Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

Section F
Technology & Analytics
F.1) Information Systems
I) Accounting Information System (AIS)
II) AIS (Business) Cycles
III) Separate Financial & Non-financial Systems
IV) Enterprise Resource Planning (ERP)
V) Database Management System (DBMS)
VI) Data Warehouse
VII) Enterprise Performance Management (EPM)

F.2) Data Governance

I) Overview of Data Governance
II) Data Governance Frameworks
III) Data Life Cycle
IV) Cyberattack Detection and Prevention

F.3) Technology-Enabled Finance Transformation

I) Systems Development Life Cycle (SDLC)
II) Role of Business Process Analysis in Improving System Performance
III) Robotic Process Automation (RPA)
IV) Artificial Intelligence (AI) and Accounting Data Processing
V) Cloud Computing
VI) Blockchain

F.4) Data Analytics

I) Business Intelligence
II) Data Mining
III) Analytic Tools
IV) Data Visualization
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Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

Section F: Technology & Analytics

One of the most important roles of an accountant is to provide information to owners and managers
so that they can make the best possible decisions for their organizations. A well-designed, well-
implemented, and properly controlled information system is the principal tool accountants use to
capture, process, and produce relevant and reliable information. This section examines the role of
technology & analytics in providing and using information. The section covers the role and use of
information systems, data governance including COSO and COBIT, and how technology is used in
transforming financial data into information. The section concludes by discussing data analytics topics
including business intelligence, data mining, analytic tools, and visualization.

This section consists of four topics:

F.1) Information Systems
F.2) Data Governance
F.3) Technology-Enabled Finance Transformation
F.4) Data Analytics

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F.1) Information Systems

In order to provide relevant and reliable information to decision makers, a business requires a method
to capture and process data and then report information. This method is called an information system.
This topic reviews the primary elements of a functional information system.

This topic discusses:

I) Accounting Information System (AIS)
II) AIS (Business) Cycles
III) Separate Financial & Non-financial Systems
IV) Enterprise Resource Planning (ERP)
V) Database Management Systems (DBMS)
VI) Data Warehouse
VII) Enterprise Performance Management (EPM)

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Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

I) Accounting Information System (AIS)

 Accounting Information System (AIS) - Formalized process to collect, store, and process accounting
information
 Was traditionally maintained with physical books (i.e., journals and ledgers). Today, an AIS is
typically an electronic system made of a software, computers, and servers
 Captures the pertinent information and recordkeeping needed in order to produce financial
statements (e.g., balance sheet, income statement, statement of cash flows, statement of
owner's equity) and performance reports (e.g., budgets, project profitability, product cost, etc.)
 This information is critical to understanding an organization's business activities
 Also, provides information needed for analysis, evaluation, and strategic decision making
 Primary function of an AIS is to report information which is relied upon by many
stakeholders/users
 Users include but are not limited to the following: executives, accountants, managers,
analysts, auditors, regulators, and tax authorities
 Producing accurate and timely information is a critical feature of an effective AIS

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II) AIS (Business) Cycles

 AIS Cycles - AIS can be broken down into several cycles, or sets of related business transactions.
The AIS collects and stores information about the activities of an organization related to the
following:
 Revenue to Cash Cycle - Process of taking orders, shipping products or delivering services,
billing customers, and collecting cash from sales
 Expenditure Cycle - Process of placing orders, receiving shipment of products or delivery of
services, approving invoices, and making cash payments
 Production Cycle - Process by which raw materials are converted into finished goods
 Human Resources and Payroll Cycle - Process of recruiting, interviewing, and hiring personnel,
paying employees for their work, promoting employees, and finalizing employees’ status from
retirements, firings, or voluntary terminations
 Financing Cycle - Process of obtaining funding, through debt or equity, to run an organizations’
activities and to purchase PPE, servicing the financing, and ultimate repayment of financial
obligations
 Property, Plant & Equipment (PP&E) Cycle - Process of acquiring resources (e.g., land,
buildings, and machinery) needed to enable an organization's business activities
 General Ledger and Reporting System - Process of recording, classifying, and categorizing an
organization's economic transactions and producing summary financial reports

 Note:
 Every company divides its transactions across cycles, but not all companies use every cycle. For
example, a manufacturing company would likely employ all of the cycles; an advertising agency
would not likely use the production cycle, since that cycle is used to track the costs of
manufacturing a product
 Although most transactions are now typically done entirely online, manual systems are
presented in this sub-topic to help candidates more easily envision the process

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II A) Revenue to Cash Cycle

 Revenue to Cash Cycle - Process of taking orders, shipping products or delivering services, billing
customers, and collecting cash from sales. Typical process: Order to Cash

Order

Cash

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 Detailing the process as shown in the chart above:

 The typical revenue/sales process starts when a company receives a purchase order from a
customer
 For purchase orders that request to pay on credit, the customer’s credit is checked and
approved or disapproved by the company’s credit manager
 Inventory control determines whether the requested item(s) is in stock and in sufficient
quantity to fill the order
 Sales order is prepared to internally document the sale
 Inventory control department prepares a picking ticket so that personnel in the warehouse
may collect, or pick, the items the customer ordered
 After the items are picked, shipping documents, such as the packing list and bill of lading,
are prepared to be sent with the items
 Items are then packed and shipped to the customer
 At the time of shipment, an invoice is sent to the customer, and the customer’s account is
updated in accounts receivable to record the expected amount that should come from the
customer
 After a period of time, the customer will send payment for the items listed on the invoice
 The payment or cash received is recorded, and the customer account in accounts receivable
is updated to reflect the payment

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II B) Expenditure Cycle

 Expenditure Cycle - Process of placing orders, receiving shipment of products or delivery of

services, approving invoices, and making cash payments. Typical process: Procure to Pay

Procure

Pay

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 Detailing the process as shown in the chart above:

 Typical expenditure process starts with inventory control identifying a need (insufficient
inventory) and preparing a purchase requisition to fill that need
 The purchase requisition is sent to the purchasing department, and a purchase order is
prepared based on the information from the purchase requisition. The purchase order is
sent to the vendor
 Vendor fills the order and ships the items to the company. An invoice from the vendor
typically follows shortly after the shipment
 The shipment from the vendor is received at the receiving department, where items are
counted, inspected, and accepted. The receiving department prepares a receiving report to
document the receipt of the items
 The items are then delivered to the warehouse for storage. Inventory control updates the
inventory records with the arrival of the items
 During this process, accounts payable collects these three documents:
 Purchase order from purchasing
 Receiving report from receiving
 Invoice from vendor
 The combination of these three documents constitutes a voucher package. The voucher
package provides three essential documents necessary before payment should be made to
the vendor: proof of order (purchase order), proof of receipt (receiving report), and proof of
billing (invoice)
 Accounts payable is updated with the purchase and directs cash disbursements to prepare
and send payment to the vendor
 Cash disbursement prepares check (paper or electronic) for the invoice
 Check is signed by an authorized signer and sent to vendor
 After the check is sent, accounts payable is updated with the payment

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II C) Operations (Production) Cycle

 Operations (Production) Cycle - Varies by company and by product; however, there is a pattern of
accounting data inputs, processes & outputs that can be used when considering the production
cycle

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 Typically, there are four major activities in the operations cycle:

 Activity #1: Product design
 Incorporates cost management reports as an input into the design process in addition to
other relevant sources
 Cost information helps guide the design of a product in order to effectively project the
cost of the various designs
 Output includes the bill of materials (the product ingredients) and the operations list
(the product recipe)

 Activity #2: Planning and scheduling

 Uses customer orders as the input in determining whether to use manufacturing
resource planning (MRP) or lean Manufacturing
- Specifically, MRP uses customer order forecasts to determine when and how much
to manufacture
- Lean (just‐in‐time) manufacturing plans and schedules production based on the
actual customer orders, meaning that inventory is ordered, and production is carried
out just in time to fill customer orders
 The outputs from this activity include the master production schedule, production
orders (authorizations to actually start manufacturing the product), material requisitions
to pull the necessary materials from inventory, and move tickets (authorizations to
move products from one stage of the production process to the next)

 Activity #3: Production operations

 Utilizes the output documents from Activity #2 (Planning & Scheduling) for the process
of manufacturing the product
 The primary accounting function in this activity is to account for production costs and to
track relevant inventory levels
 Outputs from this activity are the revised and updated input documents plus the job‐
time tickets used for costing the labor used during production

 Activity #4: Cost management

 Includes the output documents from Activity #3 (Production operations). The process
uses the data from those documents to determine product costs using either the job
order costing or processing costing methods, depending on the nature of the items
produced
 The final output is the cost of goods manufactured statement and any other relevant
and necessary reports that are used in financial reporting and management decision
making

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II D) Human Resource and Payroll Cycle

 Human Resource and Payroll Cycle -

 The primary role of the human resource cycle is to make sure the business has the people with
the right skills in place to carry out its mission
 Primary steps in the process are hiring, training, transferring, and firing employees
 In addition, the human resource process is the focal point for providing employee benefits,
maintaining good morale, and supporting a safe, clean, and productive work environment
 The primary function of the payroll process is to compensate employees for the work they have
performed and to take care of taxes related to payroll. The five main steps in the payroll
process are:
 Update master payroll data
 Record time data
 Prepare payroll
 Disburse payroll
 Disburse taxes and other deductions

 The payroll process for hourly employees starts with an accurate and up‐to‐date master file.
The master file is updated with relevant payroll‐related data from the:
 Human resources department - Updates the master file with data on new hires,
promotions, transfers, and firings
 Government agencies - Provide tax rate data
 Insurance companies - Provide data on the company’s assessed insurance rates
 Employees - Provide any updates on their withholdings and deductions, such as the number
of claimed exemptions due to changes in their family, such as the birth of a baby or an
increase in the amount the employee wishes to contribute to the retirement plan account

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II E) Property, Plant & Equipment (PP&E) Cycle

 Property, Plant & Equipment Cycle -

 PP&E generally represent substantial investments by the company and are expected to last for
multiple years
 Consists of three primary steps (as shown in the chart below):
 Acquire assets - Acquisition or purchase of PP&E requires careful planning and analysis
 Depreciate and maintain assets - After PP&E are acquired, they are maintained and
depreciated
 Use is estimated by one of several appropriate methods of depreciation (except
property, as it is not a depreciable asset), such as straight line, double declining balance,
and units of production for financial and managerial accounting reporting needs
 Dispose off assets - After a PP&E has served its purpose, it is disposed off by selling or
scrapping
 Any difference between its net book value and its market value is recorded as a gain or
loss, as appropriate
 On occasion, a PP&E may become impaired and should be written down

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Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

II F) General Ledger & Reporting Process

 General Ledger & Reporting Process -

 Primary steps (as shown in the chart below):
 Update the general ledger - Journal entries from accounting subledgers and journals as well
as the company’s treasury department update the general ledger
 Post adjusting entries - Originate from the company controller’s office and are posted to
the general ledger
 Prepare financial statements - Prepared from the data maintained in the general ledger
 Produce managerial reports (such as budgets and financial performance reports) - Also
prepared with data from the general ledger

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III) Separate Financial & Non-financial Systems

 Information Systems for Financial and Nonfinancial Data

 Financial and nonfinancial systems both record, track, and report on the health of the business.
The difference is that one uses financial metrics and the other uses nonfinancial metric
 In other words, financial and nonfinancial systems measure the same general thing but with
different tools and reflect operations that are measured with nonfinancial metrics.
 Historically, financial information was the primary, and often only, information recorded in an
AIS. This limitation was primarily a result of technological limitations
 Separate systems for tracking nonfinancial information, such as inventory tracking systems,
customer sales logs, or human resource information, were maintained as stand-alone
system
 The primary challenge of separate systems for financial and nonfinancial data is data
maintenance and making sure that the data is linked accurately in both systems
 Data should be compared to make sure that the systems are measuring the same thing
using different metrics. If the data the systems draw on is not located in the same place
or database, extensive controls must be created and maintained in order for users to
have confidence in the quality and reliability of the data
 E.g., When recording a sale, the financial system would simply record the sale, cash
receipt, or receivable, but it would not record any other information about the sale,
such as the salesperson involved, the time of day, the weather, whether the customer is
an individual or a group of people, or how many times the customer inquired about the
product (see chart below)

Financial System Non-Financial System

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Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

 Modern AIS have greater computing capabilities and larger storage capacity than previous AIS.
This has facilitated an integrated approach wherein financial and nonfinancial information can
be linked within a single information system, which is an Enterprise Resource Planning (ERP)
system, which will be discussed in the next sub-topic
 Example of a nonfinancial system that runs in parallel with an AIS that processes financial
data is a Customer Relationship Management (CRM) system. This system captures
information about sales calls, shipment tracking, and customer profiles. An ERP can link the
CRM system to AIS to reduce potential errors and increase information usefulness

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 Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

IV) Enterprise Resource Planning (ERP)

 Enterprise Resource Planning - Integrated management of core business processes

 Before the days of relational databases and inexpensive computer memory, companies had no
alternative but to create separate programs and files to manipulate and maintain data
 For example, companies would create a program and data file for daily sales and a second
program and data file for accounts receivable. The two files had to be reconciled on a
regular basis to assure data accuracy. Would it not be better to store all company data in
one database? The invention of relational databases and the falling cost of computer
memory facilitated the introduction of Enterprise Resource Planning systems (ERP)
 ERP systems store all company data in one central database. In addition, the ERP stores
nonfinancial data related to all aspects of the company from employee health plans, to
equipment maintenance records, to customer phone numbers, to capital expenditure budgets,
to marketing campaigns—and everything in between. However, this is the goal of ERP systems;
it is not always achieved
 ERP brings together business functions such as inventory management, accounting, finance,
human resources, supply chain management, and more. This shared database allows
employees in one business function to view and access data generated in other business
functions
 The shared database structure of an ERP allows greater synchronization of information
across business functions. Employees can interact with a single system rather than with
separate systems in siloed business functions
 ERP has many benefits:
 Information is available real-time rather than waiting for data to be shared across
business functions
 Collaboration and teamwork are encouraged because information is widely distributed
 Employees only need to learn how to use a single system rather than multiple
 Lower operational costs by eliminating redundant systems and simplifying system
maintenance
 ERP systems are divided into the typical business cycles as follows:
 Order to cash (Revenue cycle) - Processes order entry, shipping, inventory, cash receipts,
and commissions
 Procure to pay (Expenditure cycle) - Processes purchasing, goods received, inventory and
warehouse management, non-inventory, and cash disbursements
 Production - Processes production scheduling, bills of materials, material requirements
planning, engineering, work‐in‐process, quality control, cost management and operations
for service companies
 Human Resources and Payroll - Maintains and processes human resources, payroll, benefits,
time records, training and education, and government reports
 Financial (General Ledger and Reporting) - Maintains and processes the general ledger,
accounts receivable, fixed assets, cash management, accounts payable, budgeting, financial
statements, and other reports

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Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

 Project Management - Records and maintains billing, costing, time, performance, expenses,
and activity management
 Customer Relationship management - Maintains and supports sales, marketing, services,
contact with customers, commissions, and call center support. In addition, companies seek
to anticipate customer needs through the analysis of big data and the Internet of Things to
the extent possible
 System Tools - Provided to establish and maintain master file data, flow of data, access
controls, and others

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 Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

V) Database Management System (DBMS)

 Database Management System (DBMS) - Interface or program between the database and the
application programs that access the database. The DBMS manages and controls the data and the
interface between the database and the application programs. The DBMS facilitates creating,
retrieving, updating, managing data, and protecting data
 The DBMS controls two primary components:
 The data
 The database program that allows data to be accessed, retrieved, modified, and locked if
necessary
 The database schema or blueprint defines the database logical structure, or the way humans
view the data
 The DBMS provides a centralized view of the data that can be accessed by many different
users from many different locations. The system can also limit which data a particular user
or set of users can access, retrieve, or modify
 The DBMS schema allows users to access the database without knowing where the data is
actually physically located
Application programs

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Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

VI) Data Warehouse

 Data warehouse - Set of large databases consisting of detailed and summarized data that is used
primarily for analysis rather than processing transaction
 It is essentially a repository or storage location for all of a company’s data retrieved from
various programs, sources, and databases. The data is typically cleaned and organized so it can
be searched.

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 Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

VII) Enterprise Performance Management (EPM)

`

 Enterprise Performance Management - Process that facilitates the linking of an organization's

strategies to specific plans and actions. Includes monitoring and evaluating business performance
 The overall process can be broken down into several key sub-processes including the following:
 Planning, budgeting, and forecasting
 Performance reporting
 Profitability and cost analysis
 An underlying goal of EPM is to help strategic goals and objectives be communicated to
employees and reflected in budgets and action plans. EPM is not only a performance tracking
system, but also a communication tool
 EPM requires reviews and updates on a periodic basis. The timing and frequency of these
reviews can be adapted to serve the needs of the organization
 For example, companies with a shorter operating cycle, such as retail, may need more
frequent review than some manufacturing companies with longer operating cycles
 EPM relies on key indicators of performance to inform management decision making and
analysis. EPM can help identify business and market trends
 EPM software packages can improve efficiencies in planning, budgeting, and reporting
processes by relying on a centralized database and workflow. EPM can also reduce or even
eliminate the need for spreadsheet-based business activities by acting as a central repository
for performance data
 EPM provides a more holistic view of an organization's performance by linking its financial and
operational data and metrics. This helps facilitate the analysis and reporting of the
organization's activities

 ERP vs. EPM - Whereas ERP

` systems help management with the day‐to‐day operations of a
company, EPM
` is about managing the business through analysis, comprehension, and reporting

 Evolution of EPM - Although EPM has been around for decades, its methodology has become more
and more sophisticated as the tools and software for EPM have improved and evolved
 In its earliest stages, EPM consisted simply of face‐to‐face meetings and phone calls. The first
EMP software applications focused on collecting and providing accounting, budgeting, and
financial performance capability
 The advent of electronic spreadsheets eliminated the tedious process of creating manual
spreadsheets, facilitating more strategic planning, better budgeting, and improved reporting
 Later, dedicated EPM software packages were developed that automated much of the financial
consolidation and reporting duties of the finance and accounting departments. Windows‐based
client/server systems have given way to web‐based programs. Software as a Service (SAAS)
applications have been widely adopted, freeing employees to focus on higher‐level strategic
tasks rather than on managing IT‐related concerns

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(This page is left blank for any reference notes on

Information Systems)

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 Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

F.2) Data Governance

This topic addresses data governance from the standpoint of its definition, frameworks, life cycle,
retention policy, and protection.

This topic discusses:

I) Overview of Data Governance
II) Data Governance Frameworks - COSO-ICIF & COBIT
III) Data Life Cycle
IV) Cyberattack Detention and Prevention

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Miles CMA Review - Class Notes to Wiley CMA Learning System Part 1, Section F

I) Overview of Data Governance

 Data governance - Set of defined procedures, policies, rules, and processes that oversee the
following attributes of an organization's data
 Concerned primarily with managing the availability, usability, integrity, and security of data,
data governance is important because an organization’s data holds intrinsic value
 However, without a well‐designed and functioning data governance program, data can be
corrupted, devalued, rendered unusable, lost, or even stolen
 A data governance plan should include an oversight body, a set of procedures and controls,
and a set of policies or directives to implement the procedures and controls.
 During the implementation phase of a data governance plan, data stewards should be selected
and trained in their role of responsible caretakers of their assigned data
 Data stewards should be given primary responsibility over their data’s availability, usability,
integrity, and security
 Various controls should be established to aid the stewards in their responsibilities. Input,
processing, and output controls aid data stewards in maintaining data quality
 Input controls include data entry controls, such as proper data input screen or form
design, field checks, limit checks, completeness checks, validity checks, and batch totals
 Processing controls include data matching, proper file labels, cross‐footing balance
tests, and concurrent update controls
 Output controls include user review of output, reconciliations, and data transmission
controls
 Data availability should include proper fault tolerance and redundancies built into
information systems, uninterruptible power supplies and backup generators, backup and
tested backup procedures, and real‐time mirroring
 The integrity of data can be preserved by proper segregation of duties, data change
management and authorization structures, and independent checks and audits
 Data security can be aided by using a defense‐in‐depth approach, which includes implementing
data security controls throughout the organization at various levels; in other words, not relying
on just locking the front door but locking all office and closet doors in case a perpetrator
penetrates the front door
 In addition, data security depends on employee training on proper data security
procedures, authentication controls, authorization controls such as an access control
matrix, firewalls and other network security tools, data encryption, and patch management
 The best controls in the world can be compromised if one employee accidentally (or on
purpose) leaves the data exposed
 Of course, there is no way completely safeguard data from hackers, no matter how much
money is spend on safeguards. That is where data risk management comes into play

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 Attributes of an organization's data overseen by data governance:

 Availability - Refers to the ability to make data accessible when it is needed and where it is
needed. Data that is available can be easily accessed in a timely manner
 Policies and procedures related to data availability can also cover how data is accessed
when disruptions occur within an organization's IT system.
 Usability - Refers to data being delivered to end-users in formats and structures that allow the
completion of desired business activities, analysis, and operations
 Usable data can be successfully integrated and processed in software and applications
desired by end-users
 Integrity of data - Refers to the accuracy and consistency of data. Data must be reliable in order
for proper inferences and decisions
 Data governance policies should provide specific safeguards and protections to ensure that
data is accurate and valid
 Security of data - Governs how data is protected from unauthorized access and from possible
data corruption
 Examples of data security techniques include data encryption and physical barriers. Secure
data is protected against accidental or intentional modifications, removals, or disclosures.
Data security includes both electronic and physical safeguards to protect data

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II) Data Governance Frameworks

 Two primary data governance frameworks typically are used in the accounting profession:
 COSO's Internal Control-Integrated Framework
 ISACA's Control Objectives for Information and Related Technologies (COBIT)

II A) COSO’s Internal Control - Integrated Framework I/C over data governance

 COSO's Internal Control-Integrated Framework - Helps companies visualize various dimensions of
I/C. I/C must be implemented to ensure proper data governance. The framework does not provide
specific policies that should be implemented. Rather, it provides guidelines to help companies
consider which internal controls make sense for their organization

Objectives
of I/C

Entity
Structure

Components of I/C

 Objectives - I/C over data governance are necessary for operations, reporting, and compliance
with applicable laws and regulations
 Entity Structure - I/C over data governance should be implemented at all levels of the
organization, including the entity, divisions, operating units, and individual functions
 Components - 5 components of I/C {CRIME}:
 Control environment - I/C over data governance depends on good leadership and culture
 Risk assessment - companies need to identify risks to data governance
 Information and communication - ensuring proper I/C over data governance improves
information quality throughout the company
 Monitoring activities - companies need to monitor and adapt controls to respond to
changes in the environment
 Existing Control activities - specific policies & procedures put in place to ensure data
governance

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II B) Control Objectives for Information and Related Technologies

(COBIT)
 ISACA's COBIT - ISACA (Information Systems Audit and Control Association) created a best-practice
framework called COBIT (Control Objectives for Information and Related Technologies) to guide
information technology (IT) management and governance
 COBIT focuses specifically on security, risk management, and information governance
 COBIT provides not only a framework, but also a variety of resources, technical guides, and
trainings

 As the title implies, COBIT is focused on effective internal control as it relates to IT. The COBIT
framework provides best practices for effectively managing controls over IT. It is a voluminous and
very detailed set of manuals for creating, implementing, and maintaining IT‐related controls
 COBIT 4 framework divided IT into four major parts (which are then broken down into 32 IT
management control processes):
 Plan and Organize,
 Acquire and Implement,
 Deliver and Support
 Monitor and Evaluate
 COBIT 5 is based on five key principles for governance and management of enterprise IT;
together, these 5 principles enable the enterprise to build an effective governance and
management framework that optimizes information and technology investment and use for the
benefit of stakeholders
 Principle 1: Meeting Stakeholder Needs
 Enterprises exist to create value for their stakeholders by maintaining a balance
between the realization of benefits and the optimization of risk and use of resources.
COBIT 5 provides all of the required processes and other enablers to support business
value creation through the use of IT
 Since every enterprise has different objectives, an enterprise can customize COBIT 5 to
suit its own context through the goals cascade, translating high-level enterprise goals
into manageable, specific, IT-related goals and mapping these to specific processes and
practices
 Principle 2: Covering the Enterprise End-to-end
 Integrates governance of enterprise IT into enterprise governance:
- It covers all functions and processes within the enterprise; COBIT 5 does not focus
only on the ‘IT function’, but treats information and related technologies as assets
that need to be dealt with just like any other asset by everyone in the enterprise
- It considers all IT-related governance and management enablers to be enterprise-
wide and end-to-end, i.e., inclusive of everything and everyone—internal and
external—that is relevant to governance and management of enterprise information
and related IT
 Principle 3: Applying a Single, Integrated Framework
 There are many IT-related standards and good practices, each providing guidance on a
subset of IT activities. COBIT 5 aligns with other relevant standards and frameworks at a

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high level, and thus, can serve as the overarching framework for governance and
management of enterprise IT
 Principle 4: Enabling a Holistic Approach
 Efficient and effective governance and management of enterprise IT require a holistic
approach, taking into account several interacting components
 COBIT 5 defines a set of enablers to support the implementation of a comprehensive
governance and management system for enterprise IT. Enablers are broadly defined as
anything that can help to achieve the objectives of the enterprise. The COBIT 5
framework defines 7 categories of enablers:
- Principles, Policies and Frameworks
- Processes
- Organizational Structures
- Culture, Ethics and Behavior
- Information
- Services, Infrastructure and Applications
- People, Skills and Competencies
 Principle 5: Separating Governance From Management
 The COBIT 5 framework makes a clear distinction between governance and
management. These two disciplines encompass different types of activities, require
different organizational structures and serve different purposes.
 COBIT 5’s view on this key distinction between governance and management is
- Governance
 Governance ensures that stakeholder needs, conditions and options are
evaluated to determine balanced, agreed-on enterprise objectives to be
achieved; setting direction through prioritization and decision making; and
monitoring performance and compliance against agreed-on direction and
objectives
 In most enterprises, overall governance is the responsibility of the board of
directors under the leadership of the chairperson. Specific governance
responsibilities may be delegated to special organizational structures at an
appropriate level, particularly in larger, complex enterprises
- Management
 Management plans, builds, runs and monitors activities in alignment with the
direction set by the governance body to achieve the enterprise objectives
 In most enterprises, management is the responsibility of the executive
management under the leadership of the chief executive officer (CEO)

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III) Data Life Cycle

 Data Life Cycle - Although there is some debate on the actual number of phases included in the
data life cycle, these 8 phases represent a general view of the data life cycle:

 Data Capture - In order to be analyzed, data must first be recorded or captured

 Data can be captured by entering by hand, scanned by computers, or acquired by sensors
 The data captured may come from outside or inside the company
 Today’s Internet of Things generates huge amounts of data that can potentially be
captured.

 Data Maintenance - In order to be useful, data must be converted to a usable form. The
process of creating usable data may include cleansing, scrubbing, and processing through an
extract-transform-load (ETL) methodology
 Companies use enterprise resource planning (ERP) systems and other less sophisticated
systems for their information needs. ERP and other information systems utilize database
technology to organize and query their data
 In order for data to be loaded into a database, it must be cleansed and scrubbed of
superfluous characters and symbols. Also, it must be checked to ensure that date data fills
date fields, numeric data fill numeric fields, and character data fills character fields. In
essence, data cleansing and scrubbing transforms unstructured data into structured data
that can be used in an organization’s information system

 Data Synthesis - Involves the use of statistical methods that combine data from many sources
or tests in order to obtain a better overall estimate or answer to the questions being asked of
data
 Some may term this data modeling or using inductive reasoning to transform data. Others
view data synthesis as a subset of data maintenance

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 Data Usage - Using data to support the mission of the business, such as strategic planning,
customer relationship management (CRM), processing invoices, sending purchase orders to
vendors, etc.

 Data Analytics - Science of examining raw data with the purpose of creating new information
and generating business insight
 Encompasses the skills, technologies, and practices for iterative exploration and
investigation of past business performance to gain insight and drive business planning for
the future
 At its most basic level, it means using data analysis methodologies to answer questions
 Some view data analytics as subset of data usage

 Data Publication - Act of sending data outside the organization

 Although the data can be published for wide consumption, typically data is sent to business
partners, such as sending a statement to a customer

 Data Archival - Process of removing data from active use to be stored for potential future use

 Data Purging - Involves deleting data that is no longer useful or needed

 Management should create a data retention policy to enforce proper data purging practice
 For example, this policy should include governmental and regulatory time frames for
data retention, such as the Internal Revenue Service tax return data retention
parameters in case of an audit
 For example, for internal data, data that has not been accessed for a period of 10 years
is purged

 Record Retention - A competent record retention policy is necessary for every organization
 Records must be kept and maintained for internal use as long as they are needed by users to
research, analyze and document past events and decisions
 In addition, records must be preserved to meet legal and regulatory requirements
 For example, the IRS instructs tax payers to retain tax return data for between 2 and 7 years
depending on the date of filing or payment and types of deductions the organization
claimed

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IV) Cyberattack Detection and Prevention

 Cyberattack Detection and Prevention -
 All organizations linked to the Internet are subject to the risk of cyberattack. Malicious hackers
conduct cyberattacks using various methods and tactics from email phishing to denial of service
to SQL injection to zero‐day exploits. Most cyber experts assert that it is not a question of if a
company will be attacked, but when a company will be attacked
 How can companies protect themselves from these attacks?
 Penetration testing - one of the methods to determine where the company is vulnerable to
attack
 Normally involves hiring an outside consulting firm that specializes in identifying and
assessing the vulnerable points of entry for malicious attacks
- May be viewed as an authorized attack on a company’s information system.
Consultants attempt to employ every possible and conceivable means to
compromise the company’s system, and they are almost always successful in finding
a weak point to enter and exploit
 Alternatively, may use vulnerability testing to identify existing vulnerabilities. However,
unlike penetration testing, it does not attempt to assess if and how the vulnerability
could be exploited
 Unfortunately, no one is able to use every possible means of identifying vulnerable
points. Hackers keep finding new ways!
 Biometric Identification - another method of detecting and preventing cyberattacks
 Each information system user should authenticate themselves to the system. There are
three primary methods of authentication namely:
- something you know such as a password,
- something you have such as an identification card, and
- something you are such as your fingerprint
 The problem with the first two methods (password and identification card) is that they
can be forgotten, lost or stolen. On the other hand, biometric identifiers are very
difficult to lose or steal. Thus, access to a company’s information system can be more
restricted by the use of biometric authentication methods
 Firewalls - offer another method of detecting and preventing cyberattacks
 Firewalls use the concept of defense‐in‐depth in that security features are set in
successive layers so that if one level of security is breached, there is another layer right
behind it to stop the attack
- It’s like a building’s front door is locked, each office within the building is locked, and
within each office there is a locked filing cabinet where sensitive data is kept
 In addition to defense‐in‐depth, firewalls utilize such methods as packet filtering and
deep packet filtering to identify and block malicious cyberattacks
- Packet filtering examines the source address of a packet sent to a company’s
network and compares it to a list of sources of malicious packets. If the address is on
the list, it does not enter the company’s information system
- Deep packet inspection scans the contents of packets for malicious code before
allowing the packet to enter the company’s information system

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Data Governance)

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F.3) Technology‐Enabled Finance Transformation

This topic addresses technology‐enabled finance transformation—in other words, how technology can
make a company’s finance operations run faster, better, and more effectively. This section addresses
the topics of the systems development life cycle (SDLC), business process analysis, robotic process
automation (RPA), artificial intelligence (AI), cloud computing, software as a service (SaaS), and
blockchain.

This topic discusses:

I) Systems Development Life Cycle (SDLC)
II) Role of Business Process Analysis in Improving System Performance
III) Robotic Process Automation
IV) Artificial Intelligence and Accounting Data Processing
V) Cloud Computing
VI) Blockchain

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I) Systems Development Life Cycle (SDLC)

 Systems Development Life Cycle - Structured road map for designing and implementing a new
information system. Although there are many versions and variations to SDLC, a basic five‐step
approach is presented below:
 Systems analysis - Involves identifying the needs of the organization and assembling the
information regarding modifying the current system, purchasing a new system, and developing
a new system
 Conceptual design - Involves creating a plan for meeting the needs of the organization. Design
alternatives are prepared and detailed specifications are created to provide instruction on how
to achieve the desired system
 Physical design - Involves taking the conceptual design and creating detailed specifications for
creating the system. The design would include specifications for computer code, inputs,
outputs, data files and databases, processes and procedures, as well as proper controls
 Implementation and conversion - Involves the installation of the new system including
hardware and software. The new system is tested and users are trained. New standards,
procedures, and controls are instituted
 Operations and maintenance - Involves running the system, checking performance, making
adjustments as necessary, and maintaining the system. Improvements are made and fixes are
put in place until the organization determines that the cost of maintaining the old systems does
not justify its benefits, and the whole cycle starts over again.

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II) Role of Business Process Analysis in Improving System

Performance
 Role of Business Process Analysis in improving System Performance - Because better information
should lead to better decisions, the quality of a company’s system performance directly impacts
the overall performance of the company. As such, companies always want to find ways to
improve—that is, do things better, cheaper, faster, or not at all, to increase profitability. One way
to do this is through improved system performance
 A company’s systems are comprised of a set of business processes
 Business processes are simply the way companies run their businesses. They are the tasks,
procedures, teams, and communications companies do every day to provide their products
and services and keep the doors open
 In many new and growing businesses, processes were not always developed with an eye on
how the processes would fit into the overall structure and objectives of the business.
Instead they were created based on the easiest way to get the job done with little thought
for long‐term consequences. Many times, the easiest way or the path of least resistance is
not the best way to accomplish the task. Unfortunately, after a business process is in place,
inertia takes over, and it is difficult to change, which can retard growth. A haphazardly
designed system is normally ill‐prepared to handle business growth and may in turn actually
impede business growth
 Business process analysis - Systematic method to study all of a company’s business processes
to determine how they can be improved. There are four basic steps:
 Clearly identify the process, who is involved, and what is currently being done with a
clearly defined starting and ending point - It is best to start with the processes that are
most critical to the business. These processes should be directly connected to the
company’s main product, revenues, or expenses.
 Do a walk‐through of the process to document it clearly and fully - As part of this step,
interview key employees to learn what they have to say about the process. Look for gaps in
the process where information is lost or misdirected
 For example, walking through a production process would allow the analysts to directly
observe the process. Direct communication with personnel would help the analyst to
fully document the system since the analyst may ask questions of the employees during
the walk‐through
 Examine the current process to identify strong areas and areas that can be improved, such
as bottlenecks, friction points, and weaknesses - Look for ways to add value to the process.
If a step in the process is not adding value to the company, remove it. As mentioned, direct
observation can illuminate areas for improvement. In addition, those working directly in the
process have intimate knowledge of its problems and bottlenecks and most likely are in the
best position to offer solutions to these problems
 Based on the analysis, propose a plan for improvement

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Top RPA companies: UI Path,

III) Robotic Process Automation (RPA) Blue Prism, Automation Anywhere
 Robotic Process Automation - Use of software/bots to complete routine, repetitive tasks. RPA is
typically used in settings with high volumes of routinized actions. Rather than employing human
labor to perform these functions, robots can be employed to manipulate data, record transactions,
process information, and perform many other business and IT processes.
 Many business processes require professionals to capture and combine data from various
sources. For example, for the account reconciliations process, professionals need data from an
accounting general ledger package, data tables from an external entity such as a tax authority,
and data from the company’s human resource system or other data system. Professionals then
go through the process of importing or copying and pasting this data into a spreadsheet. This
type of work is detailed, time consuming, and subject to human error due to momentary lack of
attention or mental fatigue. RPA provides an effective solution to the risk of human error when
performing these tasks
 RPA employs software that can reach across various data platforms to capture and record
data into one single processing facility, such as a spreadsheet like Excel. RPA robots are able
to imitate many user actions, such as logging into programs, copying and pasting data,
moving files, and filling in forms
 The term “robot” invokes images of walking and talking machines like the droids depicted in
science fiction/fantasy movies. However, in this case robots are really just a set of
automated instructions designed to manipulate machines or data sources to achieve a
specified task. Because using RPA requires minimal knowledge of computer programming,
most professionals can be trained to use RPA software to automate desired tasks
 For example, suppose an employee is required to copy and paste specific fields of data
from a PDF form from a governmental agency's website each week into an Excel
spreadsheet so that the data can be analyzed. Instead of manually copying and pasting
the data fields, an RPA robot can be programmed to go to the governmental agency's
website, retrieve and open the PDF form, open Excel, and move the data from the
agency's pdf form to the company's Excel spreadsheet
 Current RPA software utilizes drag-and-drop programming objects in a flowchart-type
interface, making the task relatively simple to learn and implement since users are not
required to learn a formal programming language

 Primary benefits of RPA:

 Quicker completion of monotonous tasks at a lower error rate than humans can perform
the tasks
 Leaves an audit trail of all of actions and changes to data
 100% consistent in that it performs the programmed functions the same way every time
(barring code or data corruption)
 Frees humans from doing boring and repetitive tasks so that they may focus on more value‐
added tasks that lead to increased employee morale and productivity
 RPA can also allow organizations to scale processes faster than otherwise possible
compared to hiring and training additional workers to perform identical tasks
 Can work without interruption (24 hours a day, 7 days a week!)

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 Drawbacks of RPA:
 If rules or processes change, then the RPA system requires updating. This can require
significant time and energy if changes are significant.
 The initial investment to develop a rule-based system that automates workplace tasks can
be costly. It requires significant time and understanding to define procedures and
processes, and further time and resources to test, verify, and/or audit the process to ensure
accurate completion of the task
 RPA can lower companies’ costs by increasing throughput and reducing errors, yet that
benefit must be weighed against the cost of designing and implementing the automated
process

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IV) Artificial Intelligence (AI) and Accounting Data Processing

 Artificial Intelligence (AI) - Different from RPA because rather than a prescribed, rule-based
system, AI involves computers performing tasks requiring critical analysis and pattern recognition.
For example, AI can be used to recognize speech or textual patterns. It can be used to analyze
various inputs and provide a recommended decision.
 Artificial intelligence (AI) also involves a learning aspect. That is, the computer can learn from
prior information processing experiences and revise and update future processing, much like a
human would do. Rather than simply following a set of rules as in RPA, AI is adaptive
 AI can augment human analysis and decision making by processing information more quickly
and in larger quantities than the human mind can. AI can thereby help discover patterns and
trends
 Manual accounting processes take time and are susceptible to human error. For example,
before artificial intelligent (AI) systems, processing purchase orders required that a paper-based
purchase order be manually filled out and then manually entered into the company's
purchasing system. Then the purchase order was coded, forwarded to the proper party for
authorization, and mailed to the vendor. AI systems can now process the full transaction from
electronically capturing the purchase order data to processing the data in the company's ERP,
including recording and approval, to sending the purchase order electronically to the vendor
 In addition to the obvious benefits of greatly increasing speed and a much lower error rate,
using AI systems provides transparency throughout an accounting process, which allows
professionals to monitor the process and take advantage of such things as purchase
discounts
 Two areas where AI can improve accounting processes are in data entry and analysis and in
reducing fraud
 A significant benefit of AI systems is that they can “learn” from their mistakes and be
programmed to not repeat those mistakes. Intelligent systems can be programmed to
identify and interact with customers and vendors; capture, code, and process routine
transactions such as invoices and purchase orders; track payment deadlines; and ensure the
proper approvals are recorded in a timely manner
 There are currently few commercially available products. Companies often create their own
softare, but AI can be expensive to implement due to software development costs and lack
of experienced programmers
 Few applications and uses of AI in accounting - While a skilled accountant is needed to help
define the parameters and metrics of interest, AI can be trained through repetitive data
processing to perform many accounting functions:
 AI can be used to classify or categorize transactions into appropriate accounts
 AI can be used to identify potential errors or irregularities in accounting data, which could
be used to improve financial reporting or by auditors to detect misstatements and/or
fraudulent activities
 AI can analyze cost data and create reports on cost behaviors and patterns

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V) Cloud Computing
 Cloud Computing
 Cloud computing is a shared resource setup that allows for improved processing of electronic
information. Cloud computing is a network of remote servers that are connected by the
Internet. The remote servers are used to store, manage, and process data. Rather than
performing these functions on a local server or a personal computer, cloud computing joins
numerous servers and computers. Cloud computing can provide access to larger data storage,
processing speeds, and software applications.
 Cloud computing can help avoid data loss due to localized hardware failures and malfunctions
because of networked backups and redundancies. The “cloud” or network of servers provides a
safeguard by storing information on multiple servers at multiple geographic locations. While
cloud computing does rely on the Internet in order to function, it alleviates the reliance on
individual servers and computers to store and process information.

 Software as a Service (SaaS)

 Cloud computing can reduce the information technology (IT) costs. While cloud computing is a
distributed, remote network of servers and computers, it can act like a centralized system that
enables local users to have more computing power and more software availabilities. Rather
than building up local computing capabilities and installing software on each local PC, a cloud-
based system can make these features available system-wide to each local PC without
repetitive installments and equipment. This can reduce IT costs for local servers and computers.
This type of setup is referred to as Software as a Service. It is based upon delivering and
licensing software through online applications, in an “on-demand format,” rather than
installations on individual computers
 SaaS often shifts the responsibility for software maintenance and troubleshooting to the
software provider, thereby allowing firms to outsource typical IT responsibilities. Many firms
may still find it advisable to have local backups of critical business data
 SaaS can face limitations on functionality and offerings compared to localized installation of
software on individual computers. More specialized and customized software may not be a
good fit for SaaS; however, advancements in technology are quickly making this less of an issue.

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VI) Blockchain
 Blockchain -
 Most business transactions need some kind of middlemen like banks, insurance companies etc.
Blockchain removes the need for a middleman and connects consumers & suppliers directly
 Crytocurrency is the most popular currency used in Blockchain technology
 Blockchain process -
 Transactions initiated are represented as a ‘block’ or an online record (e.g., A wants to send
money to B)
 The “block” is broadcasted to every party in the network to all parties who are connected
 Once the parties in the network authenticate the transaction, the “block” is added to the
“chain” and transaction is processed (e.g., money transfer from X to Y)
 Note that “blocks” on the “chain” are secure and permanent records that cannot be deleted

[Image: Financial Times]

 Characteristics of blockchain - Basically, blockchain consists of “blocks” (i.e., online records)
that are “chained” (i.e., linked and secured using cryptography)
 Each block is connected with the previous block through links that contain timestamp and
transaction data
 Takes the form of a ledger that is decentralized on a peer to peer network
 Users can confirm transactions without a central authority certifying them
 Buyer and seller interact directly without needing verification by third-party intermediary
 Transaction record is created in a blockchain, but identifying information is encrypted, and
no personal information is shared
 Blocks of transactions, as well as individual transactions, are continuously validated so
committing frauds is very difficult
 Algorithms also incorporate an ID for each buyer and seller in a transaction, adding those
IDs to the block
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 Advantages of Blockchain -
 High transparency in the transactions, which can be tracked accurately
 The ledger are permanent record (which cannot be altered)
 Every core transaction is processed just once (in one shared electronic ledger), thus,
reducing redundancy and delays
 Huge cost savings versus maintain physical records and builds collaborative technology
between companies doing business
 The ledger being distributed, publicly verified, and nearly real-time data mining, and records
verification reduces time and effort spent on reconciliation of information
 Disadvantages of blockchain -
 Technology is complex
 Regulatory clearance and implications are unknown
 Implementation and training is complicated
 Blockchain uses - Blockchain technology is mostly explored in the financial services sector
currently and spreading into healthcare, legal, insurance, telecommunications, etc.
 E.g., Settling of stock trades, patient’s health records, insurance
 E.g., Supply chain - The ability of blockchain technology to exchange data seamlessly
through decentralized peer‐to‐peer networks with all transactions immutably stored and
available for audit could make the supply chain system much more transparent and reliable.
Blockchain technology and smart contracts could reduce or eliminate the numerous
documents that accompany the international shipment of goods and the time lag required
to process international financial transactions
 Few emerging categories for blockchain use cases [Image: Peter Bergstrom]:

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 Cryptocurrency -
 Currency which is ‘mined’ by miners (who are the network of parties that authenticate the
transactions)
 Miners are generally computer programmers who get rewarded by getting digital currency
 Basically, mining serves two purposes:
 Authenticating transactions and
 Generating digital currency.
 Mining needs a lot of resources and is intended to be an arduous task. Individual blocks
contain the proof of work of the miners, and is verified at every time a new block is
generated. Miners ensure that the transaction is secure and processed properly and safely.
The miners add transaction records to public ledger
 Characteristics of Cryptocurrency:
 Just like currency, cryptocurrency is a medium of exchange
 Created and stored electronically
 Does not have intrinsic value and cannot be redeemed for another commodity
 Central bank does not determine supply for cryptocurrency, the network is distributed and
decentralized
 Cryptocurrencies provide cheaper and faster peer-to-peer payment options without the
need to provide personal details
 Regulatory requirements for cryptocurrencies are still not well established and how
different countries are going to react is yet to be seen
 E.g., Bitcoin, Ethereum, Litecoin

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Technology‐Enabled Finance Transformation)

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F.4) Data Analytics

This topic discusses:

I) Business Intelligence
II) Data Mining
III) Analytic Tools
IV) Data Visualization

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I) Business Intelligence

 Big Data - Refers to datasets which are extremely large and/or complex
 Big data is used to gain insight into relationships and associations to improve decision making
and strategy
 Big data is too large to be analyzed by traditional spreadsheet software and requires special
software and computational power to be processed and analyzed
 The advancement of computer processing has enabled organizations to record, store, and
analyze large volumes of data which previously was unavailable
 Big data is broken down into four dimensions:
 Volume - Refers to the quantity of the data
 Big data is just that, BIG. Enormous amounts of data are stored in databases with
information on thousands, millions, or even billions of observational units.
 Velocity - Refers to the speed by which big data is generated and analyzed; frequently, big
data is available in real time
 Big data can involve the analysis of a constant stream of new data. For example, the
New York Stock Exchange captures over 1 terabyte of trade information during each
trading session. This huge amount of data is instantly incorporated into analyses
 Variety - Deals with the types of data, such as numerical, textual, images, audio, and video
 Big data can refer to traditional relational databases, videos, social media exchanges,
emails, health monitors, and more
 Veracity - Refers to the quality/accuracy of data
 Poor-quality data can make business decision making more difficult
 The opportunities for the use of big data are substantial
 Big data can glean data from many sources so that a business can target advertising directly
to potential customers who have shown interest in their product by internet searches,
social media posts, and demographics
 Hospitals can capture data on patients to screen for harmful drug interactions or drug
allergies of an incapacitated patient brought into an emergency room
 Big data also presents challenges:
 Personal privacy - There is concern about all this data being available to marketers in real
time—to say nothing of the cost of data breaches to customers and companies or the risk of
the infringement of civil rights in the case of governmental use of big data
 Human touch - Companies also face the challenge of keeping a human touch on interactions
with potential customers, who may not appreciate being mere sets of bytes to a company

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 Data Structure - Data can be structured or organized in several ways.

 Structured data - Has fixed fields, such as data organized in a spreadsheet with column or row
identifiers
 Easily searchable because it is organized and identifiable, typically in a relational database
form with unique identifiers easily linking databases together
 In a structured database, the data can be queried using structured query language (SQL) for
any information that may be contained therein
 E.g., Data that has been placed into a relational database. Say, a database contains two
tables: the first one for recorded sales that is linked to a customer table (which means we
would have a list of all sales made by the company, and the customers who are associated
with these sales). The second table could be for cash receipts; which could also be linked to
the customers who have delivered cash payments for purchases
 The data is structured so that these data elements could be combined conveniently. If
the sales table were combined with the customer table and the cash receipts table, we
could easily see which customers have paid and which ones have not. The resulting
query of the customers who have not paid comprises the company’s uncollected sales -
in other words, the company’s accounts receivable

 Semi-structured data - Does not have neat, organized fixed fields like structured data, but may
still contain organizing features such as tags or markers
 While it does not have the formal structure of a relational database, semi-structured data
does have features which allow it to have classifications and groupings
 E.g., XML (eXtensible Markup Language) which is used to encode documents in human and
machine readable formats

 Unstructured data - Unorganized and is not easily searchable - i.e., computers cannot easily
work with the data
 Unstructured data is often text-based, like human speech, rendering it difficult to categorize
and organize into predefined, set data fields
 E.g., Email, Twitter feed, text messages, photos, videos

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 Business intelligence - Applications, tools, and best practices that transform data into actionable
information in order to make better decisions and optimize performance. Business intelligence
supports better decision making.
 Data Transformation - From Data to Action

 Data by itself has very limited meaning. It is simply facts, statistics, symbols, numbers, texts,
or characters that may lack structure or form. Data is raw and unorganized
 When structures or organizations are used, data is transformed into information
Information is different from data because information carries meaning and understanding
 Based on information, knowledge can be defined and created. Knowledge is what we know
and how we understand the way things are
 From knowledge, critical analysis can be done through logical thinking to gain insights and
understand situations/context in order to make decisions and undertake actions

 Data Analytics - Critical step in the progression of data to actions

 Data analytics processes data into information by organizing data and using analysis
techniques to identify and understand relationships, patterns, trends, and causes
 Data analytics can help individuals develop and refine information into knowledge, which
requires human understanding. Increased understanding may lead to insight or judgment as
individuals recognize connections that are not readily apparent
 Data analytics can be challenging for a variety of reasons:
 Big data requires compilation of disparate data sources into a unified, structured
database
 In addition to the computational processing needs, gathering and combining databases
can be time consuming and intellectually challenging
 Procedures and processes must be put in place to validate data sources and verify
proper processing has taken place
 Often, specialized training in computer sciences, information systems, and statistics is
needed in order to have the requisite skillset to conduct data analyses. Furthermore,
new technologies are being developed that require training and education
 When done properly, data analytics can become a strategic asset:
 Data analytics not only can help identify new opportunities, but it can also be used to
evaluate and verify the efficacy of a company's business practices and philosophies
 Data analytics can help increase the value of a company by improving the understanding
of a company's operations and providing information to guide the evaluation of
company performance and strategic options

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 Using Artificial Intelligence for Business Intelligence - Create computer programs that can mimic
human insight (i.e., to take a database of facts and find the connections/patterns in the data)
 Opportunity is to capture and preserve expert knowledge, insight, and decision‐making
skills so that they are not lost to future professionals. Programs can acquire and process
data faster and in greater volume and detail than a human decision maker
 Challenge is to capture something as subjective as human insight and decision making and
convert it to something so discrete and objective as computer code; lines of detailed
instructions that can be programmed into software. In essence, this process creates the
thousands of rules necessary to reproduce human decision making

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II) Data Mining

 Data mining - Using analytic tools on large data sets. In essence, data mining involves querying a lot
of data. The idea is to find patterns, relationships, and insights in data that an organization
routinely collects but does not use in most operational settings
 Involves statistical methods, computer learning, artificial intelligence, and large-scale
computing power to analyze large amounts of data in order to extract useful information about
relationships, trends, patterns, and anomalies. The primary goal is to provide useful information
for decision making and anticipating future outcomes
 E.g.,
 A classic and possibly apocryphal example of the use of data mining is finding a significant
correlation between the purchase of beer and diapers. Through data mining techniques, a
large retailer found that on Friday afternoons, young fathers who purchase diapers also
purchase beer. Thus, the retailer started placing diapers and beer in closer proximity in
order to exploit this newly found correlation and increase the sales of both diapers and beer
 Credit card fraud. If you have ever received a notice from your credit card company alerting
you to suspicious activity on your account, the credit card company has used data mining
techniques to identify purchases or purchase location patterns outside of your normal
purchasing habits
 Challenges:
 Data quality -
 If data has missing values, errors, or insufficient sample size, it can limit the ability to
conduct statistical tests and draw inferences
 If there is bias in how the data is collected, such as a non-response bias to a survey, it
can limit how broadly the results of the data can be generalized
 It may also not represent the targeted population, such as when only disgruntled
customers respond to a customer satisfaction survey, and can thereby limit its
usefulness due to lack of a representative sample
 Coalescing and combining data from multiple sources - This data may come in a variety of
formats, making it difficult to match observations. It may also be difficult to transform the
data into a common format to use for analysis
 May involve enormous datasets - Analyzing large datasets can require computational power
beyond the capabilities of standard computers
 This can lead to inefficient processing, sometimes even making computations
inoperable without the use of a specialized computer with greater processing
capabilities
 Furthermore, special software, servers, and storage might be needed in order to
conduct data mining analyses. These software and hardware can be expensive
 Can produce large quantities of output - Sifting through the output to identify useful
information can demand significant time and effort. It can also require specialized
knowledge about the data context in order to properly interpret data output

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 Data mining is an iterative process

 It requires skill to conduct computational algorithms and statistical tests to process data,
and then further requires understanding and knowledge to interpret the output.
 Data mining is a mix of both science and art that can require many iterations and analyses in
order to identify patterns, trends, and associations.
 Data mining involves the use of specific tools to manipulate and extract information from a
database
 Structured Query Language (SQL) is an established tool used to mine large data sets. SQL
can be used to perform various functions with databases such as manipulating data,
defining data, and accessing data.
 There are three basic commands in SQL:
- SELECT - Selects the data fields that are of interest to the user. In other words, what
does the user want to see as a result of the query?
- FROM - Identifies the tables where the data is located
- WHERE - Restricts the data so that it meets certain criteria, such as Where Date <
December 31
 Other commands—such as mathematical functions, sorting data, joining tables, and so
on—are also used in SQL
 Data mining has many uses in business settings
 E.g.,
 Use to identify sales trends or predict customer purchases habits
 Use to better understand a firm's cost structure and identify cost drivers
 Possible techniques could include looking for groupings or clustering of data, identifying
associations to help classify and categorize information, or using regression analysis to
estimate statistical associations and effect sizes

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III) Analytic Tools

 Types of Data Analytics

Source: Gartner Inc.

 Descriptive Analytics - Form of data analytics which aims to answer “What happened?”
 Is observational and reports the characteristics of historical data
 Describes statistical properties such as the mean, median, range, or standard deviation
 Beneficial because it provides understanding of what has actually taken place
 Diagnostic Analytics - Form of data analytics which aims to answer “Why did it happen?”
 Looks at correlations, the size and strength of statistical associations
 Can help identify empirical relationships that may be unknown or uncertain and data is
explored to find meaningful statistical associations
 Tries to uncover and understand why certain outcomes take place and what could be
important factors causing those outcomes
 Predictive Analytics - Form of data analytics which aims to answer “What will happen?”
 Builds upon descriptive and diagnostic analytics to make predictions about future events
 Can take the form of what-if analysis where sets of possible facts, their likelihoods, and
ranges are used to formulate potential future outcomes
 Considers risk assessments, usually taking the form of outcome likelihoods and
uncertainties, to guide the prediction of future outcomes and trends
 Prescriptive Analytics - Form of data analytics aims to answer “How can we make it happen?”
 Draws upon the other forms of data analytics to infer or recommend the best course of
action
 Can take the form of optimization or simulation analyses to identify and prescribe the
actions to undertake to realize the best or most desired result

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 Fitting Analytic Models

 Analytic models are an empirical or data-driven approach to understanding connections,
effects, and outcomes
 Underlying an analytic model is a question about how one factor is affecting another
 Is the relationship positive or negative?
 Do two factors (variables) have a significant statistical association?
 Part of the challenge when analyzing data is developing explanations, otherwise known as
theories, and/or hypotheses (expectations) about empirical relationships
 Analytic models can provide insight by validating with statistical techniques that effects do exist
and by providing estimates of effect sizes. Analytic models can also help with the discovery of
potentially unexpected relationships.

 When to Use Analytic Models

 Clustering - Data analysis technique that involves grouping similar objects together
 Focused on the discovery and identification of patterns of similarity and dissimilarity
 Exploratory technique that provides insight into common properties or characteristics. It
typically does not start with predefined groupings or categories, but rather explores
whether a set of items has a relationship
 Results of cluster analysis are often presented graphically to aid in the identification of
groupings

 Classification - Data analysis technique which attempts to predict which category or class an
item belongs to
 Typically begins with predefined categories and then attempts to sort an item into one of
those categories

 Regression - Data analysis method of analyzing the correlation of an outcome (dependent

variable) with explanatory or independent variable
 Can be performed with only one independent variable (i.e., simple regression) or with many
independent variables (i.e., multiple regression). Takes into account all of the observed
values and provides estimates of the correlation between dependent and independent
variables
 A regression equation typically looks like this: Y = a + bX where
- Y is the dependent variable
- The intercept is represented by a
- The slope is represented by b
- X is the independent variable
 In multiple regression, more independent variables are added. For example,
Y = a + bX + cW + dZ
 In accounting, cost equations are often estimated using regression analysis. A cost equation
could look like the following: Total Cost = Fixed Cost + Variable Cost × Units.
 If the regression output estimated the fixed cost (intercept) to be $1,000 and the
variable cost (slope) to be $20, then the total cost equation would look like this:
Total Cost = $1,000 + $20 × Units.
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- This equation could then be used to predict a total cost based on the output level. If
output was 100 units, then the total cost would be estimated to be
$3,000 = $1,000 + ($20 × 100 units).
 How well a regression line fits the observed data is measured by the coefficient of
determination, commonly referred to as R2
2
 R can be interpreted as the % of variation in the dependent variable that is explained
by variation in the independent variables
- That is, if R2 is equal to 0.73, it means that 73% of the variation in the dependent
variable is explained by variation in the independent variables
 Another commonly used statistical measure is the correlation coefficient, commonly
referred to as R. R is a measure of how two variables are related. It provides both the
direction, positive or negative, and the strength of the relationship between two variables.
R ranges between -1 and 1.
 Regression analysis provides other useful statistical measures:
 The standard error of the estimate measures the accuracy of predictions
 The regression analysis provides a prediction line, and the standard error of the
estimate tells how far away a data point is from the predict point
 The goodness of fit is a measure of how well the observed data fit a statistical model.
That is, it is a summary of the discrepancy between observed values and what the
model would predict the value to be
 Finally, a confidence interval is a range of values in which the true value lies. Regression
models only provide estimates of effect sizes and relationships. A confidence interval
provides a range rather than point estimate over which the true value is likely to be
 Regression modeling provides many useful benefits, but does face limitations. For example,
 Regression models should only be used to make predictions within what is called the
relevant range. The relevant range refers to a set of observed values. If a desired
prediction is outside of the set of observed values, there is a possibility that the
estimated relationship from the regression model will not be the same outside of the
observed values. Doing so is referred to as extrapolation whereby predictions about an
unknown observational range are inferred from a known observation range
 Regression analysis can also be affected by outliers, extreme values that are far away
from the main observations

 Time series - Data analysis method that considers data points over time. The temporal ordering
of data points allows for patterns to be identified, aiding the prediction of future values.
 It should be noted that regression analysis is often done on cross-sectional data, that is,
data that takes place within the same time period. It is possible to combine cross-sectional
data with time-series data to observe the same phenomena over multiple periods of time.
Combined cross-sectional and time-series data is referred to as panel data.
 Time-series analysis can identify patterns in observed data. Trends provide useful
information to help predict future outcomes based on what has happened in the past.
Common trends include systematic trends (such as prolonged upward or downward
movements), cyclical trends (such as macroeconomic cycles that rise and fall), seasonal
trends (such as periodic spikes in retail shopping around holidays), and irregular trends
(such as erratic fluctuations due to unforeseen events like natural disasters).
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 Other Data Analysis Techniques:

 Exploratory data analysis - Used to summarize the characteristics of a dataset
 This technique often involves using visual methods to examine the data for patterns or
anomalies. Summary statistics and graphical representations aid in understanding what
the data is and what possible questions the data can help address
 Rather than focusing on hypothesis testing, exploratory data analysis is used to help
identify and discover what hypotheses to test. Exploratory data analysis is the initial
step that is used to inform future data collections and statistical tests.
 Sensitivity analysis - Recognizes that predicted outcomes from analytic models have
uncertainties and assumptions
 Exploration of how a dependent variable might be affected given different possible sets
of independent variables
 For example, when predicting a company's net income in future years, an assumption is
likely made about how fast sales will grow. Will sales grow at 5%, 10%, or 2%? Sensitivity
analysis examines how results might change if assumptions about a model or prediction
are changed. This type of analysis can be referred to as what-if analysis. One type of
what-if analysis is a goal-seeking analysis which asks what assumptions must hold true in
order for a particular outcome to occur.
 Simulation models - Based on computational algorithms that follow specified assumptions
to model possible outcomes. Monte Carlo simulations are a specific type of simulation that
generates the probability that an outcome will occur. Monte Carlo simulations aid in the
assessment of risk and uncertainty and are commonly used for prediction and forecasting.
They are based on random sampling done repeatedly in order to form probability
distributions for the outcome of interest. That is, a Monte Carlo simulation randomly draws
values for variables of interest, each with specified possible ranges and probability
distributions, and then provides the realized outcome. This is done thousands, even tens of
thousands of times and results in a probability distribution of the outcome of interest. That
probability distribution can then be used to help assess the risk and uncertainty related to
the outcome variable.

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IV) Data Visualization

 Data visualization -
 Method to convey information to a reader. Data visualization leverages the common adage that
a picture is worth a thousand words. Indeed, a well‐conceived and constructed image can
convey a significant amount of information more quickly and completely than reading text that
conveys the same information
 Key is the proper design and execution of images that provide information to the viewer
 Care must be taken in choosing the most effective data visualization technique to
communicate results
 With today’s technology, anyone can create pretty pictures and call them visualizations.
However, in order to clearly convey the message that is contained in the data, the creators
of the visuals must use knowledge of basic statistical principles and assumptions plus
judgment in selecting the proper visualization. A poorly designed visual can distort the real
story you are trying to tell

 Data tables are the first level of providing information to readers. Tables efficiently use space,
are scalable, and can be simple. Due to the prevalence of spreadsheets, most users are familiar
with and comfortable making tables and graphs. Software programs can make data tables
readily accessible and make it relatively easy to find and manipulate data. Six best practices
that can and should be applied to tables and graphs are listed next.
 Planning - Before the first cell receives data, the purpose and content of the table and
graph should be planned. Know the audience for the table/graph and plan accordingly.
 Focus - Focus of the table/graph should be the most prominent part of the design so that
readers will instantly recognize it
 Alignment - For tables, text must be aligned or justified on the left of the cell and numerical
data must be aligned on the right side of the cell. Column headings must be appropriately
placed according to the content.
 Size - Character (text and numeric) size matters. If the text is too small, then it is difficult to
read and probably will not be read. In addition, the use of common fonts is recommended;
uncommon fonts may focus attention on the font and not the information the designer is
seeking to convey.
 Clutter - Enemy to every table and graph. Always leave sufficient white space to help the
reader focus on the message
 Color - Can be a powerful tool in providing depth, focus, and contrast. However, too much
or poorly planned color can distract from the message of the table/graph

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 Data visualization tools - Multiple tools/methods each have their specific purpose. The more
common data visualization tools and their purposes are described next. These tools have common
uses. Some are better at providing comparisons, others, distributions, still others at relationships
and trends. They can also be categorized according to their intended use.
 Comparisons
 Bar charts - Used to compare categories of data or data across time
 E.g., we could compare the annual gross revenue of 10 different action movies with
each bar representing a movie. We could also represent the gross receipts for each
month after the release of one movie

 Pie charts - Can be used to compare the proportion of categories of data

 However, most data science experts tend to frown on the use of pie charts unless the
proportions are significantly different. Trying to decipher the difference between a 10%
pie slice and a 12% pie slice is problematic. Thus, it is best to use only a few slices on
your pie chart

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 Distributions -
 Histograms - Show how many data points fall into a certain range so that the distribution of
the data points can be viewed
 Can look like bar charts. The main difference is that the histogram displays the
distribution (frequency) of one variable where the bar chart displays a comparison
based on two variables (i.e., one variable is tracked on the y‐axis and the other variable
is tracked on the x‐axis). However, histograms are only used with numerical values, and
the data points are displayed in an interval rather than the actual values.

 Dot plot - Similar to a histogram except it uses vertical dots to represent a data distribution
rather than a bar. Dot plots are useful for relatively small data sets

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 Box plot (or box‐and‐whisker plot) - Displays the distribution of a data set using five
standard measurements: the minimum data point, the lower quarter of the data points
(first quartile), the median or middle point of the data, the third quartile of the data points,
and the maximum data point
 Box plots do not show individual values and can be skewed, but they are also one of the
few techniques that display outliers. They are also useful in showing a comparison
among distributions

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 Location
 Maps and Filled maps - Display geospatial data so that data points can be viewed in relation
to their geographical locations
 When data relates to geographic locations, such as countries, states, cities, and zip
codes, maps and filled maps are powerful tools to visualize data

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 Relationships
 Scatterplot - Displays data points as they are plotted according to their relative position to
the x‐ and y‐axis
 This technique provides a view of how the data is related or positioned as well as its
distribution
 However, scatterplots do not show the relation between more than two variables.

 Bubble chart - Version of the scatterplot. Here the dots on a scatterplot are consolidated
into bubbles, which vary in size to represent the number of data points
 Similar to pie charts, bubble charts are best used when the bubble sizes display
substantial variation

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 Heat map - Displays a relationship among variables through changes in the intensity of color
 Heat maps provide a visual way to see numerical values. In fact, heat maps can show a
substantial amount of data without overwhelming readers
 Heat maps also facilitate identifying outliers by displaying squares with a color intensity
significantly different from the surrounding squares
 However, heat maps are less precise than other techniques since distinguishing among
various color hues can be difficult.

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 Trend -
 Line chart - Displays information as series of data points
 Line charts are easy to read and interpret. They are also helpful in making comparisons
between data sets and for showing changes or trends over time
 One limitation is that line charts only show data over time

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(This page is left blank for any reference notes on

Data Analytics)

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