By Etienne Savatier,
Reconciliation has often been viewed merely as matching engines when in fact these financial control systems involve a wider range of functions and serve a higher purpose. An effective reconciliation strategy will lead to the implementation of enterprise-wide reconciliation in order to get a consolidated view across all business lines and reduce operational risks.
Reconciliations are processes identifying, investigating, and resolving differences between books, suspense account, cash balances, internal systems and external systems or sources. Controls are any consistency checks or variation checks within a system or between systems. In any case, reconciliations and controls always lead to an investigation process, explaining differences and taking corrective action, escalating issues which should be the core focus of the process.
Each time two systems (internal or external) record the same financial transaction in a different way, a reconciliation process must be implemented as a final check point to ensure global consistency. The most basic example is that of bank account reconciliation. The reconciliation of the bank statement confirms that the amount of cash reported by the company’s books is consistent with the amount of cash shown in the bank’s records. Reconciliation therefore forms a fundamental component of an administration’s internal control system. However, reconciliation applies to more than just bank account statements. Back office operations involve internal reconciliation processes when handling multiple lines of business involving multiple systems and also external reconciliation with banks, customers, counterparties, brokers and suppliers among others.
The reconciliation of an organisation’s finances is time consuming, costly and prone to human error with reconciliation errors having potentially major consequences on a company’s financial well being. High transaction volumes, multiple bank accounts, different transaction types, multiple currencies and various bank file formats exacerbate the problem.
Depending on the size of the institution and its requirements, three types of solutions may be implemented:
• Integrated (in the ERP or in the Core Banking application)
• Matching tool (very specialised ie Accord, OMGEO, Swapswire)
• Enterprise-wide reconciliation (generic solutions)
The integrated solutions are easy to implement as fully embedded in the main business application ie SAP but the functionalities are limited and in some cases other systems must be reconciled and it is not possible.
The matching tools are very efficient but usually limited to one transaction type for one-to-one matching ie MT300 for SWIFT Accord or OTC for Swapswire and it cannot be extended to other transaction flows.
Only enterprise-wide reconciliation solution can cover the full scope of reconciliation at transaction level as well as account level across the different systems of the organisation.
Transaction matching is an automated reconciliation process that compares internal source data, typically from portfolio management systems or treasury FX confirmations, to incoming external data. While transaction matching is the process that de-risks each individual transaction, account reconciliation is required to de-risk the entire account or position.
Account reconciliation ensures the integrity and completeness of the transaction flow through comparison of opening balances with previous closing balances, validation of closing balances against the opening balance plus the sum of any new transactions, proof of internal and external balances and unapplied transaction.
Enterprise-wide reconciliation solution must also be coupled with a data mapping tool and an investigation tool.
Data acquisition and transformation tool
If it is easy to reconcile SWIFT format against SWIFT format, it is certainly not the case with multiple sources of data extracted from various systems and received via various channels. To address this, a data acquisition and normalisation tool is required which focuses on translating the data received by the organisation into a consistent format so that it can be efficiently analysed, matched, reconciled, and stored.
Such a tool can also perform a pre-calculation process on certain types of balances. During the mapping and transformation processes, this tool should be able to filter, enrich, modify or transform values (eg b = buy) and aggregate data (eg individual transactions into one block position) as appropriate. Simple or complex business rules can be constructed and executed during pre-calculation, in advance of the matching and reconciliation phase.
Exception management and investigation tool
Of course despite everybody’s dream that everything should be matched at 100 per cent during a reconciliation phase, this is never the case. Hence reconciliation tools need to be combined with an investigation and exception management system. Usually reconciliation staff do not own the transaction. So should the former detect an exception, it is the latter who processes and resolves the transaction. The system must therefore incorporate an integrated collaborative case management tool in order to open an investigation case and to assign it to the department which is the transaction owner. Outstanding cases can subsequently be assigned, escalated, or force-matched by authorised individuals. To aid in the resolution of breaks and exceptions, the system typically offers templates for use in communicating record adjustment instructions to counter-parties via email or SWIFT messages. In cases where source data is incorrect, some reconciliation systems can push an update to the portfolio accounting system.
This level of automation can deliver huge cost savings related with manual activity and reduce losses through a more timely resolution of breaks.
Given that most banks, financial institutions and corporates already employ a solution for bank account reconciliation, the first recourse, when there is a new reconciliation requirement for another business line, is to implement an additional solution be it internally developed or vendor supplied. This trend results in the acquisition of a new system for each new reconciliation requirement, which in turn significantly increases the system maintenance overhead for the numerous different reconciliation systems with multiple data flows and different user interfaces as below.
On the other hand, implementing an enterprise-wide reconciliation system is a strategic approach that can simplify drastically the architecture. In a multi-entity and multi-location organisation it offers, from a single user interface, a real-time reconciliation for all business lines and market instruments including, cash, general ledger, bank accounts, securities transactions, custodians holdings, funds, treasury, foreign exchange, money markets and precious metals.
With an enterprise-wide reconciliation you can leverage on the same infrastructure to cover the full scope of reconciliation requirements of your organisation. The users across departments can share a single exception management application and the same database – it is the only solution to improve back-office efficiency while reducing risks.
Etienne will be talking at the Moving from silos matching to enterprise-wide reconciliation session on Wednesday 21 September10:00 – 10:30 in Open theatre 1.
Click here for more information on the session