Financial reporting: rise of the machines

Imagine a financial reporting system that relies on spreadsheet calculations and ‘ruler and eyeball’ manual processes for data management and validation. Then consider how one significant spreadsheet error could impact the integrity of key regulatory, financial and investor reporting data. It’s a risk scenario that seems counterintuitive to the vision of improving financial reporting transparency and control, but one inherent in the back-office infrastructure of many mutual fund and hedge fund shops.

Yes, it’s astonishing. Spreadsheets, manual processes and disparate systems still define the data management infrastructure in many fund shops. Error prone, inflexible and lacking scalability and process control, these reporting systems can no longer meet mounting reporting challenges in the fund industry. Driven largely by industry demands for transparency and control, the need for data consolidation and automation has never been greater.

Spreadsheets are still used pervasively in the back office. A June 2008 survey of fund administration managers and top executives found that half of the companies interviewed use spreadsheets for more than 25% of their fund administration work and 76% want to decrease their reliance on spreadsheets. And that’s not surprising—especially when factoring in the risk of errors. Research by a major accounting firm found over 90% of spreadsheets larger than 150 rows contained at least one significant formula mistake.

Greater transparency will mean new reports, additional disclosures, and more frequent reporting. Firms that still rely on manual processes and spreadsheets for financial and regulatory reporting simply won’t have the flexibility to scale to meet the challenge; their systems are too “brittle” and error prone to manage the load of reporting already in place.

The drive for transparency and control comes at a time when fund administrators are also dealing with a myriad of strategic challenges – from administering new, complex instruments to managing global regulatory and accounting compliance, such as the impending IFRS and US GAAP convergence.

The key to back-office control lies in streamlining and automating data management and report generation – from the collection of data, the creation of reports, the confirmation of report data and the delivery of information to regulators, auditors and investors. Such reports include a range of financial statements, regulatory reports and NAV figures.

There are various steps you can take to bring more transparency to your financial reporting systems and enable data consolidation and process automation.

Understand and document your objectives

With multiple stakeholders involved, setting objectives is a complex task. But the energy invested up front will pay off in the long run by helping to ensure your efforts are aligned with your company’s strategic goals. Setting successful objectives involves:

* Identifying the right stakeholders (internal providers of data, fund administration staff and any internal/external clients, and outside auditors that rely on financial reporting).

* Prioritizing business goals that are driving the decision – for example, data control, risk mitigation, cost reduction or elevating service levels.

* Making sure senior leadership is aligned with the department-level team, for example, where the team doing the work thinks the initiative is about increasing efficiency, while senior management only wants to reduce costs.

Strategic thinking

Think strategically about how your company’s business plans, regulation and customer expectations will create increased demand for financial reporting flexibility. Consider how:

* Internal and external consumers will place greater demands for more timely, flexible and accurate reporting on your company.

* The need to quickly and efficiently adapt to new regulations will impact reporting demands, staff resources and the ability to scale.

* The proliferation of new and more complex instrument types will create challenges for greater reporting flexibility.

Conduct a gap analysis

Analysis will enable your company to compare its current state with its desired state. At its core are two questions – where are we and where do we want to be? As you move to develop an automated financial reporting system, a gap analysis can help map current processes and costs to what your processes and costs will look like post-implementation.

It can also help identify all manual processes in your current state and where they can be eliminated, while quantifying the variances between your current state and desired state, thereby providing valuable ROI data to justify your investment.

What is automated and what is not?

With financial reporting software, there are different degrees of automation. If your goal is to mitigate risk in the back office by eliminating manual processes, you must understand what aspects of the financial reporting process can and cannot be automated. Consider the entire financial reporting process – from the collection of raw data from your accounting system to the delivery of a published document or electronic report.

Back-office fund administration is evolving – fast. Just a few years ago, the concept of automated financial reporting was embraced by just a few early adopters who stepped forward to take a leadership role in shaping the future of fund administration. Back then, the innovators, unconstrained by conventional thinking, were envisioning what the world of fund administration could be today. Their insight has resulted in new ways to gain control, reduce costs and improve efficiency by automating the data collection, creation, confirmation, and delivery process.

What will the future for fund accounting and administration look like? As you embark on your endeavor to improve transparency and control, remember you are making a long-term strategic decision. Your challenge is to implement a system that will help you meet your company’s immediate needs, as well as your needs for whatever comes next.

Kirk Botula is chief operating officer of Confluence, a global leader in fund administration automation