of the applied study. Section 4 introduces the discussion and results. Section 5 point into the conclusion and future research.

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

2. Overview of relevant Literature An ERP project is a large enterprise program, it is from a business and technology point of view. It generates huge changes and involves calling into question many traditional functions within the company, for which people are seldom well prepared. It often requires the implementation of several new systems and their integration into existing systems. A. Concepts ERP Concept ERP systems are multiple module software packages that evolved primarily from traditional manufacturing resource planning (MRP II) systems. The objective of ERP is to integrate key processes within the organization such as order entry, manufacturing, procurement and accounts payable, payroll, and human resources (Hall , 2011 , p.490). ERP combines all systems into a single integrated system that accesses to a single database to facilitate the sharing of information and to improve communications across the organization (Hall , 2011 , p.490). ERP system is an integrated information system that is used to support business processes and resource management within an organization (Hasibuan & Dantes , 2012, p.15) Internal Control Concept Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance (COSO,2013) . Competitive Advantage Concept A competitive advantage is an advantage gained over competitors by offering customers greater value, either through lower prices or by providing additional benefits and service that justify similar, or possibly higher, prices (Ehmke, C. 2011,p1). The competitive advantage is the score of benefit that company has through ERP implementation. However, not all ERP implementationcan give competitive advantage to a company. (Dantes, &Hasibuan, 2011,p1).The alignment of the business strategy and the technology may give a competitive advantage. (Dantes, &Hasibuan, 2011,p3). In the implementation of ERP system, a business transformation always aligns ERP’s business process and company’s business strategy (Esteves and Pastor, 2001,p2). This transformation will influence company’s business process improvement, cost reduction, service improvement, and minimize the effect on the company’s operation (Summer, 2004,p8).

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

B: Impacts of ERP on Internal Controls According to the report of the Commission (COSO, 2013) , and with regard to the technological developments of generations software applications and ERP systems, it must determine the effects on of internal control elements after using ERP systems in companies . B/1 Control Environment The impact of using ERP Can be illustrated through several trends evident in the following: a) ERP system makes internal control more effective. ERP allows all the enterprise service processes to become a supply chain with each unit closely related. It also rendered enterprise management structure streamlined. This relatively parallel pipeline strengthens the fluency of information communication and improves the efficiency of enterprise management. For example, rapid information exchange makes the communication between parent and subsidiary company more fluent. Decision makers can evaluate the information fast, decreasing the level of enterprise internal control risk. Moreover, enterprise would have a clearer responsibility division and more efficient internal control. Information communication would be more fluent and management efficiency could be reflected (Wei-hua,2011,P.10). b) Performing ERP in all sections has been effective on the control environment. It means that company has been successful in developing methods to prevent illegal access and destroying documents, reports and assets. So, the reliability and validity of information have increased and individual's tasks don’t interfere with each other (Valipour, et al., 2012 , p.236) . c) ERP systems have led to a new division of responsibilities in the organizational structure, as they require more development and training of human resources policies. Furthermore, it led to the development support of integrity and ethical values mechanisms, and management philosophy. Moreover, the application of ERP systems reflects the administration directed towards universal integrity and operational efficiency, to facilitate the effectiveness of internal controls, to improve job satisfaction, to work under the team spirit and to strengthen the competitiveness of the organization's performance (Hsiung& Wang, 2014., p.33). d) ERP systems implementation involves broad organizational changes in business processes and significant implications for the management model, structure and individuals within organizations. The organizational changes joined ERP systems can affect the social environment and reform the entire information infrastructure. in addition, ERP imposes its own logic on organizations. Therefore, ERP implementation can be viewed as organizational-change projects. ERP systems are a significant factor in the users’ real lives. organizations with highly advanced abilities to use information derived from an ERP have the potential to alter their job roles and change their organizational structures (Elbardan, 2014,p.12).

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 B/2 Risk Assessment The impact of using ERP Can be illustrated through several trends evident in the following: a) ERP system makes risk evaluation more scientific. ERP system gives risk discovery, risk analysis and risk treatment. ERP largely cuts down the error rates, allowing enterprises to handle and evaluate the possible risks in different parents and subsidiary companies exactly and promptly. (Wei-hua, 2011, P.10). b) New risks of ERP systems are generally represented in the system development risks - project management risks - financial risks - reputational risks - risk of data integrity - technology risks - legal and regulatory risks - product risks - security risks - Support and maintenance risks - business processes risks - and risks of resistance to prepare users (KPMG , 2012 , p.5). c) Performing ERP generally influenced risk assessment, admitting the ERP effect facilitates designing plans by management to reduce the probable risks.( Valipour, et al., 2012 , p. 236). d) ERP systems had led to the prevention of fraudulent behavior and reduce risks through the availability of control and mutual check mechanisms, and prevention of errors at the source (Hsiung& Wang, 2014., p.31). e) ERP systems are risky , risks revolve around implementation, technicality and functionality. (1) In ERP implementation, the efforts of Reengineering and customisation cause risk of resistance to change, lack of enthusiasm to learn new ways of doing jobs or unwillingness to accept new responsibilities. The main implementation risks include : (1.1) organizational risks such as the degree of required changes and capabilities in process re-engineering; (2.1) technical skills risks that include ability to attract and maintain qualified staff, optimal utilisation of internal employees, cross technical training and exchange of knowledge between groups; and (3.1) system risks that include identifying and understanding the changes required and user risks that include system comprehension by the users, coordination among departments and resistance to change . (2) ERP technical risks include the tight integration of application modules, data and privacy concerns. ERP system presents risk due to the linked interdependencies of business processes and relational databases, It increases security risks, which may increase financial statements risk if access is not adequately and periodically monitored. An error in one part of the system brings down the entire system and disrupts the organization’s business processes. Moreover, integration increases the risk of fraud by users who have excessive authority.(3) the functional risks arise from the challenge of incompatibilities between systems and organizational needs in regard to processing procedures and the presentation format and the information content of the output. These risks can lead to wrong access, miss validation procedures, inappropriate operational steps, inappropriate output formats and incorrect information content of input (Elbardan, 2014, p.13).

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 B/3 Control Activities The impact of using ERP on control activities can be illustrated through several trends evident in the following: a) ERP system makes control procedures more flexible and efficient. A case in point is inventory control. Enterprises can exactly figure out the maximum and minimum stock by detailed analysis and estimate. By these numbers, they could make appropriate inventory strategy and purchase plan (Wei-hua, 2011,p.10). b) Effectiveness of ERP performance has been proved, such as periodic accounts closing and interim financial reports have become easy, fascinating monthly bank reconciliation and cash expectancy, controlling activities such as product tracing to ingredients, controlling production line, estimating cost, and etc. (Valipour , et al. 2012, p.236.) c) ERP systems led to several regulatory actions related to the prevention of fraudulent behavior and control of upstream operation's mutual-mail inspection.Moreover, through the general and application control mechanisms can review the performance of all internal departments of the organization. ERP increased the ability to control over operations and data processing, and increased control over the safety and security of the system and databases (Hsiung, & Wang, 2014, p.34). d) Control risk increases when advanced technology is implemented for accounting and information systems. Traditional internal controls are insufficient in preventing or detecting errors for accounting systems with advanced IT (Huang et al., 2004, p. 684). The integrative nature of ERP systems affect many control issues such as control planning, control monitoring, authorisations, reconciliations, segregation of duties and risk assessments (Rikhardsson et al., 2005,p37). ERP systems facilitate the automation of some control activities, reduce manual tasks and enable stricter controls. ERP systems enable integrated information for greater visibility of employees’ activities (Elmes et al., 2005,p8). ERP helps organizations control their activities by centralising information (Ragowsky and Somers, 2002,p14). B/4 Information and Communication The impact of using ERP Can be illustrated through several trends evident in the following: a) The appliance of ERP system makes accounting process more efficient. The ERP system perfectly combines the “three flows” (logistics, capital flow and information flow) together. This kind of information sharing and use not only encouragessharing and transparency of operation information, but also makes an enterprise information systems more open, prompt and electronic. (Wei-hua X. 2011, p10). b) Performing ERP has influenced the information and communication, facilitating internal information related to financial results to be used by internal users‚ as well as reviewing the company performance results. ERP leads to creation of a system by

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 management to provide mechanized information to ensure that the aims and needs are sound and management will be able to handle the affairs better than before. (Valipour, et al. 2012, p236). c)

ERP systems have led to an increase in the quality of information and communication between individuals and departments. Moreover, the information system in the ERPshas many characteristics such as accuracy, completeness, clarity the relative importance, ease of understanding, timely, concise, reliable, continuous updating, objectivity, flexibility and efficiency, competence (Hsiung, & Wang, 2014, p34) . d) ERP systems solve the issue of the asymmetric information,enhance control through standardised information, enable standard operational processes and increase organizational formalisation and controls. ( Rajan & Saouma ,2006,p678) . B/5 Monitoring Activities The impact of using ERP Can be illustrated through several trends evident in the following: a) The appliance of ERP system makes service supervision more efficient. By taking advantage of various kinds of information provided by ERP system, enterprises can design a series of dynamic performance supervision system to improve internal control efficiency and to better achieve the internal control objective. This will strengthen the management of enterprise capital supervision and transactions, and a better control function of cost and expense. (Wei-hua X. 2011, p.10) b) Internal auditors have a complete control on the organization. ERP has facilitated internal controls assessment by internal auditors, which in turn helps to compliance tests of independent auditors, leads to costs reduction, and increase of reliability in conducted observation tests. (Valipour , et al. 2012, p.237). c) ERP systems have enabled the reviewers to adjust the performance of the internal departments and monitor deviations before they occur continuously, reporting and making proposals to address them. (Hsiung, & Wang, 2014, p.39) . d) Internal auditors are responsible for identifying weaknesses in internal control systemsand provide recommendations to improve the effectiveness of the internal control structure (Fraser & Henry, 2007,p392). (Cattrysse,2005) suggests that the assurance provided encompasses: organization's governance activities; operation and information systems, integrity and reliability of operational and financial information; safeguarding of assets, efficiency and effectiveness of operations,and compliance with regulations and laws. Hirth (2008) points out that an organization with the best internal audit generally has better controls. Rikhardsson et al. (2005) suggest that ERP seems to affect the aim of the internal control regarding whether it should be based on preventive controls or detective controls and how these two should be mixed. (Dechow& Mouritsen,2005,p694) conclude that ERP systems separate the internal control function from the

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 management accounting function. Thus, control is no longer in the domain of the accounting department but a collective affair where ERP systems define the logic through which the control function is performed. C: Impacts of ERP on competitive advantages There are 11 indicators to measure the organization’s competitive advantages that caused by ERP implementation (Molla and Loukis, 2005,p9),( (Dantes, &Hasibuan, 2011,p3)) namely: (1) value added, (2) rare product, (3) product leading, (4) non-substitute, (5) support core business, (6) reduce product cost, (7) product differentiation, (8) operational efficiency, (9) increase entry barrier, (10) bargaining power again supplier/customer, and (11) support competitiveness. Some researchers have claimed that ERP systems encourage economic growth, as measured by return on assets (ROA), return on investment (ROI), and asset turnover (ATO). (Holland et al. 1999) argued that organizations do not implement ERP systems to achieve such benefits but rather to deal with their outdated legacy systems. Others have argued that ERP can be part of achieving a competitive advantage in some situations (Beard & Sumner, 2004). (Lengnick-Hall &et al. 2004) claimed that ERP systems do not offer competitive advantages in themselves, but that they have to be combined with social and intellectual capital within the firm (Kalling, 2003; Mata& et al., 1995; Powell & Dent-Miallef, 1997). There is a paucity of research on the topic of managerial issues arising from the deployment of ERP systems and creating a competitive advantage (Mata et al., 1995; Beard & Sumner, 2004; Kalling, 1999). The few studies that exist treat the issue of gaining competitive advantage in a relatively simplistic fashion (Kirchmer, 1998). (Mata &et al. 1995) used the resource-based view of the firm to find out if four proposed attributes of IT could be a source of a sustainable competitive advantage. The four attributes of IT are capital requirements, proprietary technology, technical IT skills and managerial IT skills. However, their study (Mata et al., 1995) was theoretical: it reviewed prior research. They argued that the only attribute that is expected to create a competitive advantage is managerial IT skills. Managerial IT skills include management’s ability to conceive of, develop, and exploit IT applications to support and enhance other business functions. Thus the real value is not the ERP system in itself, but the way the managers exploit it (Barley, 1990). (Beard & Sumner 2004) also used a resource-based view when they attempted to see if an ERP system could create a competitive advantage in itself.

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 Their conclusions using the four criteria in the framework are summarized . Is the resource or capability valuable? .There was no evidence that showed that ERP systems reduced costs. Most of the benefits of the ERP systems were in the “valueadded” category. Is the resource or capability heterogeneously distributed across competing firms? It was argued that ERP systems were heterogeneously distributed within some industries, but not in other industries such as oil, chemicals and technology, where ERP systems were becoming “standard” due to the common system approach. ERP systems could therefore be used to achieve a temporary competitive advantage at best, but most often they achieve competitive parity only. Is the resource or capability imperfectly immobile? Being an early adopter can give a temporary competitive advantage, but this benefit is eroded over time. This is due to the “lessons learned” by the pioneers of ERP implementation. ERP systems are increasingly imitable and create only a temporary competitive advantage at best. Is the firm organized to exploit the full potential of the resource or capability?Successful project planning, implementation, alignment and utilization of the ERP system may be a source of competitive advantage. This means that the management of the ERP project and subsequent operations should be in focus. Successful Business Process Reengineering (BPR) projects to facilitate the fit between the system and the organization were also argued to be important. This conclusion by Beard and Sumner (2004) has been supported by other researchers on the topic (Mata & et al., 1995; Somers & Nelson, 2003). Along these lines, ERP suppliers promote what they claim to be “best practices” for a particular industry. These are process templates which, if followed carefully, are claimed to enable organizations to transform their businesses and become more effective (Ross, 1999). D: Evaluating of Internal Control in ERP environment Internal auditors should examine and evaluate the internal control system in the ERP environment through some major phases starting from the planning, implementation, and reporting. These evaluation phases can be summarized in two basic phases as follows: The first phase: Initial Evaluation of Internal Control System At this phase, Initially evaluating of Internal control through the planning process and the initial review - which involves understanding the nature of the business and the study of the structure of the facility and get full access to the powers of the ERP system, See Figure 1.(Brody & Kearns, 2009,p11).,and (Cerullo&Cerullo, 2005,p6). The second phase : The Final Evaluation and Test Controls. At this phase ,Controls are evaluated and tested through the determination of the feasibility of effective and continuous performance of the actual regulatory activities within the ERP environment, and then assessing the level of controlrisk, See Figure 1(Brody & Kearns, 2009,p10).,and (Cerullo&Cerullo, 2005,p2).

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 Phase I

A

Start

Test Controls

Determine the nature of the entity's business, and organizational structure

Use COSO framework , COBIT and SOX Act standard SAS 94, standard PCAOB No 5

plan and scope of the audit and evaluation

Obtain an understanding of IT control .environment

No Can you understand ERP environment and complete the evaluation and audit

1 ERP is very complex and difficult to Interpolation

Yes Is there a need for specialist auditor in ERP?

Yes

Phase 2

No

yes

May be able to bypass testing of controls and increase the amount of substantive testing

Design efficient test of controls

Determine nature ، timing and extent of control tests

Audit ERP Physical Security

Review Super User Access Review Audit Logs

Performing initial analytical procedures

N o

2

ERP system is complex ?

No Fraud Suspected?

Cooperation with specialist auditor in ERP Freeze Site , Use Forensics Set acceptable auditrisk and inherent risk Assess the complexity and sophistication of ERP systems

Perform initial risk assessment

Identify control activities, general and application controls

3 ERP Installation, Recently ? Review Subschema ، Access Matrix، Security Settings

No Is ERP applications separated?

Document the understanding of ERP controls

What is the initial level of assessment of control risk?

yes

No

Can you separate applications in ERP

Low

yes

Examine and test eatch application independently

No

High plans to perform more controls

Prepare reports for initial assessment plan

Design and operation tests of controls on the application independently or on the ERP system fully

Audit ERP Through Computer , EAM and MCL

yes

A

ERP elements are Large or Non-routine Items No

B

Audit With Computer, GAS and

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

B Evaluating the results of examined tests and controls for ERP

What is the level of the final evaluation of risk control? Low

High Can you rely on complementary controls? No

yes

Test and evaluation of controls

2

Identify and address weaknesses and important deviations in ERP environment

1

3

Documentation of results and reporting

End

3. Research Methodology The method of this research is survey based. One of the most common ways of collecting data in the survey method which has been used in the current study is personal interviews and questionnaire. The questionnaire consists of various items and has been organized for 7 different parts of the considered organization‚ that is includes all the questions ( control environment- risk assessment - control activities - information and communications - monitoring - ERP - competitive advantages ) . Research Hypothesis and Variables To achieve the research objectives, The following three hypothesis are developed: H1: Internal Control system in ERP environment has a significant relationship with achieving competitive advantages . H2: Internal Control system has been affected after using ERP. H3: Competitive Advantages have been affected after using ERP.

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 The research variables are (1) ERP , (2) Competitive Advantages , and (3) internal controls. The latter variable is divided into 5 sub-variables: (1) Control environment, (2) Risk assessment, (3) Control activities , (4) Information and Communications , and (5) Monitoring. In this paper, we used Cronbach's alpha formula which is calculated by the SPSS software to evaluate the validity and reliability of the questionnaire. The validity coefficient value for the questionnaire is (93.4 %) based on the Table1, which reflects the high validity of the above mentioned questionnaireregarding content admissibility. The main part of questionnaire is related to the questions about internal control‚ as said before has been derived from the questions designed by COSO committee and reliable scientific sources such as international magazines. Format admissibility view for the used questionnaire in this paper undertook some changes in the structure by the consulting a professor and 5 experts in the field of (ERP) Enterprise Resource planning ,internal control and Internal audit. Table 1—Reliability and Validity Statistics Cronbach's Alpha

%

Validity

%

N of Items

.872

87.2 %

.934

93.4 %

50

4 .The Discussion and Results In this section the required hypothesis has been evaluated for each level to accept or reject them. 1- Descriptive Statistics of Research Variables The Table 2 shows the statistical analysis for the research sample about the beginning of using ERP . Table 2—Begun to use ERP system formally

Valid

Missing Total

less than 5 years from 5 -10 years more than 5 years Total System

Frequency 16 35 20 71 40 111

Percent 14.4 31.5 18.0 64.0 36.0 100.0

Valid Percent 22.5 49.3 28.2 100.0

Cumulative Percent 22.5 71.8 100.0

The Table 3 shows the statistical analysis for the research sample about the ERP system currently in use. Table 3— ERP system currently in use

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

Valid

Missing Total

(Microsoft Dynamics Double Click - Delta - Sage Other systems) ( Epicor -Infor ) (Sap- Oracle - JD Edwards ) Total System

Frequency 21

Percent 18.9

Valid Percent 29.6

Cumulative Percent 29.6

14 36 71 40 111

12.6 32.4 64.0 36.0 100.0

19.7 50.7 100.0

49.3 100.0

2- The Results of First Hypothesis Test Table 4— Correlations y 1

Pearson Correlation Sig. (2-tailed) 71 N Pearson Correlation .844** .000 X Sig. (2-tailed) 71 N .804** Pearson Correlation .000 Z Sig. (2-tailed) 71 N **. Correlation is significant at the 0.01 level (2-tailed). Y

x .844** .000

z .804** .000

71 1

71 .726** .000 71 1

71 .726** .000 71

71

According to Table 4 , The correlation coefficient R when (sig=0,000), tells us about the strength of the linear relationship between Research Variables x ,z and y .When we look at the value of the correlation coefficient R , we found that the linear relationship between X and Z is (0.726**) , and this is a strong enough to use the model of the relationship . Else , we found that the linear relationship between X and Y is (0.844**) , and this is a strong enough to use the model of the relationship . last , we found that the linear relationship between Z and Y is (0.804**) , and this is a strong enough to use the model of the relationship . And therefore we can accept the first hypothesis which says that Internal Control system in ERP environment has a significant relationship with achieving competitive advantages. 3- Results of Second Hypothesis Testing Table 5—ANOVAb Model

1

Sum of Squares

Df

Mean Square

F

Sig.

Regression

.630

1

.630

76.989

.000a

Residual

.565

69

.008

Total

1.195

70

a. Predictors: (Constant), x b. Dependent Variable: z

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

Table 6—Coefficients Unstandardized Coefficients Model (Constant)

1

x a. Dependent Variable: z

B

Std. Error

3.024

.076

.164

.019

Standardized Coefficients Beta

.726

t

Sig.

39.572

.000

8.774

.000

Based uponTables 5, 6we get the slope (b1) and the standard error (SE) from the regression output. b1 = 0.164 SE = .019 We compute the degrees of freedom and the t-score test statistic, using the following equations. {DF = n - 1 = 71 -1 = 70 } , { t = 39.572} where DF is the degrees of freedom, n is the number of observations in the sample, b1 is the slope of the regression line, and SE is the standard error of the slope. We use the T Distribution table to find T vaue(t = 1.294) T Calculated = 39.572 . Since the T-value ( T Calculatedt> T Tabulated ) is at a significance level (0.001). According to Tables 5, 6 describes a hypothesis test to determine whether there is a significant linear relationship between an independent variable X and a dependent variable Z . The test focuses on the slope of the regression line : Z= Β0 + Β1X where Β0 is a constant, Β1 is the slope (also called the regression coefficient), X is the value of the independent variable (ERP), and Z is the value of the dependent variable (internal controls). Z= 3.024 + 0.164X And therefore we can accept the second hypothesis which says Internal Control system has been affected after using ERP. 4- Results of Third Hypothesis Testing Table 7—ANOVAb Model 1 a. Predictors: (Constant), x b. Dependent Variable: y

Sum of Squares Regression Residual

df 9.119 3.672

Mean Square 1 69

Total

12.791

70

F 9.119 .053

Sig. .000a

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

Table 8—Coefficientsa Model

Unstandardized Coefficients B Std. Error 1.414 .195

(Constant) 1 x a. Dependent Variable: y

.625

.048

Standardized Coefficients Beta .844

t 7.255

Sig. .000

13.090

.000

Based uponTables 7, 8 , we get the slope (b2) and the standard error (SE) from the regression output. b1 = 0.625 SE = .048 We compute the degrees of freedom and the t-score test statistic, using the following equations. {DF = n - 1 = 71 -1 = 70 } , { t = 7.255} where DF is the degrees of freedom, n is the number of observations in the sample, b1 is the slope of the regression line, and SE is the standard error of the slope. We use the T Distribution table to find T vaue(t = 1.294) T Calculated = 7.255. Since the T-value ( T Calculatedt> T Tabulated ) is at a significance level (0.001). According to Tables 7, 8 describes a hypothesis test to determine whether there is a significant linear relationship between an independent variable X and a dependent variable Y . The test focuses on the slope of the regression line : Y = Β0 + Β2X where Β0 is a constant, Β2 is the slope (also called the regression coefficient), X is the value of the independent variable (ERP), and Y is the value of the dependent variable (competitive advantages). Y= 1.414 + 0.625X And therefore we can accept the third hypothesis which says Competitive Advantages have been affected after using ERP.

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 5- Direct and Indirect effect Figures F 2 –– Direct and Indirect effect

Table 9—Regression Weights: (Group number 1 - Default model)

Z <--- X Y <--- Z Y <--- X

Estimate .164 1.320 .408

S.E. .019 .260 .059

C.R. 8.860 5.072 6.936

P Label *** *** ***

Based uponTable9 , Figure 2,, we found the following: • The probability of getting a critical ratio as large as 8.86 in absolute value is less than 0.001. In other words, the regression weight for x in the prediction of z is significantly different from zero at the 0.001 level (two-tailed). (two • The probability of getting a critical ratio as large as 5.072 in absolute value is less than 0.001. In other words, the regression weight for z in the prediction predi of y is significantly different from zero at the 0.001 level (two-tailed). (two • The probability of getting a critical ratio as large as 6.936 in absolute value is less than 0.001. In other words, the regression weight for x in the prediction of y is significantly ificantly different from zero at the 0.001 level (two-tailed). (two • Dividing the regression weight estimate by the estimate of its standard error gives z = .164/.019 = 8.860. In other words, the regression weight estimate is 8.86 standard errors above zero. • Dividing ividing the regression weight estimate by the estimate of its standard error gives

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 z = 1.320/.260 = 5.072. In other words, the regression weight estimate is 5.072 standard errors above zero • Dividing the regression weight estimate by the estimate of its standard error gives z = .408/.059 = 6.936. In other words, the regression weight estimate is 6.936 standard errors above zero. P Direct = 0.410 P Indirect = (0.16*1.32) =0.211 P Total = 0.410+0.211=0.621

5. Conclusions and Future Research This paper aimed at evaluating the impact of internal control in ERP systems environment on creating new competitive advantages. To achieve this goal, the survey was conducted. ERP systems has affected on internal control efficiency and effectiveness.The absence of a strong system of internal controls resulted in poor performance of the enterprises and operational efficiency and reduces their competitiveness, since the establishment of effective internal control is to be able to manage risks. In ERP Environment, enterprise would have a clearer responsibility division and more efficient internal control. ERP has methods to prevent illegal access and destroying documents, reports and assets. ERP systems had led to the prevention of fraudulent behavior and reduce risks through the availability of control and mutual check mechanisms, and prevention of errors at the source. ERP systems facilitate the automation of some control activities, reduce manual tasks and enable stricter controls. ERP systems have led to an increase in the quality of information and communication between individuals and departments. ERP systems have enabled the reviewers of the ability to adjust the performance of the internal departments and monitor deviations before they occur. The internal control system is the first actual tool used by the company toward maximizing and enhancing their competitiveness. It is the first line of defense for the company or entity in control and governance of the company or facility internally, and then make them more capable of external orientation towards more possession and increase its market share and strengthen its competitive position. Moreover, the Internal Control system in ERP environment has a significant relationship with achieving competitive advantages. In the future, we may study the role of internal and external auditor in implementing and validating ERP systems. Devolving countries may learn from developed countries using the new technology to overcome the weakness in the internal controls and to be able to create the competitive advantages.

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015

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The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 Appendix 1:

Questionnaire Evaluating the impact of Internal Control in ERP Environment on Competitive Advantages : With an application to Egyption Post Sector Dear Sirs, Hello: In recent years , Industry intense competition, enterprises rely on information technology to increase competitiveness in order to improve business performance, ERP implementation is extremely important e-business blueprint infrastructure, enterprise executive financial reporting process ,Sequence an important tool software with real stake in the Sarbanes-Oxley corporate information governance internal control relevant provisions facilities, the Sarbanes-Oxley IT control the focus of attention for the enterprise.

The purpose of this study is to analysis the impact the ERP system based on internal control and protracted Core architecture, divided into five dimensions the control environment, risk assessment, control activities, information and communication, monitoring . The various factors of the questionnaire have been reviewed by the group of expert consultants in related fields, and the initial screening proposed income and experts to screening things . The questionnaire wanted to take advantage of your professional experience and extensive knowledge, to determine the effect of ERP system on internal control and Competitive Advantages .

Please take a moment to fill out the questionnaire survey, and to urge as soon as possible Return the questionnaires. If you need any explain ( reference to us ). Thank you for your support and assistance of the research on Yours thanks . Mohammed Ali Wahdan

Ahmed Ragab Ahmed Nassar

[email protected]

[email protected]

Part I: This part of the advice you and your company's basic information, all information for statistical analysis of the whole, so stay safe heart answer: NAME : ------------------------------------E-mail : -------------------------------------1. Does your company have the use of ERP systems? Unused Planning to Use Being on the line Has been completed on-line

2. What your ERP system currently in use? (Sap- Oracle - JD Edwards ) ( Epicor -Infor ) ( Microsoft Dynamics - Double Click - Delta - Sage - Other systems)

3. When you have begun to use ERP system formally ? less than 5 years from 5 -10 years more than 5 years

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 Part 2 What do you think about each of the following assessment factors internal controlling and it's impact of ERP on it , assess from the relative importance of that ? 5 Strongly agree

4 Agree

3 Neutral

2 Disagree

1 Strongly disagree

1- Control Environment 1 2 3 4 5 1. 2. 3. 4. 5. 6. 7.

Enterprise would have a clearer responsibility division and more efficient internal control. ERP has methods to prevent illegal access and destroying documents, reports and assets. ERP has been able to provide the information on time . Individual's tasks don’t interfere with each other . ERP systems have led to a new division of responsibilities in the organizational structure. ERP leads to the development support of integrity and ethical values mechanisms, and management philosophy in Operating The application of ERP systems reflects the administration directed towards universal integrity and operational efficiency .

2- Risk assessment 1 2 3 4 5 1. 2. 3. 4.

ERP system makes risk evaluation more scientific. ERP system gives risk discovery, risk analysis and risk treatment new ideas. New risks of ERP systems are generally represented in the system . ERP has been effected in designing plans by management to reduce the probable risks.

5. ERP systems had led to the prevention of fraudulent behavior and reduce risks through the availability of control and mutual check mechanisms, and prevention of errors at the source. 6. ERP systems are risky , risks revolve around implementation, technicality and functionality. 7. ERP system makes risk evaluation more scientific.

3-Control activities 1 2 3 4 5 1. 2. 3. 4. 5. 6.

The application of ERP system makes control methods more flexible and efficient. ERP systems led to several regulatory actions related to the prevention of fraudulent behavior and control of upstream . Increased the ability to control and censorship operational system elements (input, processing and output) Increased control over the safety and security of the system modules and related secured databases and the possibility of redemption and restore security, storage mechanisms. Traditional internal controls are insufficient in preventing or detecting errors for accounting systems with advanced IT ERP systems facilitate the automation of some control activities, reduce manual tasks and enable stricter controls.

4- Information and Communication 1 2 3 4 5 1. 2. 3. 4.

ERP system makes accounting process more efficient. ERP leads to create a system by management to provide mechanized information ERP systems have led to an increase in the quality of information and communication between individuals and departments Information in ERP has many characteristics such as accuracy, completeness, clarity and the relative importance and ease of understanding and timely.

The First Cairo University International Conference On Accounting - CUICA 2015 12th & 13th September 2015 5- Monitoring 1 2 3 4 5 1. 2. 3.

ERP system makes the monitoring more efficient. ERP can design a series of dynamic monitoring to improve internal control efficiency ERP has facilitated internal controls assessment by internal auditors, which in turn helps to Compliance tests of independent auditors and leads to costs reduction . ERP systems have enabled the reviewers of the ability to adjust the performance of the internal departments and monitor deviations before they occur Internal auditors are responsible for identifying weaknesses in internal control systems. ERP affects the aims of the internal control regarding whether it should be based on preventive controls or detective controls.

4. 5. 6.

6-Competitive advantages of companies 1 2 3 4 5 The following are the advantages to achieve and maximize the competitiveness of companies:1.

Competitive price

2.

Top quality and after-sales services

3.

The appropriate speed to meet the client's needs

4.

Better exploitation of the productive energies

5.

Quality of processes and outputs

6.

Creativity and Innovation

7-ERP advantages and Benefits 1 2 3 4 5 1.

Tighter controls for financial compliance declaration

2. 3. 4. 5.

The single data source for product and services information Increased access to valuable corporate data delivers a clear. Effectively managing projects holistically fosters decision making at critical levels . Support for streamlined sourcing and procurement processes to alignment to customer demands. 6. Deliver a centralized buying model to reduce unauthorized and unnecessary expenses. 7. Providing sales and operations planning with access to critical information fosters 8. Automating processes such as invoicing and sales and purchase orders within one system 9. Improves forecasting accuracy and reduces inefficiencies. 10. Using a single base of information for billing and other customer interactionsimproves service levels and increases customer retention. 11. By the ERP system, it enables centralized storage/back-up of all enterprise data. 12. ERP systems are more secure as centralized security policies can be applied to them. All transactions happened via the ERP systems can be tracked. 13. ERP systems provide better company-wide visibility and hence enable better/faster collaboration across all the departments.. 14. ERP systems make it easier for order tracking, inventory tracking, revenue tracking, sales forecasting and related activities. Thanks ,,,