Half Of Senior Risk Executives Interviewed At Leading Banks Believe Risk Information Across Enterprise Is Inadequate

London – 28 September 2012

White Paper Reveals About Two Thirds of the Institutions Interviewed Are Currently Reviewing Risk Infrastructure to Enhance the Value of Risk Information Across the Business

Half of senior risk executives interviewed at leading banks believe that capturing and processing risk information across their enterprises is currently inadequate. Additionally, seven in 10 financial institutions sampled* acknowledged that they are currently reviewing their risk infrastructure to better understand risk information, according to a White Paper by IDC Financial Insights sponsored by Sybase, an SAP Company (NYSE: SAP) and industry leader in enterprise and mobile software.

Based on interviews with senior risk executives from tier one and tier two financial institutions, the White Paper examines the role of the risk function in optimising the effectiveness of capital allocation and consumption at all levels of a financial institution.

Rachel Hunt, Head of EMEA IDC Financial Insights commented: “In recent years the banking industry has paid lip service to the importance of the risk function; however, the White Paper shows that now the Chief Risk Officer is being empowered to deliver a more proactive strategy that is focused on value creation rather than simply managing financial risk in arrears. The challenge with playing such a pivotal role is the pressure on risk management performance has intensified.”

“While senior risk executives are required to play a more strategic role and drive capital opitmisation in the post-crisis world, they are in danger of being undermined by a restrictive legacy technology that severely impedes the value of risk information. Forward looking firms will invest in risk data infrastructure to ensure that high quality risk data is consistent and available throughout the organisation,” said Stuart Grant, Financial Services Business Development Manager at Sybase, an SAP Company.

According to the White Paper, eight out of 10 view the risk management role as a strategic partner to the board, whilst seven out of 10 cited its importance in driving strategy across the business. Once a reactive tool, the risk management paradigm is evolving to take on a decidedly more proactive approach that creates value. The front office faces strict internal mandates to take responsibility for the risk it originates. While a few banks are able to refresh this type of information intra-day, real-time updates delivering value to the business are viewed as a distant prospect. Many institutions are still forced to accept trade-offs between timeliness, reliability and completeness of analysis when it comes down to risk, liquidity and capital information.

“In the coming months and years, risk management has the opportunity to cement its recently attained status as the core of a financial institution. However, this will require material investments of time and money to bring the risk information and analysis capability to a level of implementation commensurate with the demands of today’s world,” Grant added.

A busy year for Big Data errors

By Ralph Baxter,
CEO at ClusterSeven

2011 should go down as the most significant year yet for errors in the sea of unstructured financial data – increasingly seen as part of the Big Data problem engulfing all modern institutions. One wonders what 2012 will bring.

Despite the problems that these errors have caused, firms such as ClusterSeven face a huge challenge ensuring that ‘data management risk’ gets its fair share of the media spotlight. For example, the biggest data error story of the year was largely under-reported. At the end of October, the German government announced that the country was €55bn [sic] “richer” after an accountancy error undervalued assets at the state-owned mortgage lender Hypo Real Estate.

Cited by Reuters, the finance ministry was quoted as saying: “It was due to sums incorrectly entered twice.” (1)

One can presume that these incorrect sums were entered into the most common host of unstructured financial data – i.e, a humble spreadsheet. Without a proper data control process in place, nobody knew much about them until checks were made later on. How many other such errors are currently – or historically – littering the balance sheets of the world’s financial institutions and national economic data?

Other errors came to light across the course of 2011. In August, the UK’s Office of National Statistics had to revise UK construction industry data sharply downwards after admitting an “arithmetical error” had caused it to overstate the strength of the sector in Q2 by 180 basis points.

In October, Richard Cuthbert, CEO of UK outsourcing specialist Mouchel, stepped down after a spreadsheet-based accounting error reduced Mouchel’s full-year profits by more than £8.5 million to below £6 million, a move which prompted a profits warning.

As the global financial and economic malaise drags on, the fear is that data management will not be a core risk for financial institutions looking to cut costs. This is particularly ironic given that less IT resources will mean more spreadsheets and more pressurised users mean it will become easier for errors to occur.

It is common for audits of spreadsheet estates in leading financial institutions to exceed 10s of millions of recently active files – a staggering indication of the deep-rooted nature of spreadsheets in the modern business world. It is also an indication of the huge risks firms are exposed to if these estates are not managed properly.

One positive development is that spreadsheets have become a core focus for market regulators such as the Financial Services Authority (FSA) in the UK. The FSA has stated very clearly that one of the biggest risks for insurance companies in the run-up to Solvency II is managing the data contained in large estates of spreadsheets.

There is clearly a great deal of work to do, however. According to recent research by ClusterSeven, just over one in two (57 per cent) of spreadsheet users have never received formal training on the spreadsheet package they use.(2)

Almost three quarters of respondents (72 per cent) admitted that no internal department checks their spreadsheets for accuracy, with only 13 per cent reporting that Internal Audit reviews their spreadsheets.

ClusterSeven is in the process of conducting further research into spreadsheet risk among senior business professionals. The early indications are that while spreadsheet risk is seen as serious, companies are simply not putting the right structures in place to mitigate or, better still, eradicate it.

In short, financial institutions will continue to report high profile instances of data mismanagement and fraud unless they take 100 per
cent control of the vulnerable financial data files that move and manipulate information between their business systems.

These include files known as CSVs (comma separated variable), plus spreadsheets and Microsoft Access Databases. Spreadsheets and CSVs are the ‘glue’ that joins everything else together. If this ‘glue’ is contaminated – such as bad data values – then this will be extremely difficult to spot further down the line. Many firms get used to accepting exceptions in this data such as test values or balancing items. However, these loopholes can hide more malicious entries for long periods.

For firms that have put the right system in place to ‘control’ spreadsheet usage and invested into defining, controlling and validating
spreadsheet processes, the rewards are significant.

Actuaries, for instance, benefit from the ability to extract, manipulate and represent the data spreadsheets contain in very fast and efficient manner and to re-present this data as the business environment changes – without being delayed by unnecessary checks.
These rewards include such things as data trending over time, automated documentation to avoid increased administration costs and automated validation of data feeds into the internal model and other core systems.

As ClusterSeven will keep on highlighting, it is only when a serious financial mistake occurs that the subject of spreadsheet risk becomes a discussion point. Many firms do not realise how vulnerable their unstructured financial data processes are until it is too late as they lack formal processes and tools to make sure all these critical data files are accurate and truthful.

Indeed, many firms do not accept just how fundamental spreadsheets are to their business. The outlook for 2012 does not look particularly rosy: we can expect many more errors to swim to the surface over the next 12 months.

Koger: Can Private Equity Firms Afford The Risk of Spreadsheets?

Private equity firms continue to rely heavily on Excel spreadsheets when it comes to data calculation management, but a recent review paper by the UK’s financial services watchdog has prompted a rethink of this business practice.

The paper by the Financial Services Authority (FSA) recently highlighted that data management was a key area in where firms could do better to achieve lower levels of operational risk.In a bid to strengthen their business models with better data management, private equity firms have reached a point where they must decide whether to continue relying on Excel spreadsheets or consider the use of an expert system for private equity administration.
In making a balanced decision, private equity firms may ask what the risks are of spreadsheets and what added benefits a software provider could add.Some of the drawbacks with spreadsheets include significant reliability problems, high human error risks, complexity, capacity limits, lack of transparency, security, and lack of auditing and revision controls.Key man risk is also key – with the average life of a fund being around eight to ten years and the average tenure of a CFO averaging around three to four years, it could take a significant amount of time for someone else to figure out all the spreadsheet calculations – assuming they can, that is.

Ras Sipko, chief operating officer at Koger, which provides administration software to private equity firms, explains: “Spreadsheet risk is a real concern, and one that GP’s are growing more serious about tackling. While Excel offers a short term solution around calculations, it just doesn’t offer long term reliability and audit trail that’s required.”

“Currently there are systems on the market that provide alternatives to Excel, but go much further to satisfy transparency requirements,” he adds.

Koger’s private equity software for example– PENTAS – manages all the investor data from initial commitments, transactions, drawdown’s, to complex fee calculations like waterfall distributions alongside reporting, compliance and auditing services.

PENTAS provides users with greater flexibility and automation of specific processes, ensuring efficiency and accuracy – and those working in private equity know too well the importance of accuracy and timely maintenance when it comes to making importance business decisions.

In addition, with better transparency, auditing control, control over user access and being able to track user changes, private equity firms could significantly cut the risk of errors and be better equipped to meet the data management recommendations of the FSA.

So, as private equity players reach cross roads, it seems there is only one real route to success for reliable data management and risk control.

Why Hedge Funds Need to Consider Spreadsheet Risk

Written by: Chris DeNigris
Risk undoubtedly plays a major factor in any business today, but for hedge funds in particular, with the complexity surrounding them, risk of any kind should sound alarm bells.One of the key operational risks that hedge funds face today is spreadsheet risk, which are still common practice but no longer viable in today’s operational environment where transparency and risk mitigation play a major role in the success of a hedge fund’s capital raising efforts.Both investors and regulators are pushing for more transparency; clients of hedge funds today are not only looking for performance, but detailed reports and an understanding on how performance is achieved – and keeping track of records using spreadsheets is not adequate.

As obvious as it may be, it seems firms are still naive to the common problems associated with spreadsheets.

Although spreadsheets do allow users to modify information simultaneously by more than one user, audit trails around this are not possible since the results of the saved work are merged into one common file. They are also open to viruses, subject to fraud, and most typically, human and mechanical errors are common.

Human errors are particularly placed under the spotlight when it comes to equalisation, where manual entries and calculations are inappropriate and hedge funds using several independent systems or modules for processing different types of administration functions leave plenty of room for errors.

With the danger of making key decisions on potentially inaccurate data and with investors asking for every inch of information in a timely manner, hedge funds must show they have suitable systems and reporting measures in place and can no longer afford to ignore the issue.

And with high profile cases such the Bernie Madoff scandal and several other fraud cases, the pressure to be as accurate and efficient as possible is greater than ever before.

As a result, a number of firms are looking to outsource these requirements to software providers to apply expert technology to meet demands, improve automation, and achieve greater efficiency.

Koger, which provides administration software to hedge funds, understands that transparency is one of the biggest operational issues hedge funds face. Investors want detailed information on everything – and for those firms relying on spreadsheets are open to scrutiny and are deemed to be operating in an inefficient environment.

Hedge funds cannot afford to ignore this, as the costs associated with spreadsheets risk are high and believe it or not can even result in fund failures. Spreadsheets, which involve manual entries and calculations, are not seen as reliable and simply lack integrity. If hedge funds are to continue attracting investors, then it is time to update the working environment.

Lastly, key man risk is an important issue that should not be over looked. These spreadsheets become extremely rich with many formulas to maintain, and it creates a very steep learner curve if a new person steps into the CFO role.

Koger’s transfer agency system, NTAS, for example, is designed to meet the needs of most modern fund complexes and their administrators.

NTAS manages subscriptions, redemptions, reporting, cash management, fund structures, trade processing, compliance and calculation of fees over complex fund structures, but most of all, it eliminates the dependency on spreadsheets by achieving accuracy and efficiency.

It is tailored specifically for the financial services industry, is cost effective, robust, and a scalable solution for the challenges of effective fund administration.

NTAS is already being used a number of financial organisations, mainly third party administrators, and presently a growing number of hedge fund managers are turning to Koger for support. When managers look to reconcile their books against an expert system like NTAS, it’s much more time consuming using excel than it would be using NTAS in-house and shadowing an administrator.

Having a fully automated system on both sides eliminates errors that result in high costs. Partnering with a quality software provider is already gathering momentum in the private equity space and hedge funds are expected to follow suit over the coming months as they strive to succeed in challenging times.

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