Accounting platforms, the Rodney Dangerfields of financial technology when it comes to getting respect, are at least getting some attention. Whether it leads to any action will be quite another question.
“Weakness in outdated accounting platforms compromises a buy-side firm’s ability to be competitive and leads to human error, compliance breaches, failure to detect fraud and incorrect valuation of portfolios,” according to a new report by Woodbine Associates.
Entitled “Accounting Solutions: Backbone of Investment Management,” it was prepared for SimCorp, a provider of investment management software. The report calls for immediate action on accounting systems.
“Investment management executives must take the opportunity now to ensure their firm’s operations are supported by a state-of-the-art platform, before it becomes more difficult,” it says.
A recent SimCorp poll showed that 56 percent of the buy-side concede they are not confident in the accuracy of their present accounting systems, and 30 percent state they cannot calculate exposure in real-time, said David Kubersky, managing director for SimCorp North America.
“This paper challenges the status quo where supporting accounting and back-office operations is an afterthought. It is our hope to illuminate the importance of investment accounting and illustrate the dangers outdated record-keeping systems pose to the buy-side firm, its counterparties and the industry at large.”
Good luck with that. Pamela Pecs Cytron, CEO of Pendo Systems, another provider of investment accounting software (See story below) said the call for modernized accounting systems has been a familiar refrain for several years. Wall Street & Technology predicted in its January issue that this would be the year for investment in the back office. Then again, it predicted much the same thing in 2010.
Sean Owen, director for fixed income at Woodbine and a co-author of the paper, thinks this really could be the year that makes a difference within buy-side back offices.
“A tipping point is regulation. Typically what regulators want, people at firms push to the forefront.”
He expects IT departments and back office administrators will use regulatory demand to persuade senior executives that it is finally time to invest in new accounting systems, something many people in operations have wanted for years.
“A lot of firms have been too slow to upgrade their legacy accounting system,” Own added. They could be more focused on the front office trading and risk systems or just reluctant to integrate a variety of back office systems that have been acquired through mergers and acquisitions.
“I tend to think this year may be the year, given the changes going through the markets and changes in market structure such as the OTC derivative market.
“You are completely changing the way people do business there. Replacing the legacy systems with a more optimal accounting system and platform it can help a firm in areas that go well beyond accounting.” It can help a firm evaluate its trades, facilitate risk management, and meet new business requirements in clearing where firms will need to manage their positions on a real-time basis.
“Centralized record keeping and centralized data that is achievable with some of the current accounting platforms will help firms with collateral management,” Owen said. “Firms are looking to manage collateral less on a siloed basis and more on an enterprise-wide basis.”
The key regulatory changes in the U.S. come from Dodd Frank and FATCA (Foreign Account Tax Compliance Act) will require firms to upgrade their compliance function, Owen said.
“We advise firms to look at their systems holistically and look for solutions that can cover a large footprint,” Owen said. “In some cases, a different accounting platform or trading platform can offer benefits to other functional areas. Rather than individual point applications, firms might be able to get an aggregated platform that can meet a lot of their needs in a cost-effective manner.”
Pointing towards the collapse of Lehman Brothers and Bear Stearns, the Woodbine paper argues that legacy accounting systems are ill-equipped to recognize risky exposures and incorrect valuations. As a result, investment managers may not be able to adjust positions expediently and accurately in response to today’s volatile markets.
Legacy accounting systems can also delay the rollout of new products, said Matt Samelson, principal of Woodbine Associates and another co-author of the paper:
“Investment managers will not wait 4-6 weeks for the back-office to support a new fund or security type. Neither will the firm’s senior management tolerate delays in entering new markets if system limitations prevent support of local accounting frameworks, financial instruments, currencies and regulations. Furthermore, investors have become hypersensitive about operational risk and cost matters to business processes and technology that could result in catastrophic loss.”
The report notes that international operations or trading make the business more complex.
“Usually, a designated team within the firm’s core operations group is responsible for accurately recording on the accounting platform each asset’s location, type of registration and the specific asset positions for each portfolio and customer account. The complexity of these processes is magnified considerably for investment firms that trade internationally due to different practices, regulations, taxes, settlement cycles, etc.”
Just as Cytron pointed out that many firms running legacy systems have several instances of them to overcome capacity and operational issues, Woodbine concluded that “It is essential that these systems run on a single operating platform that can be deployed for firm-wide processing. The storage and retrieval of securities and holdings data to each functional area needs to be seamlessly integrated and managed.”
It added that “Best-in-class accounting systems consolidate data storage to and retrieval from a single centralized database. This database is the repository for recording the organization’s financial holdings and positions; it serves as the ‘golden record’ for the firm. It connects to the general ledger and is the single point of record for all financial positions and holdings.”
Woodbine pressed its argument in the closing sections of the report.
“Investment firms running on legacy systems should give grave thought to: why? As technology and the markets have advanced astoundingly in the past decade, top systems should provide multiple updates annually. Using legacy systems, which are as much as a decade old, is akin to typing on an IBM Selectric.”
Woodbine concluded: “The time to act is now. Legacy systems present too great of a risk to a firm and its profitability to be ignored.”