Reconciling complex financial transactions is messy yet vitally important work. Clients get timely confirmations, but official statements of record arrive at various times and in various forms. These typically must be manually reconciled, with gaps and exceptions noted and flagged as appropriate.
Failure to properly manage the reconciliation process exposes the firm to hidden and unmanaged risks. Existing applications or workflows may not focus on the exceptions. There may be unseen correlated risks in the portfolio. Are the gaps important?
Many firms have approached the reconciliation gap problem by using smart people armed with spreadsheets. While this might be sufficient when transactions are simpler and infrequent, it does not scale well. As client transactions grow in complexity and frequency, the team responsible starts to fall behind.
Not only is this hard on the people involved, it creates new forms of risk for the firm. Here’s what to look for:
For example, a state-owned bank may have delayed or ambiguous official statements of record. Those facts may or may not be captured in someone’s spreadsheet, but they are very difficult to spot and evaluate when in that form.
As a result, unseen systemic risk may build up to a point where the problem becomes much more visible, with associated consequences. Worse, there is no record of how facts were evaluated and decisions were made, so there is essentially no basis for improvement.
To make an important decision, it’s helpful to have full knowledge of the facts and what they mean. Having those facts and their interpretation ready-to-go when an important decision needs to be made improves outcomes — both in timeliness and accuracy.
Perhaps better, when there is a clear record of facts available and reasoning applied, all less-than-perfect decisions serve as an excellent platform for process improvement.
When important decisions need to be made, and the facts and reasoning behind their interpretation aren’t readily available, it stresses the people attempting to provide both of these via spreadsheets and tribal knowledge.
This may be reflected in poor job satisfaction, high rates of turnover, or similar indicators. When people don’t have the tools to do the job they’ve been asked to do, they get frustrated and start considering other options.
Your operation may not be subject to compliance audits today, but it’s a fair question – could you if you had to? If your answer isn’t an immediate “yes”, consider this?
All fiduciary firms are increasingly subject to new forms of regulation, compliance, and scrutiny. Simply put, it’s inevitable that more will be asked from you in the future.
Put this way, having a clear and easily auditable record of how decisions were made with the facts available at a point in time will lessen any regulatory or compliance burden: past, present, or future.
Historically, we’ve used groups of smart people to evaluate facts and collectively decide what they mean. With regards to transaction reconciliation, the facts themselves are the reconciliation artifacts, when and where presented.
What those facts might mean is up to the smart people involved.
The transition to digital business models has resulted in many more forms of events where context matters. The presence – or absence – of a fact may be important, or not.
Deciding this importance quickly and accurately becomes crucial, as failure to do so can have severe consequences over time.
The answer becomes a database – a database of facts, and what we know about them. That knowledge also includes interpretation in context, whether we’re talking about a potentially suspect actor, or a novel situation not seen before.
This semantic database – facts and what we know about them – can be used to evaluate incoming confirmations and reconciliations in any form. New facts (or absence of facts) can be evaluated against known facts and interpretations. A fast, automated decision can be made to create an exception for further analysis, or to safely decide not to. A record of the decision made with the facts known at the time is available if needed.
While re-engineering a legacy process onto a new platform is never an easy proposition, it does pay substantial benefits:
If you’re ready to learn about a new approach to solving the challenge of transaction reconciliation – and many others – we’d like to hear from you!
Send us an email to get in touch.
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