Staffing and organizing the management accounting function at large financial institutions

Alexander, Woody

By Woody Alexander*

This study will lay out some of the considerations financial institutions have faced in putting a management accounting group in place. Management accounting, as the name implies, is charged with providing financial decision support information to managers at all levels of the enterprise. A sister function, financial accounting, is primarily charged with an external reporting of financial information to stockholders, regulators, and security analysts. MANAGEMENT ACCOUNTING FUNCTIONS Some of the responsibilities assigned to the management accounting organization are the following: Profitability reporting for organizations, products, and customers Profit planning and forecasting for organizations, products, and customers

Policies and procedures supporting profitability measurement and reporting (PMR) Development of allocations and transfers supporting PMR Development of funds transfer pricing rules supporting PMR Conduct of cost and profitability studies, including activity cost development

Performance and reporting support, to include balanced scorecard preparation This is not an exhaustive list, as different financial institutions may add or delete requirements. For example, in some institutions, management accounting also is responsible for supporting productivity reporting and commercial account analysis. This study will address the staffing and organization supporting the core function. FINANCE VERSUS DATA PROCESSING Financial institutions tend to resemble large accounting functions running on a data processing platform. Management accounting in these institutions tends to resemble the same type of financial system. Management accounting applications, including profitability measurement and planning systems, are configured in accordance with “best practices” policies and procedures. These applications are then processed in a variety of environments in order to calculate and report actual, budgeted, and forecasted results for given reporting periods. This automated environment causes some staffing and organizational issues. Should the function be located in Finance or Data Processing? Most institutions house management accounting in Finance and look to Data Processing to provide systems support. Sometimes, a dysfunctional rift will open between the two groups over support requirements. In recent years, this organizational issue has led the Finance group to pursue client/server solutions. However, because of the large number of source applications and vast quantities of data to be posted and maintained in the management accounting “warehouse,” support from Data Processing will be required in virtually any institution. CENTRALIZED VERSUS DECENTRALIZED Management accounting in large financial institutions has become more centralized as executive management sees profitability measurement and reporting as an effective controlling, communicating, and directing tool. Centralization provides control over the data in order to prevent “multiple versions of the truth.” Having each line of business or region develop its own policies and systems seems like a great tool for “empowering” profit centers. But when trying to manage across an entire enterprise, some centralized management accounting warehouse is required. For example, a customer may have business in multiple regions and lines of business, so in order to get a clear understanding of the customer’s value, management accounting must provide a total view across organizational dimensions. Centralized control does not hamper decentralized execution. Financial executives in regions and lines of business can design and deliver specialized queries and reports from data marts under their control. EXAMPLE OF STAFFING AND ORGANIZATION

Based on a survey of three large regional banks which are on the cutting edge of management accounting `best practices,” the example of staffing and organization shown in the figure on the next page was compiled. The remaining portion of this paper will comment briefly on the example. MANAGEMENT ACCOUNTING AND REPORTING (MAR)

All of the banks studied have a separate (MAR) division in the Finance Department. This group is a sister staff to the Financial Accounting and Reporting (FAR) division. MAR runs the Management Accounting system; FAR runs the General Ledger, Fixed Asset, and Accounts Payable systems. The GL feeds and reconciles to the Management Accounting System, but the two groups have no major interaction otherwise. The component teams of MAR are:

Systems Support (organizationally housed in the Information Systems Department of the Operations Group) Production Methodologies Cost Accounting Information Access

A brief comment on staffing and responsibilities will be made for each team. MANAGEMENT ACCOUNTING SYSTEMS SUPPORT Although this team is technical and reports to Operations, most of its interaction on a daily basis is with the financial team within MAR. Thus, the dotted line to MAR Production is stronger in reality to the solid line from Financial Application. Systems Support is responsible for the day-to-day maintenance of the system, such as applying fixes and enhancements from the vendor. The small staff of programmer analysts is knowledgeable on relational database maintenance, LAN engineering, and systems security. A Lead Analyst usually serves as manager in a lead, guide, and assist role.

MANAGEMENT ACCOUNTING PRODUCTION

This team is often designated as the MIS department in many European banks. They configure and run the Management Accounting applications (Profitability and Planning), as well as serving as liaison between the true accountants and true data processors.

In order to generate the calculations and profitability plans and reports, several tasks must be accomplished by the Production Team. Maintenance of Source Application Extracts These banks have as many as 80 different source applications feeding into the management accounting data warehouse, many of them on a daily basis. The Production Team maintains these extracts developed during initial implementation. Production also maintains any extract data staging parameters, such as translation tables, reconciliation parameters, and posting controls. An example of a posting control would be whether an amount in question would be sent to Funds Transfer Pricing or not. Maintenance of Hierarchies and Definitions

Definition of posting and reporting entities, as well as their associated hierarchies, is another task for the Production Team. The normal dimensions are:

Organization (Company and Reporting Unit)

Product

Customer

Amount (Acount)

Multiple hierarchies will have to be maintained in each dimension. For example, one organization hierarchy may be required for regional reporting, and a very different hierarchy will be maintained for line of business profitability and planning. Forecasts and budgets may use still other variations of the hierarchy.

Maintenance of Interest Rates and Funds Transfer Pricing Rules Production also is responsible for setting up rate tables for Funds Transfer Pricing (FTP) and Net Interest Margin planning. Guidance for establishing what rates to use comes from the Methodologies Team. In addition to establishing yield curves, Production sets up posting parameters for Funding Centers and Net Interest Margin calculations. These parameters specify which rate tables and posting accounts are to be used to calculate and post Interest Income or Expense and FTP Charges or Credits.

Generation of Production Profitability and Planning Reports The Production Team uses the report writer for the Management Accounting applications to develop standard or customized profitability and planning reports. These reports may be generated on files, such as spreadsheet downloads, or as traditional paper reports. Increasingly, these reports are being routed to users via electronic mail or company intranet. Production coordinates report delivery and data mart generation with the Information Access Team. Application Processing

Last, and most importantly, the Production Team initiates, controls, and monitors production of the profitability and planning applications. Many of the jobs, such as source extracts, occur automatically on job schedulers. Other steps require a conscious decision to move forward, such as in interim review of preliminary results. The Team reviews the many control reports available from the various processes: audit trails, exception reports, and posting journals.

The Production Team members are truly the people who make the results of the management accounting process deliverable. MANAGEMENT ACCOUNTING METHODOLOGY TEAM Members of the Methodology Team are the “gurus” of “best practices” in management accounting for the institution. Their role is analogous to service provided by external consultants in a strategic advisory role. They also get senior management concurrence for changes in policies and methods. Some typical issues which this team addresses are: How to break apart and analyze interest rate risk components How reporting hierarchies should roll up for profitability and planning What yield curves should be used to fund what products What costing methodology should be used How capital should be allocated to organizations, products, and customers

How Shareholder Value Added or Balanced Scorecard methodology should be implemented. Methodology supports the other teams with direction on policies and procedures. COST ACCOUNTING TEAM

This Team conducts studies to develop the proper rates and allocations of not only cost amounts, but also revenue and balance sheet amounts. The size of the staff is primarily determined by whether they are developing standard costs or not. Smaller staff size can be acceptable if the allocations and transfers module supporting profitability and budgeting can automate much of the effort. This Team physically establishes the appropriate allocation instructions in the applications. Members of this group can also be located in different operations centers to support analysis on a functional basis. INFORMATION ACCESS TEAM

This Team provides the allocated and funded results to end-user departments. They serve as a liaison between Production and the planning and financial analysts staffing in decentralized locations. Information Access configures individual department data marts and trains the analysts on query tools accessing those data marts. The Team serves as the liaison with the department planners on the input methods and timetables for forecasting and budgeting. This Team also administers the financial management input to the Executive Information System, to include building briefing book reports and graphs. SUMMARY

This paper has provided a vision of how the Management Accounting function at a large financial institution might be organized and staffed in order to maximize efficiency and effectiveness. A survey of actual regional banks provided a baseline for the composite example. The most effective model incorporates centralized control of the data and processes and decentralized distribution of the profitability and planning information.

‘ CSC Financial Services Group, 5525 LBJ Freeway, Dallas, TX 75240; (972) 341-6479.

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