Establishing Investment Accounting

and Reporting Best Practices

Four Imperatives for Creating and Implementing an Ideal Operational Framework

WH ITE PAPE R

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Those tasked with managing the investment portfolio are actively looking for solutions designed to ensure accuracy and transparency, while also accelerating the accounting and reporting function.

Whether an investment accounting and analytics solution is built in-house, purchased, or outsourced, implementing a best-practice model requires more than merely selecting new software. Caretakers of the investment portfolio and its related functions must weigh selection priorities based on their objectives and choose an overall solution that best fits their organizational objectives.

Certain imperatives exist when considering any best-practice model for portfolio accounting, reporting and analytics, regardless of the industry, the size of the entity or the timeframe involved in selecting and implementing a model best suited to satisfy a variety of criteria. We examine these imperatives, with insight into each one.

1. Be Consolidated and ConsistentConsolidate Worldwide Assets Under a Single Login

Consolidating assets under a single login sounds simple but it is not always the case. Many companies have a single, custodial bank but do not have worldwide assets housed within that custodial agent. A foundational tenet of any investment operations best practice framework is that accounting and finance professionals must have a consolidated view of their assets. Without a consolidated view of these assets, they cannot ensure compliance with the investment policy and consistency of calculation methodologies. They can’t make savvy investment decisions and they cannot report fully to the Board.

With today’s market environment prompting Boards and senior management to be more risk-averse, the key players responsible for the

data’s integrity must be able to answer questions about exposures as they arise. Entities without a consolidated view of these assets have a real problem. “90% sure isn’t sure enough. Accounting and finance professionals cannot afford to be unaware of 10% of their company’s investments,” says Warren DeSouza, Vice President, Finance at Onyx Pharmaceuticals, Inc. A single access point is the key to transparency, and transparency is critical.

Standardize Pricing, Accounting, and Calculation Methodologies

In a perfect world pricing sources never vary, accounting methodologies used by software platforms would always be consistent, and data vendors would only report identical information. In reality, this perfect world doesn’t exist. As such, accounting and finance professionals must ensure accounting/reporting controls and systems use consistent data methodologies across the entire portfolio regardless of custody

More than ever, accounting and finance professionals operate within a very complex world.

Accounting rules change. Markets swing. Prices move. Credit ratings shift overnight. Auditors

scrutinize. At the same time, Boards must be briefed and they expect all portfolio data to be

accurate—at their convenience. With growing investment balances across the industry, it’s

imperative that the relevant stakeholders have access to automated, consolidated investment

information that is actionable and timely in order to react to market moves, senior management

questions, accounting rules, auditor inquiries, and to make intelligent investment decisions.

“Reconciling data every day might require additional resources, or an outsourced solution, but it ensures

that filing month-end reports is a relatively painless function.”

Goran JankovicVice President and Treasurer

WellCare Health Plans

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location or asset manager. Organizations using a system or process that leverages disparate data and methodologies run the risk of having inconsistent and inaccurate data permeate throughout the entire reporting and accounting function. Furthermore, auditors will have concern with the notion of using inconsistent accounting and pricing methodologies that differ depending on the account. In the end, keeping all data standardized at every stage of the process is the easiest and most effective way to avoid future headaches. No one wants to explain to the Board why the bottom line on one set of figures is different from that of another. Inconsistent pricing and accounting also prevents consistent investment decision-making. “When performance, risk or compliance monitoring systems are not drawing from the same accounting data, there will often be inconsistencies,” says Pedro Andrade, Head of Treasury Investments at Dell, Inc. “Ultimately, these inconsistencies can cause investors to question the validity of the data they are using to make informed investment decisions.”

Ensure Numbers Tie Out Across Accounting, Compliance, Performance, and Risk Reporting

There is inherent risk in running separate systems for various investment

accounting and reporting functions. Often, securities will have different master file characteristics. For example, if treasury runs its investment activities off of one set of data, and accounting uses a different set to produce financial reports in a separate system, the two may not match since these disparate systems lack the ability to communicate with one another.

Information must not only be consolidated and consistent, it must also be complete. Ideally, risk, compliance, performance and accounting information should draw from the same master files and have access to the same data. They should also be handled by a single system which brings all the components together into a unified set of data.

There are implications to not having a daily information feed. In today’s environment, assessing exposure to an issuer, for example, cannot wait until month end. If the CFO asks whether the company is exposed to a particular issuer, the answer needs to be immediate and the reaction just as timely.

2. Be Fast and AgileProvide information on a daily basis

While many accounting and finance professionals do not look at holdings

information daily and may argue they don’t need to, having daily access to up-to-date data is an insurance policy in case something does happen. As the financial crisis of 2008, the credit downgrade of 2011 and the foreign sovereign debt crisis have proved, significant market events can be sudden and dramatic.

“Odds are that a shift in the market that calls for an immediate holdings assessment may not conveniently happen at month end,” cautions Keith Jennings, Vice President and Treasurer at Cameron International Corporation. If the only view into the data is at month end, accounting and finance professionals miss the chance to correct or identify mistakes throughout the month. “You don’t need daily integration into the general ledger, but you do need visibility into the portfolio on a daily basis—especially when significant market events take place,” adds Jennings. After all, if

“Accounting and finance professionals cannot afford to be unaware of 10% of their company’s investments; 90% sure isn’t sure enough.”

Warren DeSouza, Vice President, FinanceOnyx Pharmaceuticals Inc.

relevant stakeholders won’t be satisfied with monthly access to cash positions, it stands to reason they would not be satisfied with the same, limited access to investment activities.

Reconcile daily to ensure custody data is timely, accurate and complete.

It is the custody bank’s business to clear transactions; not to reconcile them. As a result, custody banks cannot ensure seamless accuracy when reconciling cash positions and transactions. When dealing with millions of bits of data, something will inevitably fall through the cracks due to incorrect entries, often at the hands of rushed, manual input. By having a framework in place that reconciles cash positions to the bank daily, those mistakes can be caught early and immediately reconciled. Tracking an erroneous data point in a month-end report involves digging through piles of spreadsheets to find the error – if at all.

“There’s an immense amount of value in cash position and transaction information reconciled to the custody bank,” says Goran Jankovic, Vice President and Treasurer at WellCare Health Plans. Reconciling that data every day might require additional resources or an outsourced solution, but it ensures that filing month-end reports is a relatively painless function.

Complete journal by 2:00PM on T+1.

Generally speaking, accountants are resigned to working late into the night in order to close the books at month-end. Historically, this process is tedious, arduous and fraught with unpleasant surprises. Fortunately, this is unnecessary. The right system can perform daily

reconciliation in a matter of hours as long as the system is working from a consolidated data source and has access to consistent data throughout the month.

Some companies get started on the closing process before month end in order to close at T+1. Fortunately, this too is unnecessary. With the proper accounting system and adherence to best practices, reconciliation should be swift and seamless, ensuring efficient use of human resources, while avoiding any last-minute surprises.

3. Be AutomatedMinimize Manual Efforts

There are two big problems with manual data entry. First, it affects data integrity. Manual entry, by virtue, is prone to human error. Given the time required for manually entering data into complicated spreadsheets, little time is left for review and revision. As a result, the first version of what is entered into these spreadsheets often ends up serving as the book of record. Ultimately, these errors compound over time, making month end more of a hunting exercise than a time to focus on expanding data into useful reports.

Second, manual data entry takes time. By automating the process end-to-end, accounting and finance professionals can free up time to work on more strategic projects and focus on decision making rather than re-keying data. This is a case where time saved, equals time earned. Every minute spent manually entering data into a spreadsheet could be reclaimed by implementing an automated solution that allows staff to be less administrative and more strategic.

Automate the creation of footnotes and SEC reports

Preparing the right disclosures and footnotes for financial statements can be a labor-intensive and time- consuming exercise; the complex nature of accounting for investments doesn’t make it any easier. If companies rely on internal staff to produce disclosures using antiquated spreadsheets, they run the risk of making mistakes, running up auditing costs and complicating SOX controls.

“If someone tasked with filing reports does so while applying principles based on FAS 115-1 and is not aware of FAS 115-2, he or she will make mistakes,” says Laura Fisher, Managing Director at Silicon Valley Treasury Consulting Group. Commonly, accounting professionals are tasked with staying current on accounting developments and interpretations by default; a difficult task, given the pace of change.

If any regulatory reporting requirements are interpreted and applied incorrectly, this default structure for marshaling such changes becomes a liability. The antidote to this risk lies in offloading this function to a system supported by dedicated subject-matter experts who track such activities and produce the appropriate reports automatically. It’s essentially a matter of delegating specified tasks to those best equipped to handle them, thus allowing the investment portfolio team to focus their efforts on core competencies. As accounting teams are not necessarily structured to track regulatory changes in real-time, custody banks are not in the business of monitoring regulatory and accounting developments either.

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As such, these teams may want to employ systems capable of tracking these developments. A service provider focused on investment accounting and reporting is not only more nimble and able to make changes on-the-fly, but also has access to a large selection of clients and can gauge evolving best practices in different market segments. “A third-party provider specializing in these disciplines – with visibility into multiple industries – can accelerate the change implementation process,” says Fisher. Use a Platform with Automated, Plug-and-Play Functionality

Investment reporting relationships can produce a co-dependent dynamic that makes switching to a new system or provider, at best, extremely impractical, if not a blind leap of faith. It can take up to two years to switch custodial banks for accounting and reporting functionalities, let alone the safekeeping function. The same is true when considering external managers. If portfolios are managed and information flows from multiple providers, it will be very difficult to switch from or add to that dynamic. Custodial banks can be the most

entrenched, but what happens when a specific institution is no longer viable? What happens if a particular asset manager is underperforming, is acquired by a larger entity or if the need arises to add a new manager for a new asset class or investment strategy?

“A platform designed to automatically interact with any provider’s data can empower corporations to make proactive changes to their investment reporting structure with minimal pain,” adds Fisher. Most providers have accounting assumptions hard-coded into their system without the ability to provide flexibility based on client needs. “You need the flexibility to account for your portfolio in your own way, versus the way the provider has decided to do it. That allows you to dictate the investment policy and get buy-in from auditors on your own terms.”

4. Be ScalableNot only does the team tasked with investment accounting and reporting need to scale itself operationally, the systems they use to perform their functions must also be built to handle changes in investment tactics, mergers and acquisitions, new regulatory requirements and internal restructuring – without stretching its IT resources. In short, the operational framework and its

systems should solve problems without creating new ones.

Scalability is Never Bolted On

Rigid, disparate investment accounting and reporting systems—particularly those designed to monitor risk and compliance—can inhibit portfolio flexibility. They discourage investment managers from adding new types of assets as the company’s needs for cash evolve and change. Rigid systems can also make it very difficult to scale up quickly in the event of an acquisition. “Suddenly you have twice as many securities and twice as many accounts,” says Bret Myers, Assistant Treasurer and Head of Investments at Group Health Cooperative. “The operations platform needs to be flexible enough to absorb change seamlessly, add managers, add asset classes, and integrate with an acquired company.”

Don’t Over-Commit

Too often, when organizations entrust their investment, accounting and reporting functions to an outsourced solution, they agree to long-term contracts which lock them into a system they ultimately have to use for as many as five years, even if the system proves inadequate, difficult to use or unreliable. These same systems often charge additional fees—above and beyond

“Locking into a long-term contract for software is not a best practice.”

Bruce Sickel Vice President and Assistant Treasurer Blue Cross of Northeast Pennsylvania

any software license—for training new staff and for maintaining the software’s operational integrity. Upgrades may also incur additional fees. “Locking in to a long-term contract for software is not a best practice,” says Bruce Sickel, Vice President and Assistant Treasurer at Blue Cross of Northeast Pennsylvania. Taking a D.I.Y. approach to vital functions, like those in accounting and treasury, should be handled with the same urgency and oversight as any other function. “You have to ask yourself where you think this world will be in five years.  Given the rapid change and advances in technology and software it is just not wise to lock into a long-term software contract when other options exist,” continued Sickel.

Segregate Duties

In today’s controls-sensitive environment, any transaction involving an operating fund needs to be handled with proper

segregation of duties. Treating investing, accounting and reporting on the portfolio as the same function operationally makes it difficult to do any of them well. Further, custodians, asset managers and the organization itself have different objectives – the custodian is the safe-keeping entity, the asset manager is focused on transactions and portfolio performance and the company is responsible for accounting and reporting on the portfolio. A logical, operational and segregated structure should always be implemented at the outset. Ideally, an independent third party should be employed to perform reconciliation to the custodian, as well as additional checks and verification along the way, to ensure data accuracy and integrity, and to ensure duties are effectively segregated.

Even applying such a structure is akin to building a four-lane highway for a

relatively low flow of traffic, having those efficiencies in place ensures that no one entity ever becomes a bottleneck. Information should flow smoothly between entities and be reconciled with cash, positions and transactions verified on a daily basis. In the event of an acquisition, a changed or added asset manager, a switch to a new custody bank or an increased focus on the investment portfolio as a revenue driver, segregated duties ensure scalability.

Offloading Tasks is a Viable Option

Some organizations simply do not have the necessary personnel to implement a fully-scalable operational structure. That doesn’t mean operational scalability is out of reach. Many organizations are turning to outsourced models, such as installed solutions, hosted versions or Software-as-a-Service (SaaS) models.

There are clear benefits to the SaaS model when it comes to investment accounting and reporting; primarily, the ability of the service provider to be nimble and react to changes in the market and the regulatory environment. Installed solutions take longer to implement and require regular, manual updates to the software itself and, in some cases, to the hardware as well. SaaS solutions can be quickly implemented and are ideal for a rapidly-evolving regulatory environment. Changes can be made on the fly. Improvements requested by one client can be quickly rolled out to everyone else. Ultimately, it’s up to the organization to determine whether they can afford to allocate the necessary IT resources to manage an installed solution or if they prefer the flexibility afforded by a SaaS model.

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About Clearwater Analytics Clearwater Analytics® is the leading provider of web-based investment accounting, reporting, and reconciliation

services for corporate treasuries, insurance companies, investment managers, and financial institutions. Clearwater

aggregates, reconciles, and reports on over $1 trillion in assets across 25,000+ accounts daily. For over a decade,

Clearwater has helped clients such as Group Health Companies, The Main Street America Group, Savings Bank Life

Insurance Company of Massachusetts, CopperPoint Mutual Insurance Company, The Warranty Group, and WellCare

streamline their investment and accounting operations. Clearwater remains committed to continuous improvement

of the solutions we are providing to current clients, while encouraging prospective firms to rethink how they approach

their investment accounting and reporting challenges.

©2011 Clearwater Analytics All rights reserved. This material is for informational purposes only. Clearwater makes no warranties, express or implied, in this summary. All technologies described herein are either registered trademarks or trademarks of their respective owners in the United States and/or other countries.05.29.2014

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ConclusionThe complexity and uncertainty of today’s financial markets have put tremendous

pressure on the teams responsible for managing investment portfolios and the

functions associated with them. Establishing and implementing a framework for

investment accounting and reporting best practices not only helps to alleviate

the pressures associated with operating in such a volatile market, it provides

companies with a logical means of protecting their solvency.

By following a framework that is consolidated and consistent, fast and agile,

automated and scalable, accounting and finance professionals are free to focus on

more strategic initiatives that can greatly improve their collective ability to stay

ahead of any potential threat to the portfolio.