Accounting for Your Investment Portfolio: Risky Business Josh Houchin
Accounting for Your Investment Portfolio: Risky Business
Josh Houchin
Who is Clearwater?
• Launched in 2002 to provide a state-of-the-art, web-based Accounting, Compliance, Performance, and Risk reporting solution for corporate operating funds
• Products focus on:– Corporate operating funds– Insurance companies– Asset managers– Other institutional investors
• $500 billion of assets for over 6,000 institutional investors
What we’re covering
• Reporting needs for treasury• Why is investment accounting
risky business?– Reconciliation / Verification– GAAP Pronouncements– IFRS– Consolidator– Other tidbits
• Q&A
Treasury
Audit
Senior Management
Financial Reporting
Tax
Accounting
Accounting Compliance Risk Performance
Reporting Needs
Reporting DepthLe
vel o
f D
etai
l
ExecutiveSummary
Lot LevelDetail
Constituents
Why is Accounting ‘Risky Business’?
• The purpose of this process is to ensure that what should be in the bank account is in the bank account.
• Core accounting data—cash, positions, transactions—must be pristine or else you risk inaccuracies.
“You can’t make chicken salad out of chicken droppings”
“You can’t make chicken salad out of chicken droppings”
Reconciliation / Verification
“Trust, but verify”
- Ronald Reagan
“Trust, but verify”
- Ronald Reagan
Common Reconciliation/Verification Issues
• Duplicate trades and payments• Trade vs. settle date data• ‘Dirty prices’• Previous factors• Late trades and payments• Mathematical inaccuracies• Improper maturity dates• Improper coding of transactions• Dummy data• Bad pricing• Transposition errors• Disparate or improper accounting
assumptions
Preventive and Detective Methods
• Identify controls at source to catch reconciliation/verification issues (SAS70 Type II audit)
• Automated software programs to verify, reconcile, and recalculate core source of data
• Monthly spot check (manual)
Proactive GAAP Interpretations
• FAS 115-2• FAS 157
General Rule: An auditor is to AUDIT your assumptions, not DEFINE your policies.
General Rule: An auditor is to AUDIT your assumptions, not DEFINE your policies.
Accounting for Investments
• Solution:– Utilize a combination of resources– Use your consolidator– “Who are the niche players?”– Talk to people—your peers, your
vendors, etc. – Read and research
• Have you taken 20 minutes to read the literature?
• www.clearwateranalytics.com
– Make a case and present it to the auditors
FAS 157: Common Problems
• Practical Expediency?– We have seen some auditors and/or companies attempt to
implement FAS 157 outside the realm of practical expediency (i.e. know specifics about all inputs for all lots)
– Over time and with experience this has become less common
• Understanding pricing methodologies and markets– Fixed income valuation differs from equity valuation– What is the difference between a broker quote and a price
received from a pricing vendor (i.e. FTID, JJ Kenny)?
• Inability to track designations (i.e. audit trail) and create required disclosures
FAS 115-2: Decision Tree
Investor Scenario: Application
• Transition from US GAAP to IFRS is a reality– Question of when not if
– In our best interest?
• Proponents of Adoption/Convergence– Existing global standard
– Streamlined reporting for some
– Comparable financial statements
– Efficient capital markets
• Opponents – Success of GAAP which was originally principles based
– Transition a step backwards in comparability
– Expense
IFRS a Reality
Common Accounting Scenario
Reconciliation
Primary Custody Bank
General Ledger
Investment Managers
Trades
Money Fund Portal 1
Information Flow
Management Reports
Reporting & Service
Money Fund Portal 2
In-house Traders
Insert Pic of Excel worksheet
Corp treasury compiles and calculates
Bloomberg
Optimal Accounting Scenario
Consolidator
TradesPrimary
Custody Bank
Money Fund Portal 1
Money Fund Portal 2
General Ledger
Reporting & Service Integrated
Reconciliation
Information Flow
Investment Analytics
What’s your ‘truck factor’?
How damaging would your departure be to your operations?