Managing Reconciliations by Exception: A Key to Improving - PDF document

Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs December 2009 P&C A publication of the PricewaterhouseCoopers’ Financial Services Institute ( FSI ) Contents Section Page 1 Point of view 3 2 Competitive intelligence 13 3 A framework for action 19 4 How PwC can help 23 Appendix A Select qualifications 29 Section 1 – Point of view PricewaterhouseCoopers 4 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Point of view In the average financial institution, reconciliation of transactions, positions, and balances accounts for between 1.5 percent and 2 percent of operating expenses. 1 The majority of these costs are labor - related, stemming from the degree of manual processes still in reconciliation operations. Although a mere 0.2 percent of all reconciliations turn out to be exceptions, a single exception can result in millions of dollars in losses. Rather than creating shared service centers to facilitate the flow of information and expedite the resolution of exceptions, m ost institutions still have multiple manual workflows within product or line - of - business silos, and rely on disparate, outdated, and semi - automated solutions. Trade confirmations, operational cash accounts, and securities matching are generally reconciled separately and only within product - line operations. Each group develops its own policies and practices, with little synergy across groups. 1 Based on analysis of SEC 10k filings by PricewaterhouseCoopers' Financial Services Advisory Group. PricewaterhouseCoopers 5 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Current environment After shared services Business - line functions Shared functions Point of view Much of this reconciliation - related spending is unnecessary and can be eliminated through creation of a shared service environment and adoption of new technologies. Settlement errors in payments Trade breaks in equity operations Position differences in custody operations G/L recon in finance Assess source systems Close sets Case creation Copy data Research Visually match Assign case Resolve w/acctg & msgs Flag Exceptions ―Quick Hit‖ resolutions Certification and Other Reporting Enterprise - wide exception Management utility G/L Trades Operating cash PricewaterhouseCoopers 6 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Point of view The financial crisis of 2007 - 2009 has resulted in an increased focus on cost containment. Financial services companies are experiencing a reduction in revenue while their costs remain relatively stable. Firms that identify opportunities to and effectively institute cost savings will be better prepared for growth as they emerge from the current economic storm. Despite this urgency, a 2009 survey performed by International Swaps and Derivatives Association (ISDA) found that only 19 percent of financial services respondents had a dedicated portfolio reconciliation function. 1 The failure of many companies to establish a shared service center for reconciliation represents a missed opportunity to reduce redundancies in the reconciliation process and reduce operating costs. In addition to delivering cost savings, shared service centers emphasize value to the customer, enhance the flexibility of the organization, improve the skill set and knowledge base of personnel, and promote partnerships among business units. Earnings pressures have become headline news, fueling a demand for improved and more transparent controls at a lower per - transaction cost. Regulators are focusing attention on controls and transparency surrounding complex transactions. Significant investment will be required by financial institutions to create cost - effective processes and systems to capture and control underlying elements of transactions such as collateral. Investor demands for a return to profitability will have a dramatic effect on business - as - usual at all financial institutions for the foreseeable future. 1 ISDA Margin Survey 2009. ISDA.org, July 2009 PricewaterhouseCoopers 7 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Point of view Highly publicized fraud cases have resulted in increased pressure from regulators and financial services companies to improve controls over the reconciliation process. Regulators are putting pressure on firms to improve controls, including process controls over investment position reconciliations. In the US, the Federal Deposit Insurance Corporation (FDIC) issued a Cease and Desist order to a state - charted US bank citing ―operating with an inadequate reconciliation process‖ as one of the primary reason for the order. 1 In the UK in 2009, a large - cap multinational investment firm was fined £1.4 million by the Financial Services Authority (FSA) as a result of controls issues which failed to detect rogue trading activity. 2 These actions are clear evidence that regulators are applying pressure in an effort to encourage companies to improve their back - office reconciliation operations to reduce risk. Financial services companies continue to be battered by fraudulent acts that reconciliation is designed to prevent. In one highly publicized event, a French bank suffered losses of $7.2 billion as a result of a rogue trader who exceeded his portfolio risk limits. 3 Besides the obvious financial losses that resulted, the bank also suffered reputational damage and increased regulatory scrutiny. Several other similar situations have been uncovered during the recent market downturn, many of which could have been detected through effective reconciliation of trader positions. Clients are demanding improvements in transparency of positions. The financial crisis of 2007 - 2009 has highlighted the importance of transparency of internal controls surrounding the safekeeping of assets held at prime brokerage firms and other custodians. Funds and investors are seeking additional comfort over the existence and, where applicable, the effective segregation of their assets. Clients are also looking for assurance that prime brokers and custodians holding their assets maintain effective internal controls. 1 FDIC press release ―FDIC Makes Public March Enforcement Actions,‖ FDIC.gov, July 2009 2 The Daily Telegraph ―Morgan Stanley Pays £1.4 million Fine, Uncovers Three Rogue Traders,‖ Factiva.com, May 2009 3 Beaumier, Carol. Bank Accounting & Finance ―History Repeats Itself,‖ Factiva.com, July 2009 PricewaterhouseCoopers 8 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Point of view The reconciliation process continues to change as a result of the expanded use of complex securities - based products with multiple counterparties and custodians. Increasingly complicated securities have led to an upsurge in both the volume and frequency of securities reconciliations in the marketplace. According to a survey performed by ISDA, 31 percent of respondents now perform daily - position reconciliations, a substantial increase from 22 percent in 2008. 1 Furthermore, a June 2009 report issued by Celent Research shows that the evolution of derivative contracts and related collateral positions over the last decade has significantly added to the complexity of the reconciliation process for these instruments. 2 Evolving market characteristics Market characteristics then (1999) Market characteristics now (2009) • ISDA estimated approximately $200 billion in collateral assets • Few counterparties • High thresholds linked to creditworthiness • Weekly/monthly margin frequency • Single product margining • M2M approach • Collateral types: cash, government bonds • Cost - center model • Reactive reconciliations • Estimated amount of collateral in circulation approximately $4 trillion, or 20 times the number in 1999 • Numerous and diverse counterparties • Wide range of counterparty creditworthiness and thresholds; more recently, increasingly careful assessment • Daily/intraday margin calls • Cross - product margining • M2M complemented with Value at Risk (VaR), Potential Future Exposure (PFE), etc. • Collateral types expanding, more recently narrowing again • Quest for optimization • Proactive reconciliations 1 ISDA Margin Survey 2009. ISDA.org, July 2009 2 OTC Derivatives Collateral Management: A Credit Risk Mitigation Technique Revisited Celent Research, June 2009 PricewaterhouseCoopers 9 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Point of view Reconciliation, although typically considered a Finance group function within each business or territory, should be approached from an enterprise - wide perspective. By instituting leading practices and consolidating functions across the enterprise, significant improvements in efficiency can be realized, including streamlining SOX compliance requirements and minimizing errors in the reconciliation process. • Exceptions can occur in front, middle, and back offices and across Finance and Operations, with more complex and riskier exceptions frequently arising in back - office operations. Reconfiguring exception management improves quality by identifying defects as early in the process as possible, particularly where small initial problems may have larger downstream effects. • Reconciliation processes and systems can identify true exceptions, while thorough investigations can promote their correct resolution, thereby correctly mitigating risk, reducing cost, and improving quality. These actions also facilitate continual improvements to the process. Most exceptions are caused by process - control errors (entry errors), system failures, human error, or fraud. Isolating the root cause provides the basis for reengineering, and these efforts yield significant value by mitigating financial and reputational risks. The following approaches should be adopted in order to focus institutional resources efficiently: - Shared service ─ The centralization of account reconciliation is a prime example of where centralized methods can provide value. This function performs activities that are common and transportable as well as activities that require local, domain expertise. Centralized methods can capture the business rules that allow specialists to execute simple activities while enabling domain experts to concentrate on the activities that only they can execute, thereby focusing efforts on true exception issues. - Adoption of new technologies ─ Failure to address opportunities at the enterprise level results in inefficiencies, inaccuracies, and duplication of efforts and technologies. The adoption of new technologies and leading practices can cut more than 20% of the costs associated with outdated solutions in a sustainable manner. PricewaterhouseCoopers 10 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Point of view Creating a shared service to manage the reconciliation process increases efficiency, enhances flexibility, and decreases overall costs. Shared service centers emphasize value to the customer, enhance the flexibility of the organization, improve the skill set and knowledge base of personnel, and promote partnerships between business units. Shared service methodology has delivered significant benefits to the manufacturing industry in the form of more efficient operations, reusable components, lower error rates, and products that meet customer demands. The parallels to financial services operations have encouraged bank operations executives to implement similar methods. Enabling faster reaction to operational breakdowns reduces reputational risk, and greatly improves client service and satisfaction. Additionally, effective exception root - cause analysis facilitates continuous improvement in production, ultimately decreasing the number of exceptions. When stakeholders are allowed to initiate and track exceptions, it greatly improves their exposure to issues and engages them in root - cause correction for future purposes, particularly when the cause stems from their actions. Shared service methodology leverages partnerships across various lines of business, leveraging the skills of each line. Capturing and leveraging human knowledge is key to achieving efficiencies. Shared service methodology allows the front office, back office, and shared services to combine separate operations, which can then be centralized into specialized, co - located operations. This enables the Operations area to concentrate on product - specific functions, while common functions can be shifted to more efficient operations. Shifting back - office functions to shared services is facilitated by incorporating business rules into reconciliation applications. These applications are designed to execute business rules to produce the desired output. This automation frees up the time of staff for more valuable tasks. PricewaterhouseCoopers 11 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Point of view Emerging practices and new technologies can significantly reduce costs related to exception management. Significant opportunities exist to consolidate similar functions by implementing better technology and delivering efficiencies and better controls. Most firms fail to invest in the appropriate tools to support auto - matching of basic information. This results in employees of the exception management function spending the majority of their time on generic, administrative tasks. Properly identifying these routine tasks and consolidating operations will drive significant operational cost improvement and quicker resolution and accuracy, resulting in better risk mitigation. Consolidating operations, by utilizing shared captive utilities and outsourcing arrangements, results in considerable cost savings — as much as 50% on a sustainable basis. This approach has proven successful for straightforward and complex product types. Increasingly complex products require more sophisticated risk solutions. Most institutions have come to realize that disparate and disjointed reconciliations of transaction segments are a poor model for complex transactions such as cash - for - securities, or extended settlement instruments such as swaps or derivatives. The need to ensure that original transactions are properly booked is required to avoid remedial and expensive exception resolution. Advances in automation tools support the case for making structural changes in exception management, allowing the use of more efficient and effective agile methodologies. This allows institutions to consolidate and relocate disparate operations, reduce costs, and improve effectiveness. Additionally, the use of workflow and case management applications results in greater transparency across organizations, and reduces the effort required to properly resolve exceptions with external counterparties and clients. PricewaterhouseCoopers 12 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Point of view Forward - thinking financial services firms are looking toward exception prevention as part of an overall strategy to reduce costs and increase controls and transparency. The cost - saving opportunities and benefits of greater controls and transparency are simply too large to ignore. To maximize success a program should use a broad definition of reconciliation. All types of external account and non - cash transactions can benefit from process improvements and automation. Implementing effective exception - management practices enables forward - thinking firms to look at exception prevention rather than exception response. The use of root cause analysis information by the production operations will reduce the number of exceptions, dramatically improving the over - all quality of the product. Section 2 – Competitive intelligence PricewaterhouseCoopers 14 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Competitive intelligence The following are examples of what leading companies have done: A large global bank has standardized utilizing two tools and is developing common procedures and metrics. A multinational bank has identified over 16,000 staff who do some form of matching or resolution as part of their job. After extensive evaluation, forty - seven different reconciliation - application implementations are being replaced in a controlled rollout with two applications chosen by a committee. Common extracts, matching rules, and reporting are being designed centrally to ensure a consistent level of service. Prioritizing the areas for automation is being managed by a transition team who documents any custom requirements. A large broker - dealer is consolidating Finance reconciliations with long - term goals of bringing all reconciliations into a common utility to speed month - end account closings, increasing the effectiveness of the controls, and reducing the number of overall exceptions. Reconciliation of G/L to subsystems and G/L to G/L reconciliation is now handled in one low - cost center for all accounts globally. This has reduced the number of days to close month - and quarter - end books from ten to six. The application is integrated with a SOX controls database to automatically record accounting control sign - offs and certifications. Reports on aging of open items, collateral conditions, and other key risk indicators are produced centrally for risk committees. Yearly savings are over $10 million. A global bank integrated a central reconciliation and investigations function with the fraud, AML, and client services functions for a complete view of operational risk. All exceptions are automatically part of a complete view of the enterprise, a continuous improvement program, and with risk mitigation areas such as internal fraud and compliance. These areas share a common client view, a common set of electronic historical records, as well as trend and performance data. Exception rates and the associated losses have been cut by 60% as a result of addressing root causes. PricewaterhouseCoopers 15 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Competitive intelligence The following table illustrates the difference between leading practices across the industry and what we see in practice. Observations Leading practices Top - ten global bank US - based fund services outsourcer Large fund management company Foreign - owned, US regional bank Labor cost arbitrage― staff performing common tasks that do not require either deep product knowledge or access to local clients in low - cost regions • Thousands of staff in high - , medium - , and low - cost cities around the world • Local supervisors and managers are needed where there are dedicated reconcilers • Many instances of reconciliation being performed as a part - time task by operations staff, raising segregation - of - duties concerns • Staff performed identification and resolution steps • Dedicated utility group handled data acquisition, auto - matching, and first - pass visual matching • Trade, position, and cash exceptions forwarded to client back offices for research and resolution • Utility split between one location in proximity to clients and the other in an on - shore, lower - cost location • All reconciliation and exception management embedded within product - line operations • Operations located in both high - and medium - cost locations • Migrating from decentralized and product - siloed reconciliation to centralized utility located in Eastern Europe and South Asia • G/L reconciliation moved first, with operating accounts moving in a second wave • Investigating business requirements for non - cash reconciliations PricewaterhouseCoopers 16 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Competitive intelligence The following table illustrates the difference between leading practices across the industry and what we see in practice. Observations Leading practices Top - ten global bank US - based fund services outsourcer Large fund management company Foreign - owned, US regional bank Consolidate operations― standardize on technology and processes and co - locate to gain efficiencies and develop concentrated expertise • Clusters of dedicated reconcilers in major operations centers • Highly distributed, smaller instances within smaller countries and regions within product silos. • High level of specialized formats, protocols, and exception handling for different clients added complexity to operations and limited flexibility in staffing • One set of processes standardized for internal G/L cash accounts, another set of practices for operating cash and securities reconciliations • Reconciliations take place in several operations centers and in the branches • Large fraud losses in a card division discovered after reconciliation flagged settlement differences PricewaterhouseCoopers 17 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Competitive intelligence The following table illustrates the difference between leading practices across the industry and what we see in practice. Observations Leading practices Top - ten global bank US - based fund services outsourcer Large fund management company Foreign - owned, US regional bank Increase use of automation • Over 40 different reconciliation tools used globally • One case management tool but implemented only for European cash investigations • One tool selected for all reconciliations which hindered onboarding of some transaction types • No case management tools to track progress between central matching utility and dispersed exception resolution staff within client operations • Only G/L to subledger reconciliations performed on a vendor application • Looking for automated account closing tool for SOX compliance and cost savings • Two vendor tools utilized on off - shore utility • Multiple case - tracking tools used for exceptions in US operations PricewaterhouseCoopers 18 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Competitive intelligence The following table illustrates the difference between leading practices across the industry and what we see in practice. Observations Leading practices Top - ten global bank US - based fund services outsourcer Large fund management company Foreign - owned, US regional bank Standardize practices • Local IT and Operations managers set data access, systems used, reporting, and escalation practices, policy, and procedures • Matching rules and practices common across all securities types and accounts • Exception management is highly customized by client • Finance has standardized the workflows for G/L reconciliation • Operations practices are set by department managers • Internal Audit has identified opportunities for improvement in Operations • No standardization in practices in the local operations • The utilities in India and Poland have strong standards and common practices • Reconciliations that migrate to the utility must adopt the standard to be accepted into the utility Section 4 – A framework for action PricewaterhouseCoopers 20 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs A framework for action Reconciliation transformation Stage 1 Stage 2 Stage 3 Stage 4 Assess Design Build Consolidate and optimize Conduct a current - state process analysis, including identifying activities undertaken by Finance and Operations departments Establish standard policy, processes, and tools Integrate reconciliation into workflow, case management, and risk reporting Assess opportunities to consolidate and relocate to further reduce costs • Assess the existence and quality of current - state controls • Obtain an understanding of the nature of breaks, root causes, and their operational impact • Assess the quality of training and skill sets of individuals performing reconciliations/processes • Assess organizational structures, roles, and governance • Evaluate the existence and value of standardization • Evaluate the use and cost/benefit of automation • Design future state of exception management • Select reconciliation tools for enterprise if appropriate • Centralize support for applications • Create a policy for performance metrics, reporting, escalation, etc. • Establish central oversight and governance • Divide commoditized processes from processes dependent on resources • Codify end - to - end processes across all transaction types with straight - through - processing capabilities • Implement workflow controls, exception identification, resolution, and reporting • Incorporate root - cause remediation and operational risk monitoring into operating model • Select operations that are candidates for relocation • Prioritize based on cost reduction/complexity criteria • Transfer to domestic or overseas center • Select vendor for BPO for select operations Benefits • Common understanding of leading practices and gaps • Controls effectiveness/ risk reduction • Quality enhancement • Cost reduction • Self - funding programs • Cost reduction • Quality enhancement • Error feedback • Segregation of duties • Straight - through - processing (STP) improvements • Cost reduction PricewaterhouseCoopers 21 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs A framework for action Sample reconciliation cost reductions from a regional bank Increasing the level of automation and consolidating reconciliation operations across the enterprise will improve quality and decrease costs and risks. After implementation of a shared services environment Business - line functions Shared functions Enterprise - wide exception Management utility G/L Trades Operating cash PricewaterhouseCoopers 22 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs A framework for action Sample reconciliation cost reductions from a regional bank Labor - cost arbitrage Consolidate operations Increase use of automation Standardization of practices Total potential opportunity • Lower FTE base salary costs by moving to low - cost location • Lower benefit costs, such as pension and health insurance • Reduce management oversight expense • Reduce expensive support staff costs • Lower facility and overhead with low - cost center • Reduce overlapping systems - License fees - Maintenance costs - Service costs • Eliminate redundant activities across functions or locations • Realize economies of scale • Automate manual processes • Reduce paper files • Lower hard - file archiving costs • Improve transparency in service standards • Improve ability to assess risk • Improve processes through knowledge sharing • Standardize reconciliation software and supporting tools • Standardize and streamline processes • Implement consistent customer service approach • Improve exploitation of internal expertise • Replace existing annual FTE costs at high - to medium - cost locations, with FTE cost at consolidated low - cost location • Potential continuous annual savings, post - implementation Illustrative (in millions) $4.8m $3.6m Relocate 1000 FTE from high - / medium - to low - cost FTE center Consolidate operations Automate processes Standardize process and tools Annual continuous saving, post - implementation $.2m These cost reductions are represented by a 25% reduction in total FTE $.5m $.5m Section 5 – How PwC can help PricewaterhouseCoopers 24 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs How PwC can help PwC’s financial services practice PwC’s financial services practice has developed a specialized group to assist our clients in every phase of optimizing their exception management operations. The cross - functional group has experience in financial effectiveness, risk and controls, and banking and capital markets operations/IT. Extensive experience We have designed and implemented new operating models for reconciliation, investigations ,and account closing for several financial services companies. In addition, we have extensive experience with the leading reconciliation and case - management vendors in the industry. Industry focus Our seasoned team of specialists bring deep industry expertise and uncover key deal issues, risks, and opportunities in the insurance and banking and capital markets sectors. Deep operations, finance ,and IT experience Our team includes finance, human resources, regulatory, information technology, strategy, operations ,and accounting advisory specialists. Tailored, integrated approach We tailor our approach and deliverables to your needs based on your strategic goals, your current operating model, and the details of the business case for change. A single point of contact Our dedicated financial services team provides a single point of contact that can quickly mobilize the appropriate resources to assist you with your transaction needs. Global presence We have a financial services presence in over 25 countries, which can add significant value to companies considering cross - border solutions for reconciliation . Solution - based approach Organizations have many choices with respect to addressing the risk, accounting, and operations issues related to reconciliation. We provide a tailored approach to address these issues in a sustainable fashion for your organization. PricewaterhouseCoopers 25 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs How PwC can help We provide solutions and support for reconciliation transformation. Strategy • Review of all matching operations • Risk assessment and quantification • Implementation of exception management framework • Development and review of sourcing strategy and business alignment • Cost/benefit analysis Feasibility • Development and review of reconciliation scope, service levels, and key performance indicators • Transition planning • Developing ―value metrics‖ to enhance continuous improvement Transaction • Analyze and recommend viable options (such as internal shared services, outsource, right placement) • Perform supplier capability assessment • Vendor assessment, selection, and planning Transition • Transition project management • Risk assessment • Business process redesign • IT applications alignment • Communication protocols • Change management • Human resource management • Compliance Optimization • Contract compliance review • Cost audit or value - for - money review • Post - implementation review • Performance management and benchmarking • Business continuity planning • Operational resilience and technology value management PricewaterhouseCoopers 26 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs How PwC can help PwC can help clients analyze and remediate an inefficient account reconciliation process. PwC can deploy a dedicated team with accounting, process improvement, and technology expertise to assist with: • Developing a standardized account reconciliation process • Streamlining documentation including process flow maps and policy and procedure documents • Organizing continuing education courses for domestic and international account reconciliation teams • Developing increased internal control processes PwC can assist clients with assessing account reconciliation as a vehicle to improve operations and with implementations as follows: • Streamlining and optimizing the use of automated tools • Developing a shared services transition plan and processing model PwC can help clients enhance quality and control in their monthly account reconciliation process by assisting with development of the following: • A standardized assessment tool to capture, analyze, and report findings • A standard reconciliation template specific to the client’s needs PwC brings to our clients a team of specialists with experience in reconciliation, cash, securities products, operations, process improvement, and technology to assist with: • Creation of a transformation plan to migrate from business - line functions to a shared service process model • Assistance defining business processes to ensure proper segregation of duties, effective controls, transparency, and accountability • Selection of technology and assistance with its implementation and configuration to maximize benefits PricewaterhouseCoopers 27 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs How PwC can help PwC can assist clients with analyzing, streamlining, and improving reconciliation activities performed in various departments including Finance, Operations, and Regulatory Control by: • Interviewing account owners to help understand the nature of reconciliation activities performed • Developing a standardized assessment tool to capture, analyze, and report findings • Analyzing the underlying causes of reconciling items, including potential P&L exposure, and propose process improvements to address them PwC’s 34,000 financial services professionals around the world in more than 150 countries have a long history of leveraging lessons learned and experience . • We have vast experience as advisors or auditors to 44 of the world’s top 50 banks — we provide financial institutions with unparalleled views of global industry leading practices and unique insights into technology, risk management, and operations. PricewaterhouseCoopers 28 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs How PwC can help For further information, please contact: John Garvey john.garvey@us.pwc.com (646) 471 - 2422 Miles Everson miles.everson@us.pwc.com (646) 471 - 8620 Patrick Giacomini patrick.a.giacomini@us.pwc.com (646) 471 - 4399 Tim O’Donnell timothy.b.odonnell@us.pwc.com (646) 471 - 8501 Appendix A – Select qualifications PricewaterhouseCoopers 30 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Select qualifications PwC assisted a large global bank with its business case development and action planning for moving exception management to a shared service. Issue The client wanted to reduce back - office costs. PwC identified account reconciliation as an opportunity to do so. The client had automated and consolidated many financial reconciliations, but believed there was additional opportunity to: • Include matching functions in the business case • Streamline and optimize the use of automated tools • Create a shared services transition plan and processing model that would compel the business lines to join • Improve the effectiveness and quality of this key control and service Approach PwC assembled a cross - line - of - service team with experience in reconciliation, cash, securities products, operations, process improvement ,and technology to assist with: • Developing a standardized account reconciliation process • Creating a transformation plan to migrate from business - line functions to a shared service process model • Defining the business processes to ensure proper segregation of duties, effective controls, transparency, and accountability. • Providing leading practices for the ―go - to‖ state • Selecting technology and assisting in its implementation and configuration to maximize its benefits Benefit • The bank has an enterprise - wide view of exception management with a defined ―go - to‖ state design • Finance and Operations are migrating processes to lower - cost regional centers running the standard process • Cost savings are accruing toward an expected $48 million a year in reductions through better use of automation, co - location, and relocation PricewaterhouseCoopers 31 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Select qualifications PwC helped a leading wealth management organization analyze, streamline, and improve diverse reconciliation activities performed in the Finance, Operations, and Regulatory Control functional areas. Issue The client had experienced rapid growth, but account reconciliation resource levels, processes, and systems had not kept pace. The level of account reconciliation expertise across the Finance, Operations, and Regulatory Control groups varied, and management believed there were inconsistent definitions of when to consider an account reconciled, as well as inconsistent interpretations of policy. Management was concerned with the lack of consistency in account reconciliation quality. Action PwC delivered a cross - line - of - service team with accounting, process improvement, and technology experience to: • Interview account owners in Finance, Operations, and Regulatory Reporting to understand the nature of reconciliation activities performed • Develop a standardized assessment tool to capture, analyze, and report findings • Formally reconcile accounts using a standard template developed specifically for the client • Analyze root causes of reconciling items, including potential P&L exposure, and propose process improvements to address them • Assess reconcilers’ understanding of each account, reconciliation criteria, and integrity of their monthly sign - off process Benefit • Enhanced visibility of process inefficiencies and control breakdowns at the senior management level • Increased communication between business units with account reconciliation responsibilities • Recommendations regarding risk management, process, and controls improvement PricewaterhouseCoopers 32 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Select qualifications PwC assisted a major private - label card issuer to analyze and remediate an inefficient account reconciliation process. Issue The client had recently combined back - office processes of multiple financial services businesses and had transferred the reconciliation of certain accounts to several global centers of excellence. Challenges included: • Lack of standardized account reconciliation processes, despite corporate reconciliation criteria • Increased volume and age of reconciling items, with no visibility into root causes • Accounts that had been acquired remained on legacy platforms and were never reconciled • Volume and dollar amounts of adjustments exceeded the business’ tolerance threshold Action PwC delivered a cross - line - of - service team with accounting, process improvement, and technology expertise to assist with: • Developing a standardized account reconciliation process • Completing over 2,000 reconciliations in cash, settlement, general accounting, and closing and reporting areas, including historically unreconciled suspense accounts and proposing adjusting P&L entries, as required • Analyzing root causes of reconciling items and proposing process improvements • Streamlining documentation including process flow maps, policy, and procedure documents • Educating domestic and international account reconciliation teams Benefit • Standardized account reconciliation process with increased internal control • Timely recognition of P&L • Enhanced communication between centers of excellence PricewaterhouseCoopers 33 Managing Reconciliations by Exception: A Key to Improving Operational Performance and Reducing Costs Select qualifications PwC helped a fleet management business enhance quality and control in its monthly account reconciliation process. Issue The client identified write - offs resulting from aged items in unreconciled accounts. The existing monthly reconciliation process lacked consistency in reconciliation terminology and grading criteria application, making timely analysis and management action difficult. The client relied heavily on temporary assistance in performing and reviewing reconciliations and desired increased accountability within the Finance organization. Action PwC was initially engaged to assist management in analyzing specific accounts with P&L exposure. In performing this analysis, we were able to identify process and control breakdowns, and ultimately assisted the client with: • Developing a formal account reconciliation policy with clearly defined accountability • Recommending technology enhancements to alleviate cumbersome manual reconciliation processes • Defining account reconciliation grading criteria to facilitate standardized reviews • Creating formal training materials and educating account reconciliation preparers and reviewers on documentation, grading, and process requirements • Implementing a management reporting process to monitor results on a timely basis Benefit • Streamlined account reconciliation processes and reduced FTE hours • Defined metrics and accountability for monthly results • Enhanced education, visibility, and SOX compliance pwc.com © 2009 PricewaterhouseCoopers LLP. All rights reserved. ―PricewaterhouseCoopers‖ refers to PricewaterhouseCoopers LLP, a Dela war e limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal en tity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.