Spelling It Out
A regulated firm told me the other day that their auditor had qualified their CASS audit report recently, in relation to their CASS reconciliations. The qualification was not because the reconciliations were incorrect or because erroneous calculations or funding movements had been made, but because the auditor found them hard to understand. Consequently the reviewer of the reconciliations described them to the firm as ‘not fit for purpose’.
This seems to me – and probably to many of you – to be overly harsh. However it does highlight an important point. Although audit standards have improved in recent years, it will always be the case that the reviewer who arrives in your offices does not know your business and the details of your processes. They will need to reach an understanding which allows them to form a judgement about a wide range of processes and controls in a short space of time. It therefore makes sense to spell out clearly what you do, how you do it and how you manage and control the processes to achieve the regulatory requirements. In other words, make your documentation ‘tickable’. Your documentation may seem to be transparent and understandable, but ask yourself a few questions:
- Are the key items sufficiently signposted? For example, if I’m performing a method 2 internal reconciliation, do the words ‘net negative add back’ appear anywhere in the reconciliation?
- Will I remember what I meant 6 months later? The narrative that seemed clear and transparent while you remember the background to a particular discrepancy may be tough to explain when you’ve forgotten those details.
- Can I evidence my controls? Procedures may state that oversight of the supplier’s reconciliations takes place weekly, but unless you can prove it then, for an auditor, it didn’t happen.
- Can staff explain their procedures in the context of the rules? If you have a reconciliation which describes the ledger as a cashbook, then if the FCA asked someone in your reconciliation team to explain which figure was the total client money resource, would they be able to do so?
- Would an insolvency practitioner be able to grasp the essentials? This speaks to the core requirements of the CASS rules i.e. the speedy and accurate return of assets to the client in the event of the firm’s insolvency. If documentation and processes are so obscure as to be unusable without having first been initiated into those arcane rites, then you probably aren’t achieving those core requirements.
If these examples are not enough to convince you of the benefits of spelling out your CASS processes, then consider also the cost to the firm of not doing so. Firstly you will spend more time and money talking to auditors who, lovely to chat to as they are, become a bit expensive as ongoing companions. You will make it easier for your own staff, including Compliance and Internal Auditors, to perform and oversee your CASS activities, reducing the risk of errors and/or undetected breaches. Finally, you may even avoid fines and censure from the regulator if they feel that CASS objectives are not being met.
If you’d like a fresh pair of eyes to take a look at your processes – let us know!