Shadow accounting is standard business practice these days. Keeping a second set of financial books and records aims to ensure that a firm’s data, which is managed by an independent, third-party administrator, is accurate and has high integrity.
The majority of investment managers who outsource their back office and administration services—such as calculation of Net Asset Value (NAV), P&L reporting, and fee and other calculations that make up the company’s official records—perform some level of shadow accounting to compare with the records of the third-party administrator. By maintaining an additional set of books, firms gain operational flexibility in terms of performing real-time analytics or off-cycle reporting.
Shadow accounting can also provide a more holistic look across different strategies in a situation where multiple external administrators handle various funds. And it’s good for business—in this era following high-profile financial scandals, potential investors and allocators want to see the additional controls that shadow accounting brings.
Shadow Accounting: Trends and Challenges
As certain accounting operations become more standardized, some companies are taking advantage of the trend toward partial shadow accounting instead of full shadowing. Some funds want total shadowing in order to mitigate as much risk as possible. Others are choosing partial account shadowing because they are only focusing on high-risk portions of their operation.
A concern, though, is that relying on partial shadow accounting means assuming that any provided data is correct. Some prefer to start with the trade itself and enter all transactions to calculate the NAV and full set of financials so they can assure senior management the results are accurate.
A Systematic Approach to Shadow Accounting
Investment Metrics provides a trusted and much easier to use, yet more sophisticated system for shadow accounting than Excel. The company’s complete portfolio analytics and reporting platform is fueled by the industry’s leading database. It offers more than 150 prebuilt report templates (or a fund can build its own). From those, a user can create reports that communicate plan results, consolidate multiple reports, calculate performance from the total plan down to composite, quickly generate detailed manager profiles, and more. Reports can be created either scheduled or on-demand.
The company has deep expertise in institutional investment and helps its global clients analyze, measure, and report on more than $10 trillion of assets under advisement. In addition to its analytics and reporting, Investment Metrics’ expertise lies in research and market intelligence.
Knowing a systematic approach is being used to keep a close eye on your financial books and records is reassuring for both a firm and its investors. The increased scrutiny, which can be cost-effective, sharply increases the likelihood that any errors will be caught and corrected right away. It’s critical to realize, too, that investors and allocators choosing where to put their capital strongly prefer, or even demand, the safeguard that shadow accounting provides.
Because fund managers are the ones ultimately responsible to investors for what their third-party administrators report, shadow accounting can be an immensely valuable safety net.