Well, it’s that time of year, when I, and others not enamored with ice fishing, wish January and February could just be eliminated from the calendar. With a single, broad brush stroke, let’s just move from the December holidays right into the promising winds of March. Sounds appealing, right?

On the other hand, for those of us who have to deal with the dreaded year-end processing in investment portfolio accounting operations, a good case can be made for adding a thirteenth month to the year rather than subtracting months. With respectful empathy for my frozen brethren, I want to make you aware of how savvy asset managers have used some very clever securities processing system enhancements to provide, in effect, a thirteenth month -- a baker’s dozen of months, if you will -- to make challenging year-end processing a non-event.

The Problem

Year-end processing effectively requires that all the carry-forward transactional and market data errors incurred during the course of the current year be corrected prior to closing the books on December 31, or, for those on a fiscal year, June 30. Once the books are closed, and -- lo and behold -- you realize that all of the necessary corrected entries did not make it into the books, the closed year may have to be re-opened (which can be like trying to open the floodgates just a little bit). Once re-opened, it’s, “Batten down the hatches!” Now, all those sticky notes found under a coffee cup or stuck on a cubicle wall are suddenly rushing toward the re-opened year and adding to the accounting headache. And, to compound the difficulty, if there is no longer a link between each investment transaction and its appropriate general ledger account, trying to tie them together to correct the GL is difficult at best. To really make your day, if reversals to prior closed periods – Q3, Q2, or Q1 – are encountered, you have a year-end processing nightmare of perfect-storm proportions, since you now have to roll everything back, period by period, and re-process everything. Forget about that winter vacation!

A Simple Truth

The more often you close accounting periods, the easier the year-end closing will be. That’s it, plain and simple. Why wait to the end of a quarter to close a prior month? Instead, do it at the end of the month, and the quarter end will be smoother. The same process applies to year end. It’s akin to reconciling positions and transactions with your custodians: do it on a daily basis, and you’re never up against the clock at the end of a month.

If your portfolio accounting system does not include an investment sub-ledger that’s interfaced to your organization’s GL system, trying to tie a correction of an income distribution event to its general ledger account, for example, will usually be a difficult and time-consuming manual task. In many systems, once the period is closed, there is no longer a reference to tie the two together (or at least there is not an automated way to accomplish this).

Enter the Thirteenth Month

So, how can an organization close the books, but not close the books? How can they get closing balances and begin the new year accounting period (or the new month or new quarter) while allowing for an orderly and efficient way to process the inevitable corrections and reversals? The answer – you saw it coming, I’m sure – is to include the capability for a thirteenth month in your accounting system.

What is a thirteenth month? It’s a simple provision to include a pseudo month – the thirteenth – between your last closing month and the new month. This month would be between December and January for calendar year, between June and July for a fiscal year, or between any other two months during a year. The pseudo month automatically posts a memo to the investment sub-ledger of the closed period, which explains the event for tracking purposes, and posts the actual transaction to the new, open period. This tracking mechanism is adequate for certain minor corrections, but if the changes are deemed worthy, a closed period can then be re-opened. In this case, all of the changes sitting in the new period will automatically go back to the closed period and be re-processed there.

In order for this to work effectively, two elements must be included in your portfolio accounting system: an investment sub-ledger and automated reversal processing.

• Investment Sub-Ledger – An investment sub-ledger can also be thought of as an investments general ledger. Whatever you call it, the key is that it is tied to the enterprise general ledger system so that journal entries can be posted from the investment accounting system to the GL and to re-connect the specific journal transaction to its GL account after a period has been closed and subsequently reopened. Without this, the tracks to the GL are obliterated with the period closing, and a manual effort is consequently required.
  
  
• Automated Reversal Processing – When a trade needs to be backed-out in a previously closed month, unless that reversal processing can be fully automated, it will be difficult, at best, to process reversals and avoid an onerous period/year end closing process. By ‘fully automated’ I am referring to the ability to roll-back the period, process the corrected transaction, and re-process everything going forward. Only by doing this will the accounting – and, in many cases, the performance numbers – be accurate.

A New Calendar

Talk to your IT group about adopting the concept of a thirteenth month in your investment accounting system. It works! Many of QED Financial System’s clients take advantage of these capabilities. For them, the year end is merely a time for completing their daily work and for staying warm. Maybe that winter vacation is not out of the question, after all.

About QED Financial Systems

Based in Marlton New Jersey, QED Financial Systems is a unique provider of a totally integrated portfolio accounting system solution to the public and private sectors. A small, privately owned company, QED carefully selects the organizations they choose to partner with and then provides an extraordinary degree of initial and ongoing service. As a result of this, QED has a 100% referenceable client base that is the envy of its industry. QED's clients account for approximately $1 Trillion in assets managed, with its largest single client managing approximately $180 Billion.

About the Author

Matt Mille is a Senior Account Executive with QED. Over the past twenty-five years he has held senior account management and marketing positions with other financial services companies such as SunGard, SEI Investments, SS&C Technologies, Financial Models Company, Netik LLC, and Premier Solutions.