When Investment Accounting Goes Wrong

Despite being considered a back-office function, the investment accounting function has effects across every part of the investment operations lifecycle. If things start to go wrong with fund and investment accounting data as it moves around the front and back, people who typically wouldn’t bat an eye about accounting suddenly care as they question calculations, managing investment accounting data themselves or wait for delayed batch processes and others correcting and verifying the needed data.

This week, FundGuard’s Alan Schneider discusses how inefficient investment accounting processes and inaccurate accounting data can impact the entire investment lifecycle and explains the benefits of real-time, dynamic investment accounting data benefits across the enterprise. 

Assessing the Impact of Faulty Accounting Data

FG: Many investment professionals like portfolio managers, performance measurement teams, and compliance officers often take accounting data for granted. Can you explain why this perspective is flawed and how problems with accounting data can disrupt more than just the accounting process? 

AS: When accounting goes wrong in the investment management process, it’s vital to know what type of accounting data is affected and the broader impact on your organization as a whole. The many different views of a portfolio’s accounting data can generally be sorted into two major categories:

1. Fund Accounting Data

Fund accounting involves highly regulated and very prescriptive requirements for performing specific tasks with absolute precision. From regulators keeping an eagle eye on reporting to compliance officers monitoring asset managers, there is no shortage of oversight. 

On top of meeting regulators’ expectations, you must also deliver executable pricing for the fund, with severe implications in instances when the accounting data doesn’t work. You may be liable for millions of dollars to the investor public, and you are likely to receive substantial fines from regulators, in addition to providing a reputational black eye. 

Moreover, your compliance officer will come knocking when your organization fails to hold up its end of the bargain on behalf of your clients and the fund board. 

Simply put, when things go wrong with your accounting data, further complications are sure to arise elsewhere in the organization. If the NAV is wrong and goes out to the market, for example, it’s already far too late to correct the error and carries significant implications for you and your clients. 

2. Investment Accounting Data

The other form of accounting data is the accounting data often used primarily by the front office. This includes portfolio views for traders, portfolio managers, client services and performance and risk measurement. In a previous post, we discussed the challenge of using the middle office as a bridge for investment accounting data between the front and back office functions. 

As you start to redefine and modernize the middle office, however, you need the ability to overcome accounting deficiencies to prevent any ill effects on the front office. And any ill effects on the front office ultimately expose the manager to issues with its clients.

Inaccurate or erroneous accounting data can disrupt many front-office functions, especially performance measurement and attribution. Asset managers and portfolio managers often receive bonuses for meeting or beating their targets, making an accurate performance measurement process a must.

Without accurate and real-time correctable, and end-of-day accounting data, however, the performance measurement process becomes increasingly complex. In many cases, the data used may not even be up to the task if it is not accessible in the right form with real time accuracy.  

Ensuring Access to Trustworthy Accounting Data

FG: When an enterprise lacks trust in accounting data, we often witness the creation of safeguards like investment buffers to ensure proper cash flow management. How is FundGuard working to ensure trust in accounting data among both front and back-office teams?

AS: When building FundGuard, we aimed to create an accounting engine so granular and with easily tracked data from inception to delivery that many major accounting data problems disappear. 

FundGuard can deliver data, in real-time, on the very specific activities happening in the portfolio directly to a performance analyst, making it far simpler for the analyst to get the right numbers with the right tagging for complete, accurate analysis. Additionally, FundGuard makes necessary corrections, ensuring data points like income earned on a securities lending portfolio are not incorrectly attributed to the portfolio manager. 

Other accounting systems cannot delineate in this way, making it far more difficult and complex to perform essential functions, like reconciliation and cash flow management. 

By comparison, FundGuard ensures that the cash flow amongst different activities within the portfolio is aligned with the proper attributions, helping to measure the performance of a portfolio manager’s choices more precisely. FundGuard can also provide portfolio managers with the cash flow information needed at the start of the day, making certain that the cash balances a portfolio manager works with are accurate.

When you’ve got a system that ensures that you’re properly taking in real-time data, applying client-defined controls – also in real-time – and that you can validate that the processes performed on that data are correct, you can vastly improve reconciliation processes as well. Rather than relying on manual reconciliation, FundGuard’s investment accounting engine provides the reconciliation tools needed to sort through volumes of data and identify and correct any inaccuracies immediately. 

The Importance of Good Data — and the Consequences of Bad Data

FG: Good and bad accounting data alike can have a monumental influence on the operational resilience of an investment organization. Can you walk us through the importance of having access to good accounting data, and some of the consequential scenarios that may arise due to bad data?

AS: Around 10 to 15 years ago, the operational alpha concept took hold in the investment space, aiming to optimize the flow of data between the front, middle, and back offices. Although the tools used to measure this never truly took hold, everybody recognized the value of optimized data.

For example, if you need to hold back substantial dollars in the portfolio to ensure you’re not going to produce a settlement break in the future, that’s an investment opportunity wasted. 

Accounting errors largely contribute to the need to hold this kind of balance, ultimately leading to a lack of trust in the data. In turn, we see the building of buffers — like the substantial cash balancer discussed before — resulting in significant losses of opportunities in the market. 

Poor accounting data impacts you in ways you may not even realize. Inaccurate accounting data not only disrupts your basic investment functions but also inhibits you from providing investors, and other interested parties the information about the good work you’ve done for them until days or weeks after a period closes. 

For institutional investors who have worked with an asset manager for several months, the inability to assess the manager’s performance against the investment management agreement can be a major hurdle. Without good data, the manager may be afraid of exposing inaccuracies due to faulty accounting. 

All in all, each of these issues comes back to a lack of access to good data. 

Accessing Real-Time Data is Nirvana, but is it Feasible?

FG: Many of FundGuard’s competitors claim to offer real-time investment accounting capabilities, yet FundGuard is the only provider of such detailed functions. Could you explain how FundGuard differs from its competitors and what makes it capable of streaming real-time, dynamic accounting data? 

AS: Before FundGuard, no provider of real-time accounting data existed. The type of central system I’ve just defined was simply not possible without a cloud-native, big-data accounting engine. 

Beware other cloud-native providers who claim to have accounting capabilities but lack a true accounting engine. Currently, only FundGuard can offer real-time, dynamic accounting data, whereas others are simply aggregating data from different systems into one system to give the illusion of an integrated, all-in-one accounting dataset. 

FundGuard takes all of the inbound data coming from different sources at our customers and the market (pricing, corporate actions, recon, amongst others) and applies various controls that ensure all data outputs are fit for purpose and tailored to the unique use cases of our clients. 

Most importantly, we can perform such results in real-time. 

To illustrate this further, imagine your favorite streaming platform. While the base layer of content is the same for all users, you are presented with a highly personalized home page when you log on to your account, with recommendations for shows and movies that match your taste and preferences.

FundGuard functions in a similar way. While all of our clients’ users have access to the same data, each downstream consumer of that data receives it, fit for their purpose. Whether you’re a portfolio manager, a performance measurement manager, or even a compliance officer, the data that you see and the way that it is structured is specific to the business view you require. 

Even though the data all comes from that same pool of streaming, real-time  data, specific controls can be applied based on needs and preferences. We refer to this as real-time dynamic accounting that updates consistently and immediately as new information becomes available. As soon as the update occurs, the data is updated everywhere, ensuring all parties using the data have access to accurate and up-to-date information. 

FundGuard makes real-time data possible, giving all involved parties access to the data needed, even when assessing or managing the portfolio from different business views. The data provided supports all of these views in exactly the same way, at all times. 

Positioning Your Accounting Team as the Heroes in the Enterprise Story

FG: Historically, back-end accounting teams have gone unnoticed and underappreciated. How does FundGuard redefine the role of accounting teams as the heroes in the enterprise story? 

AS: More and more, we are hearing that FundGuard is “different,” but what makes us so different? 

It all comes down to your enterprise’s ability to not be limited by what you know. If you try to upgrade your system while still using the same legacy tools and technologies, you greatly hinder your enterprise’s opportunity to adapt to technological change. 

FundGuard cannot truly be compared to competitors because we look beyond the legacy lens to position investment accounting as the core function powering all investment activities. It’s not apples-to-apples but rather apples-to-oranges when comparing FundGuard, requiring enterprise teams to begin asking questions differently.

Rather than treating investment accounting as an afterthought, FundGuard spotlights this function and centers the conversation around the need for newly designed systems, not just updated ones. With FundGuard, you’re not just adding another teaspoon of sugar to the cereal box and calling it new and improved — you are reimagining your entire investment accounting process. 

FundGuard doesn’t change the accounting function or workflow, but rather your entire investops systems’ efficiency and cost-effectiveness. The downstream impact of an optimized investment accounting system can change and improve workflows across your entire organization.

Built Differently

FundGuard strives to make lives easier across the enterprise. 

With FundGuard as your investment accounting utility, you can eliminate tedious processes so that your smart people can do smart work, all while reducing errors and minimizing costs across your investment operations. FundGuard’s technology transforms the accounting process into a sleek function that powers real-time investment decisions. 

Get in touch with FundGuard today to get started.