The fine (“disgracefully small” according to the FT) imposed on PwC as auditors of JPM in relation to the non segregation of client money highlights a problem for the accounting profession not just on the audit side but amongst practitioners within financial services.
Assume that JP Morgan’s books were all reconciled. Of course they were; there are fleets of accountants at JPM, and PwC, with reconciliation systems and spreadsheets up to their eyebrows.
Reconciliation is no comfort other than it tells you that so-and-so’s books agreed with somebody else’s books at some point in time and that the unidentified entries in the bank account are fully listed. Accountant: “isn’t this great because we used to do this monthly in arrears but we now do it daily which means better control”.
Yes, but where’s the money? Where is my client’s money right now? If you add up all other clients’ money and mine right now does it agree with what is in the bank account? Right now? And where was it at 1pm yesterday? And how much has my client really got in the pot? Does one of those “unidentified entries” belong to my client?
There are technologies that do this – and CashFac is one of those. Accountants need to recognize that reconciliation doesn’t mean control or segregation. It’s just a status check on records and segregation requires the physical movement of money and prompt allocation of bank transactions to the correct client.
A list of unidentified/unallocated transactions means that you have money that isn’t yours and you don’t know whose it is; and the balances in client accounts are under or overstated. It also means an investment transaction or settlement may be made in connection with a client account that appears to have money when in fact it doesn’t. Another client’s money will therefore be funding that transaction. If front line systems are real time, client account systems including reconciliation also need to be real time.
Independent Financial Advisers and customers alike will quite rightly seek reassurance from firms with whom they trust their cash. As a well-known character once said ‘’Show me the money!’’.
Malcolm Flanders
Sales Director(Wealth)
