White Paper Exposes Dangers of Failing Accounting Systems to the Buy-Side

20 June 2012

New paper authored by Woodbine Associates argues that legacy accounting systems introduce risk, escalate operating costs and delay new product launches

SimCorp, a leading provider of investment management software and services for the global financial services industry, today released a commissioned white paper, titled “Accounting Solutions: Backbone of Investment Management.” Authored by Woodbine Associates, the white paper investigates how weakness in outdated accounting platforms compromises a buy-side firm’s ability to be competitive and leads to human error, compliance breaches, failure to detect fraud and incorrect valuation of portfolios.

Pointing towards the collapse of Lehman Brothers and Bear Stearns, the paper argues that legacy accounting systems are ill-equipped to recognise risky exposures and incorrect valuations. As a result, investment managers may not be able to adjust positions expediently and accurately in response to today’s volatile markets.

Additionally, the paper outlines the opportunity cost when legacy accounting systems cannot keep pace with portfolio managers’ goals and objectives. According to Matt Samelson, principal of Woodbine Associates and co-author of the paper, “Investment managers will not wait 4-6 weeks for the back-office to support a new fund or security type. Neither will the firm’s senior management tolerate delays in entering new markets if system limitations prevent support of local accounting frameworks, financial instruments, currencies and regulations. Furthermore, investors have become hypersensitive about operational risk and cost matters to business processes and technology that could result in catastrophic loss. This is especially true where, in their perception, manual processes or 'workarounds' are required. Recent events have only amplified concerns."

The paper cites an onslaught of global regulation, including Dodd-Frank, IFRS 9, UCITS IV, MiFID II, FATCA and Solvency II, which will increase requirements for detailed reports on holdings and consequently place more demands on the firm’s record-keeping systems.

Recent industry polls conducted by SimCorp served as the catalyst for the new paper. “When 56% of the buy-side concede they are not confident in the accuracy of their present accounting systems, and 30% state they cannot calculate exposure in real-time, we have to ask why and what is the impact?” notes David Kubersky, managing director for SimCorp North America. “This paper challenges the status quo where supporting accounting and back-office operations is an afterthought. It is our hope to illuminate the importance of investment accounting and illustrate the dangers outdated record-keeping systems pose to the buy-side firm, its counterparties and the industry at large.”

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