Simplifying Inter-entity Reconciliation using Blockchain Technology

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Branden Cole
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1 A POINT OF VEW Simplifyig Iter-etity Recociliatio usig Blockchai Techology Abstract The blockchai techology is fast becomig the focus of strategic busiess iitiatives at fiacial istitutios the world over. Idustry players are begiig to explore the various operatios where blockchai techology ca help improve efficiecy. We believe that iter-etity recociliatio a key activity of the fiacial reportig fuctio is oe such area. Havig spread their operatios across the globe, large bakig groups are madated to use differet accoutig methods to suit local requiremets ad regulatios. Uderstadably, they fid it extremely challegig to perform iter-etity recociliatio ad cosolidatio at the orgaizatioal level. I this article, we discuss how blockchai-based solutios ca be used to simplify iter-etity recociliatio, i tur makig the fiacial reportig process more accurate.

2 A Poit of View Itroductio Group etities of large bakig eterprises trasact with each other o a daily basis for fudig requiremets, ledig activities, sale ad trasfer of assets, ad so o. I additio, they eed to share the cost of commo facilities ad services, maagemet ad service fees, tax allocatios, ad divideds, amog others. The umber of these iter-etity trasactios is extremely high ad ca ru ito over thousads a moth. The fact that these eterprises operate out of various geographies i differet time zoes with multiple currecies ad diverse regulatory reportig orms, as well as tax regimes, complicates the sceario further. It requires reportig specialists to accout for trasfer pricig adjustmets ad differet accoutig methods. Figure 1 depicts a typical iter-etity recociliatio process. Trasactio Group etities that trasact with each other eed to esure the balaces owed to ad from other etities i the group are i agreemet Recociliatio Group etities periodically receive ad sed statemets of accouts from ad to the other etities i the group, ad perform recociliatio of respective balaces ad trasactios Mismatch report Mismatched or urecociled balaces ad trasactios are shared amog group etities Cofirm ad match trasactios Group etities cotact each other, share respective ledgers ad statemets, provide evideces, validate etries to sort out differeces, cofirm balaces ad trasactios, pass ecessary correctio etries, ad write-off urecociled etries Elimiate trasactios Iter-etity trasactios ad balaces are elimiated while producig cosolidated group fiacial results Figure 1: Steps ivolved i Iter-etity Recociliatios (Source: TCS Iteral) Iter-etity recociliatios are ecessary to esure that balaces owed to, ad from etities, i the same group are i agreemet. Cofirmig ad matchig iter-etity ad iterbrach balaces prior to the periodic closure of accouts is oe of the most time ad effort cosumig activities that every bakig group performs. Umatched or urecociled iteretity accouts are high risk items from compliace perspective. These are also a major cause of worry to the maagemet ad auditors, give their capacity to coceal frauds ad misappropriatios. Urecociled items may lead to adverse audit observatios ad eve raise questios of qualificatio, if foud to be large i volume or value. Evetually, baks are required to write-off such urecociled balaces, which may also impact margis.

3 A Poit of View Why Iter-etity Recociliatio is a Challegig Exercise Why Iter-etity Recociliatio is a Challegig Exercise Most challeges that baks face with respect to iter-etity recociliatios are broadly attributed to the absece of adequate iformatio, tight schedules, ad fragmeted commuicatio betwee couterparties. Fiacial results must be published at predetermied timelies, which may lead to certai ope or urecociled items beig carried forward. Over a period of time, these brought-forward differeces accumulate ad result i a material mismatch. Further, the couterparties of various group etities may ot be able to coect with each other o a real-time basis. Accoutig errors, omissios ad duplicatio of trasactios, foreig exchage traslatios, trasfer pricig adjustmets, iter-group cost sharig allocatios ad adjustmets, ad complex reveue-sharig arragemets ca further complicate the iter-etity recociliatio process. Here are some aspects that make iter-etity recociliatio a complex activity: Limited couterparty visibility: Geographically dispersed group etities use varied ad isolated accoutig systems, which impairs eterprise-level visibility ito each etity's ledger accouts ad trasactio details. No-stadard accoutig: More ofte tha ot, group etities use differet accoutig ad geeral ledger systems. Moreover, sice most bakig groups are the result of takeovers, mergers, ad acquisitios, such system-level differeces have become eve more proouced. I additio, various legacy accoutig systems ad multiple charts of accouts are likely to be i operatio. It is a challege to make these varied systems talk to each other for a commo accoutig ad reportig exercise. Techology: Not all orgaizatios curretly use techology systems for iter-etity recociliatios. They may have processes that are either maual or semi-maual, which are error-proe ad time-cosumig. As a result, esurig accuracy ad timeliess of iter-etity recociliatio becomes a challege.

4 A Poit of View High volume of trasactios: The larger the group, the more the propesity of iteral trasactios. It is a challege to capture these complex, multidimesioal, volumious trasactios, ad recocile them withi stipulated timeframes. How Blockchai Techology Ca Help To couter the ill-effects of maual processes for iter-etity recociliatio, bakig eterprises have created cetralized recociliatio teams or have outsourced the activity to thirdparty service providers. While this has substatially reduced the cost of operatios, ad improved the accuracy ad timeliess of the exercise, it is ot a viable solutio i the loger ru. This is because challeges like o-stadard accoutig practices ad iadequate couterparty visibility caot be resolved usig this approach. Some baks have deployed ERP solutios to overcome recociliatio challeges, but agai, the ever-chagig busiess ladscape ad aggressive M&A activity might prove this solutio ieffective, evetually. We believe that it is imperative for baks to establish a robust mechaism for iter-etity matchig ad recociliatio. This will miimize the ivolvemet of bak persoel, whose expertise ca be chaelized to core busiess activities, thereby brigig more value to ot oly the fiace fuctio, but also the overall busiess. Baks must leverage latest techologies to achieve this; for istace, a blockchai-based solutio ca cosiderably improve the iter-etity recociliatio process. Owig to its iheret feature of a distributed ledger, the blockchai techology ca help maitai ad recocile iteretity accoutig etries easily. A blockchai-based solutio ca provide the ecessary APIs for itegratio with existig accoutig systems. Iter-etity accoutig etries posted to respective ledgers ca also be agreed upo ad recociled i ear real-time, usig the distributed ledger feature. Additioally, the use of digital sigatures will drive additioal security ad auditability i the process. Figure 2 captures the key advatages of a blockchai-based itra-etity accoutig process.

5 A Poit of View While a blockchai-based solutio ca immesely improve the efficiecy of the iter-etity recociliatio process, orgaizatios eed to factor i two aspects: The blockchai techology is still i its ifacy ad is at a stage of experimetatio at most baks. There are o, or very few, commercially available solutios. This meas it is importat to coduct elaborate proofs-ofcocept ad demos to esure the readiess of a solutio before plaig a large-scale implemetatio. Group fiace Advatages of Blockchai-based distributed ledger : Group ode Blockchai-based distributed ledger Node 1 Node 2 Node Commo, real-time, itra-compay distributed ledgers withi a group ca elimiate mismatches, ad reduce the o-value addig tasks i itracompay recociliatio ad reportig Distributed ledger software offers APIs for itegratio with brach-level fiace systems Ca be itegrated with the brach fiace systems or maitaied as stadaloe applicatios, depedig o the volume of itra-compay trasactios The recociliatio process will iclude: Brach fiace system / Stadaloe applicatio Brach fiace system / Stadaloe applicatio Brach fiace system / Stadaloe applicatio Brach-level APIs Record the itra-compay accoutig etry Approve the posted etry Query the itra-compay accoutig etry Group-level APIs Query the uapproved itra-compay accoutig etries Figure 2: Iter-Compay Accoutig with Blockchai-based Distributed Ledger (Source: TCS Iteral) Coclusio Baks are explorig the applicability of blockchai techology i various operatios ad busiess scearios. Iter-etity recociliatio is a potetial area where the techology ca deliver sigificat beefits. Sice the various costituet etities of global bakig groups differ i accoutig practices, it becomes rather challegig to streamlie the iter-etity recociliatio process. The maual ature of this process further augmets the complexity. We believe that blockchai-based solutios ca be of immese use here. However, give the fact that this techology is still at a ascet stage of adoptio, comprehesive use case testig is

6 A Poit of View the eed of the hour. Bakig eterprises must coduct elaborate tests to prove the busiess case ad the readiess of this techology, especially with regard to its scalability ad security, ad oly the pla for eterprise-level implemetatios. If blockchai-based solutios are as promisig i practice as they are i theory, the we are lookig at a iter-etity recociliatio process that is a lot faster, simpler, ad accurate.

7 A Poit of View About The Author Salil Godambe Salil Godambe is a Domai Cosultat with the Fiace ad Reportig Practice of the Bakig ad Fiacial Services (BFS) busiess uit at Tata Cosultacy Services (TCS). He has more tha 20 years of experiece i the areas of accoutig, fiacial reportig, auditig, ad busiess process outsourcig. Godambe is a qualified Chartered Accoutat from the Istitute of Chartered Accoutats of Idia (ICAI). Raghavasuresh Samudrala Raghavasuresh Samudrala is a Idustry Solutio Advisor with TCS' BFS busiess uit. He has more tha 20 years of experiece i IT solutios ad cosultig, ad his areas of iterest iclude eterprise architecture ad iovatio. Raghavasuresh holds a Master's degree i Computer Sciece from the Idia Istitute of Techology (IIT), Cheai, Idia. Cotact Visit TCS Bakig ad Fiacial Services uit page for more iformatio bfs.marketig@tcs.com Blog: Drive Goverace About Tata Cosultacy Services Ltd (TCS) Tata Cosultacy Services is a IT services, cosultig ad busiess solutios orgaizatio that delivers real results to global busiess, esurig a level of certaity o other firm ca match. TCS offers a cosultig-led, itegrated portfolio of IT ad IT-eabled, ifrastructure, egieerig ad assurace services. This is TM delivered through its uique Global Network Delivery Model, recogized as the bechmark of excellece i software developmet. A part of the Tata Group, Idia s largest idustrial coglomerate, TCS has a global footprit ad is listed o the Natioal Stock Exchage ad Bombay Stock Exchage i Idia. For more iformatio, visit us at All cotet / iformatio preset here is the exclusive property of Tata Cosultacy Services Limited (TCS). The cotet / iformatio cotaied here is correct at the time of publishig. No material from here may be copied, modified, reproduced, republished, uploaded, trasmitted, posted or distributed i ay form without prior writte permissio from TCS. Uauthorized use of the cotet / iformatio appearig here may violate copyright, trademark ad other applicable laws, ad could result i crimial or civil pealties. Copyright 2017 Tata Cosultacy Services Limited TCS Desig Services I M I 05 I 17

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