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Sarbanes Oxley : Technology : Sarbanes Oxley
Mutual Fund Reporting: An Implosion Waiting to Happen?
By
Dave Curran
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Dave Curran
CEO
Data Communiqué International
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In the Sarbanes-Oxley era, mutual fund managers find little time for sleep when their compliance processes are still based on linear models for fund reporting, using file sharing and archaic publishing practices.
Do existing software and workflow tools really help fund complexes effectively satisfy the government?s disclosure and timing requirements or do they create additional headaches and unnecessary costs during reporting periods? In addition, do these same tools provide best choice for simultaneously addressing internal demands while allowing all those involved to collaboratively create, edit, proof, publish and distribute?all from any computer inside or outside the fund company and all in real-time?
As every mutual fund executive in America is
aware, the post-Enron era has ushered in a wave
of unprecedented government scrutiny.
Sarbanes-Oxley (SOX) and its progeny have led to
stringent accountability standards, as well as
tough criminal penalties for those who go astray
? even unintentionally. Working together, the SEC,
Elliot Spitzer, the NASD and a wide range of
government agencies have responded to the
public outcry against both real and perceived
investment fraud.
As a result, high-profile fund executives have been
indicted and hauled away in handcuffs, charged
with a broad array of moral and managerial
shortcomings, and some have even been tried
and convicted. Several large mutual fund
companies have paid record fines for giving
preference to certain types of investors, and
negative press seems to loom over the industry
like a nightmare that it can?t quite shake off.
Against this backdrop the media has focused on
this new era in corporate governance and
oversight. This, in turn, has been followed by a
wave of consultants who have sprung up to
advise mutual fund complexes on how to
circumnavigate the complex regulatory minefield.
Despite the availability of these new resources, if
you?re a senior mutual fund executive subject to
enhanced reporting and disclosure requirements,
it?s probably not safe to turn off the light and sleep
soundly quite yet. The perils of your fund
reporting workflow may still prove to be the most
hazardous landscape of all.
Dealing With Compressed Disclosure Requirements
Today?s fund companies all face a monumental set of combined challenges:
- How do they collect, assimilate, digest,
communicate and distribute the huge
amount of diverse performance and
investment information relating to their
operations?
- How do they do it in a systematic way that meets the tough new compliance standards and takes into account the highly collaborative nature of the task?
- And most importantly, how do they accomplish this Herculean feat under the probing microscope of government scrutiny?
For mutual fund executives, the answers are critical and have the potential to define their own futures ? and the future of the entire industry.
Of course, as with most things, there is a precedent, and in this case, an instructive one.
For more than 30 years, corporate entities have been required to file their 10-K annual reports within 90 days following year-end, with interim reports due within 45 days. Prior to SOX regulations, the SEC estimated that the cost of compliance for ?34 Act filers was approximately $4.5 billion (United States Securities and Exchange Commission, Release No. 33?8089; 34?45741; Part III ? Paperwork Reduction Act).
But in 2002, the SEC proposed new regulations that would reduce the annual report filing requirement from 90 to 60 days, and the quarterly report from 45 to 35 days. Saddled with traditional workflow processes, the costs for companies to comply with the new time frames skyrocketed, simultaneously dealing a blow to their bottom?line profits.
Beginning in 2004, mutual fund companies suddenly found they were also on the firing line. In addition to annual and semi-annual reports, mutual funds companies were then required to publish quarterly holdings data more frequently through Form N-Q?s and the Quarterly Schedule of Portfolio Holdings.
As if that weren?t enough, they also faced a host of other pressures from their own senior management, as well as from shareholders. These included:
- Staying competitive on every level, from
operations to marketing
- Delivering compelling messages that sold products but still satisfied regulators
- Driving down costs
- Streamlining labor?intensive operations
- Maintaining and improving internal controls
- Accomplishing all of these goals with fewer and often less?experienced resources.
Why Chaos Is the Real Enemy
Although meeting government?imposed filing deadlines is difficult under even the best of circumstances, it is increasingly the infrastructure and workflow process in place within a mutual fund that represents the greater challenge.
These complexes are required to publish documentation that must be disseminated, commented on and distributed to multiple internal and external groups, including legal counsel, accounting and auditing staff, senior executives, PR/IR representatives, printers, shippers and shareholders.
Mutual fund reporting is generally ?chaos on steroids? because a typical mutual fund family needs to produce prospectuses, shareholder reports and related materials for virtually every fund and class of shares it offers to shareholders. This typically means dealing with many vendors.
Yet funds typically still rely on Word documents and Excel spreadsheets that are circulated for multiple rounds of comments, and emails that are sent to approvers who often tear their hair out trying to reconcile their own comments with those of others.
At that point, the documents are edited in lock-step by counsel (internal and/or external), accountants, marketing, finance and other interested internal parties.
In the meantime, production managers line up typesetters, printers, distributors and others who eagerly await the internal drafts so that they can create printers? proofs. These proofs are circulated to a variety of people who then further edit the documents and return them to printers
for still more proofs. Ultimately, everyone has to
sign off on the finished product - often at (or
after) the eleventh hour. And then there?s EDGAR.
It is clearly a system designed to address
regulatory requirements, but which leads to an
inevitable raft of inconsistencies and inaccuracies,
as well as unnecessarily high labor costs.
Not surprisingly, this approach also may not
satisfy the sprit of the requirements spelled out in
the SOX certification required of senior
executives, which includes -- among other
attestations -- that the registrant swears under
penalty of law that he or she:
"Designed such disclosure controls and
procedures, or caused such disclosure
controls and procedures to be designed under
our supervision, to ensure that material
information relating to the registrant, including
its consolidated subsidiaries, is made known
to us by others within those entities,
particularly during the period in which this
report is being prepared;
Designed such internal control over financial
reporting, or caused such internal control over
financial reporting to be designed under our
supervision, to provide reasonable assurance
regarding the reliability of financial reporting
and the preparation of financial statements for
external purposes in accordance with
generally accepted accounting principles."
Not only is the current workflow process
incredibly inefficient and cumbersome, it is also
costly and risky from the auditing ?paper trail?
perspective.
When auditors arrive on the scene to examine
books and records at the reporting/publishing
level, fund companies regularly look to their
counsel or outside vendors to track down key
pieces of compliance information. This search
process can be time consuming and can prolong
the audit and reporting process by days if not
weeks. At the same time, the manual process
also makes it almost impossible to ensure
consistency of data ? qualitative and quantitative
? from one document to the next and from one
period to the next.
A Light at the End of the Tunnel?
Faced with this gap between processes and regulatory requirements, an increasing number of companies in the mutual funds arena have realized that they needed a better solution. And fortunately, innovative software and workflow tools have been developed that can cost-effectively help fund complexes satisfy the government?s disclosure and timing requirements, while simultaneously addressing internal demands.
The best models use web-access software that allows lawyers, accountants, marketers, finance personnel and investor relations to collaboratively create, edit, proof, publish and distribute - all from any computer inside or outside the fund company -- and all in real-time.
The new business model can collapse weeks of late nights into days (if not hours) of a more streamlined process. It also offers the advantages of improved control, as well as predictability and reliability for core communications. And, mercifully, it is also clear and straightforward.
Lawyers, accountants and their clients can all abandon the traditional manual serial process for creating drafts and printers? proofs and replace it with web-based collaborative software that generates instantaneous proofs ? for print and the Web, as well as EDGARized for the SEC.
The step-by-step process unfolds this way:
1. Data in a content library was made available to the user for editing and review as well as for placement into their documents.
2. Documents were managed online in the context for which they are to be used. The documents were managed in context based on their output, yet the common data was shared across the output styles due to the library.
3. When a common component was modified, all related modifications were made ? without the user having to edit multiple documents. So when a performance table was used in two documents, and footnotes were required for that table, then the footnotes were assigned using the library, and they appeared in the correct sequence, wherever that table was used.
It?s All About Change
As management teams have learned from their experiences with ERP and CRM systems, buying the right software to handle the complex demands of fund reporting is only the initial step of the process. The real challenge is to successfully manage the critical organizational and behavioral changes that are necessary to meet the overall fund complex?s business objectives.
That means fund administration, legal, fund accounting, fund operations, compliance, marketing and purchasing departments must work together to understand their current processes so that they can transition effectively to the new, more automated process for publishing compliance and marketing documents.
1. Final output from these online tools was able to take several forms simultaneously, from print?ready, high?resolution PDF, to lower resolution PDF for Internet publishing. EDGAR, XML, HTML, Word Documents and Excel files were also generated quickly and easily. Automated publishing software supported complete data versioning for every data element and provided
2. Once the document was approved, it didn?t change further, although the library components continued to evolve based on the fund complex?s needs. Future versions of similar documents will take advantage of the evolved components, yet the previously approved versions remain unchanged.
Whatever managers and directors decide in terms of technology and human resources investments, there is no doubt that intelligent change to meet this growing challenge is a question of ?when? and not ?if.? As of the end of 2005 relying on traditional means to collect and publish financial and related information is no longer sufficient to address governmental, internal or shareholder demands. Ultimately, the move to automating data through a dynamic web?access approach is certain to mark a fundamental change in the fund industry.
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