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?

Q&A

Josh Houchin

Clearwater Analytics

208-489-7543

josh@clearwateranalytics.com