One of the most significant risk factors facing the industry today is the relatively new reality that operational risk is now central to their business models. This shift has much more fundamental implications than simply increasing budget allocations to better understand due diligence. Ever since the Madoff scandal made international headlines, operational due diligence has been viewed as part of the overall value proposition and, indeed, as a source of alpha.
One of the more often-overlooked aspects of operational due diligence is the need to perform an external audit of Information Technology (IT) infrastructure on a periodic basis to ensure the company’s IT infrastructure is robust enough to handle the demands associated with the growing complexity of instruments and markets.
And finally, the collapse of companies including Lehman Brothers, Bear Stearns and others has helped shine a spotlight on the importance of employing independent asset valuations whenever possible.
The business models of many asset managers are also being challenged by the fact that costs are rising more quickly than revenues. This new reality has helped focus attention on what is considered to be a general lack of transparency in the area of cost structures.
It is advisable for companies to adopt transparent managerial accounting practices in order to enable themselves to better understand and control costs throughout the entire value chain.
Ultimately, the winners will be those firms that are able to implement flexible and efficient IT-based financial accounting systems that are fully operational and that know how to allocate and deploy these resources to maximum effect on behalf of their firms.