The critical first step in the
commercial underwriting and risk management process, gathering and extracting
financial data from client submissions, is almost universally a manual,
non-responsive, error-prone, non-scalable process. Timely and consistent application of credit
policy across the enterprise is extremely challenging at best and becomes
increasingly difficult to operationalize as the organization scales.
Variation in form [electronic files, pdfs, paper
statements, etc.], format [unique to every company], language, accounting
standards across countries and data delivery methods makes automation a very complex
task. XBRL taxonomy, once seen as the panacea of Financial Statement
interchange, has gone from being very rigid to virtually no standard structure
at all in order to accommodate the unique reporting needs of various
constituencies. Adoption rates of XBRL by private companies or by any company
outside the United States is anyone’s guess. Meanwhile the challenge of
extracting financial data, interpreting it consistently across every
conceivable variation, normalizing it to a common standard for credit risk
analysis, remains by and large unchanged.
This case study describes the approach taken
by a Financial Services major in transforming its operations, dramatically
reducing cycle time and establishing consistency and quality in the upstream
processes of uploading cleansed and normalized Financial Statements into their
internal credit scoring systems and Moody’s RiskCalc.
The Challenge: (Financial Statement Variability):
Variability in Financial Statements covers covered
almost the entire spectrum of possibilities. Each statement is unique to the
source/company/industry/country it came from. The five major areas of divergence
from statement to statement have been organized in to the following categories.
Statement
form and format variability. Bringing hundreds or thousands Financial Statements
of private [and public] companies, each in their own unique format, which can
change without notice, is the first major obstacle to automation
Variation in content of Financial Statements. There is no standardization in the content of a Financial Statement. Non-standard taxonomies result in inconsistent labels. Analysts often “club” data into the next most appropriate field, without full understanding of the impact. These issues are amplified for international companies.
Information embedded in footnotes. Critical information embedded in Financial Statement footnotes need to be identified and applied. There is not standard or structure for footnotes for Financial Statements.
Variation in content of Financial Statements. There is no standardization in the content of a Financial Statement. Non-standard taxonomies result in inconsistent labels. Analysts often “club” data into the next most appropriate field, without full understanding of the impact. These issues are amplified for international companies.
Information embedded in footnotes. Critical information embedded in Financial Statement footnotes need to be identified and applied. There is not standard or structure for footnotes for Financial Statements.
Country
and Industry specific variation. Wide variation in accounting
standards across countries and accounting treatment across industries need to
be normalized.
The Financial Services manual processes had to deal
with all this variability and complexity on a daily basis for Financial
Statements received from 46,000 companies in 35 countries annually. Processing
a single statement could involve hours. The current operation was not set up to
deliver the timeliness, compliance and quality required for current operations
and even less to support any growth. Automating for this degree of variability
was not feasible for the firm.
The Solution: (Patterns, Formulas and Rules)
Leverage a patented extraction engine
handles millions of records from a variety of sources, including paper, across
many applications on a daily basis. The engine is not positional, i.e. it does
not expect data to be in any specific row or column on a Financial Statement.
It is able to process a Financial Statement it is encountering for the first
time, throwing out for exception processing what it is not able to process
automatically. Real time modification of the business logic and rules made
dealing with Financial Statement variability relatively straightforward, as
demonstrated time and again during the implementation. No code was generated; the business user
drove the process.
Extensive rules ensure accurate mapping of input labels. Following mapping rules drove the mapping process.
If a new label that is not mapped appears in a statement it is thrown out for
exception processing and the Quality Assurance team would then add a rule to
automate the mapping the next time the label appears in a Financial Statement.
Key Breakups not available in Income Statement are automatically
identified and extracted from footnotes and populated in normalized output
using RAGE technology to interpret semi-structured data.
Country Specific Rules allow for appropriate normalization of
differences in accounting rules. Industry Specific Rules allow for appropriate
normalization of industry specific items.
Differences in the construction logic of Financial
Statements are automatically recognized and handled
It was not just normalized format, it was normalized meaning in context. This requires knowledge workers with a machine intelligence assist.
The Results:
Compliance: Standards and credit
policies institutionalized. One-offs were also handled as per policy. Risk reviews based on reliable, on-time data Automated controls. Click-back to exact
extraction location in source documents.
Cost: Over
75% cost reduction. Transaction based pricing.
Speed: 80%
of Financial Statements are instantly processed.
Flexibility: Major
changes are rolled out in hours with minimal to no training. Complete
insulation from frequently changing source file formats.
Scalability: Fully
scalable operations. Doubling the volume at any point can be done instantly.
Quality: Consistency
and institutionalization of the process. Implement bank specific normalization
rules, country specific GAAP treatments, easily and rapidly without any
programming
Operating Model: No
peak staffing, attrition, training, quality and inconsistency challenges.
Net; Net:
The application of processes, pattern matching, analytics and business rules, all managed by business folks really delivers results. Truly a smarter process.
This is a highly summarized and anonymous case study based on Rage Frameworks technology
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