Strategic Treasury beyond Compliance

Corporate treasurers have seen many reforms during the past five years, including new US and international hedge accounting requirements (such as IFRS), the Patriot Act, Basel II (focused on bank regulations), and Sarbanes-Oxley. All of these reforms have provided treasurers with profound opportunities to define their strategic place within the corporate framework. Treasurers – now more than ever before – must clearly define how they will become the strategic partner to all other departments and customers within their organizations. As any architect knows, without having clear and concise blueprints and a solid foundation on which to build, the rest of the building is at immeasurable risk. The fundamentals of corporate compliance and governance, addressing operational inefficiencies (and lack of controls), developing subject matter expertise and improved communication and customer satisfaction are the key cornerstones to establishing and raising this corporate foundation and infrastructure. Therefore, the proper use of technology is the virtual ‘mortar’ that can keep the foundation together and strong. Focusing on these four operational cornerstones will lead to increased involvement of the treasury functions in bringing about the formulation of strategic decisions toward improving overall corporate growth, profitability and accountability.

Compliance Fundamental and Control Improvements

Electronic record-keeping will continue to be fundamental to existing and new legal requirements, including the Patriot Act, AML, Sarbanes-Oxley and Basel II. Although some practitioners may argue that the cost (both tangible and intangible) of meeting this regulatory requirement outweighs the short-term benefit, the prognosis for the pay-back period is three years after the initial point of compliance¹. Although costly, it would be hard to argue that significant benefits can be derived by meeting and/or exceeding compliance requirements. The IIA Research Foundation’s Sarbanes benefit survey² provides some insights into the top 10 control improvements (resulting from Sarbanes-Oxley Section 404) realized via Sarbanes-Oxley compliance:

1. A more engaged control environment – active participation by the corporate board, audit committee, and management.
2. More thoughtful analysis of monitoring controls, along with the recognition that monitoring (and testing) is an integral part of the control processes.
3. More structure to the year-end (accounting) closing process and recording of journal entries, thus recognizing the extent to which these areas have increased in complexity.
4. Implementation of anti-fraud activities with defined processes, including responsibility for follow-up by defined parties and resolution approaches.
5. Better understanding of the risks associated with general computer (and automated) controls, and the need to improve both control and audit procedures to gain assurances that the risks associated with systems are mitigated.
6. Improved documentation of controls and control processes that can better serve as a basis for training, practical day-to-day guidance, and management evaluation.
7. Improved definition of controls, and the relationship of controls and risk, across the organization.
8. Control concepts becoming embedded into the organization with a broader understanding by operating personnel and management of their responsibility for control.
9. Improvements in the adequacy of the audit trail as a basis to support operations as well as to support audit assessment of control adequacy and financial reporting.
10. Re-implementation of basic controls, e.g. segregation of duties, periodic reconciliation of accounts, and authorization processes that had been eroded as organizations downsized or consolidated operations.

The key to realizing these improvements is to leverage technology without sacrificing operational and process simplicity. With resource constraints always being placed on the corporate treasury function, making sure that any treasury technology choices are being implemented dematerializes routine operational processes. The word ‘dematerializes’ simply means ‘eliminates paper from an existing process but maintains the proper audit trail and workflow in an automated fashion’.

This treasury world without paper can only come to fruition if the treasury technology provides core financial intelligence, including integrated workflow, audit trail, and notification, functions for user-defined events. As a result, a different set of requirements must be addressed by treasury technology providers, which now must include compliance analytics and metrics, such as verification of G/L entries being double-checked or payment authorities/approvals. The technology providers should be looking to go beyond documentation repositories, audit trail reports, and online limit tracking. The corporate CFO informational needs must now extend beyond financial fundamentals and into compliance visibility – an automated dashboard of accurate and trustworthy information and data reflecting compliance controls is key to their work effectiveness and efficiency. Additionally, the treasury group must continuously test and re-test operations and processes to identify areas of vulnerability. This testing should involve the internal and external audit groups to ensure continued corporate accountability.

Bob Hemstreet, assistant treasurer of Providence-based Textron Corporation, offers these benefits of having a comprehensive documentation of core processes as well as advantages of the continued testing of these processes. Bob states “The requirement to fully review and document what we were doing on a day-to-day basis resulted in much tighter controls; and now we have fully documented processes. It is a real benefit to have each of our processes fully documented, this has aided in training new people, it has facilitated our audits (both internal and external auditors), and has given us the foundation for development of our contingency planning. We very much like the idea of having someone outside our immediate functional area that is able to pick up the documentation package and effectively test the controls. It is very difficult for someone who is deeply involved in a particular process to properly test, or for that matter, be objective regarding the controls inherent in a process. In addition, the Textron treasurer, Mary Lovejoy is much closer now to what we do on a day-to-day basis, since she is involved in the management review and approval process and examines our testing results. This gives the treasurer a level of comfort that was not even considered in the past.”

Maximizing Operational Efficiencies

These past five years have seen a real shift in measuring and quantifying treasury performance. Performance measurement is seen as a means for an organization to evaluate the effectiveness of its treasury³. One could even state this effectiveness is a potential barometer to the strategic effectiveness of the corporate treasury function. The problem to date with this performance measurement has been the actual metrics that are being used. Corporations have spent significant time and resources implementing FAS, IFRS, and Sarbanes-Oxley compliance processes without addressing better measurement metrics. Although performance measurements are a separate issue that needs to be examined separately in another article, one measure of overall performance must be based on operational efficiencies. Unfortunately, this measurement is most often overlooked due to its basic premise; however, treasurers should always be looking for new ways to do more with less, while maximizing the output of increasingly shrinking resources.

Figure 1: Main Reason for Measuring Treasury Performance

Source: Ernst & Young ACT Treasury Operations Survey – 2005 Results

The annual survey performed by Ernst & Young (E&Y) (as shown in the graph above) in connection with the ACT, reflects that treasury performance is being measured to determine operational effectiveness. The fact that the statistics reflect that formulation of strategic decisions is dramatically less than the evaluation of overall effectiveness implies that treasury is still playing its traditional operational and processing-of-cash role. The survey also illustrates a reduction on the strategic decision role over the past three years. This is a clear indication that treasury is still not considered to be a key business partner to the future growth of the corporation. Not until this transitional period of meeting new regulatory requirements, globalizing business processes, and completing global ERP implementation has passed will there be a true shift in the perceived role of the treasury function. Focusing on these operational cornerstones is crucial until (and well after) the treasury function can crystallize its role as a strategic partner.

As a general guideline, treasury’s adoption of the mantra ‘automate the routine and manage the exceptions’ will only add value to the overall performance and efficiency of the treasury group. If automation opportunities with proper controls are not being seized, the treasury function will inevitably continue to decrease operational efficiencies and consequently lack adequate time (and tools) to effectively implement additional key regulatory and fraud-prevention controls into a core business process. Continuing to push treasury technology providers to offer automation and integration tools and techniques that include (1) newly-provided web-based bank services, (2) trading market places, (3) back-office settlement centers, (4) required internal transaction workflow approvals, and (5) integrated security and audit trails will lead to a newly defined baseline of process automation and controls.

Developing Strategic-centric Subject Matter Expertise

Beyond the traditional core cash, treasury, risk, credit, and accounting management expertise, the world of the treasury function is ever-expanding, flexing, merging, and morphing to meet the competitive demands of a new global marketplace. A corporation’s business models must be elastic – and the treasury has to be ready to react. Better still, would be a proactive treasury that is ready to rapidly pounce on global market opportunities and cost-cutting measures. Understanding and managing corporate exposures, minimizing transaction costs, monitoring bank fees and compensating balances, developing cash flow forecasting models and techniques, and ultimately defining and monitoring corporate performance metrics all add to the intrinsic and extrinsic value of the treasury function. In the box below are some specific areas to focus on that are strategic for the corporate treasurer:

Improved Communication and Customer Satisfaction

To be considered as a strategic partner to the overall corporate infrastructure, treasury must implement better tools and techniques to communicate and interact with its customers. As a service provider, treasury serves many customers, including the board and C-level executives, A/P, A/R, accounting, business segments, and even indirectly the actual clients of the corporation. I’ve often heard another mantra that best describes the ideology for the treasurer and the treasury functions: think like a customer but act like an owner. Applying this mindset to treasury resources and operations is simple and even intuitive, but incredibly effective.

Adopting a self-service treasury model will benefit the customers and simultaneously transform the perception of the treasury group into a service-oriented function. This model simply allows customers to access financial information or process transaction requests in a fluid and controlled manner with little or no paperwork, emails, faxes, or phone calls required (remember the concept of dematerialization). Through effective technology deployment, customers can immediately access payment confirmations, account-posting status, report exposures/forecasts, request financial contracts, open/close bank accounts, and have immediate access to market data, marketplaces, and performance metrics. A self-service treasury model places treasury in the middle of the financial value chain, which is the most effective position to be in to excel once the strategic role has been synthesized.

Conclusion

Compliance can be seen as just a short-term fix that addresses problematic symptoms. The treasury vision must expand beyond dealing with these symptoms and attack the core problems and pain points. A strategic treasury will and must play a critical role in building, supporting, and monitoring the corporate foundation. Banks and other business partners are just starting to recognize and embrace the importance of the global customer relationship management. The corporate treasurer must prove his/her worthiness before being considered for a strategic partner role. This worthiness comes only after demonstrating preparation, effectiveness, efficiency, improved communications, and an ability to add something of value to the strategic conversation. The corporate treasury group must first be introspective and ensure that all four cornerstones are in place before that lofty strategic partnership can be realized.

The four cornerstones of a strategic treasury group:

• Compliance fundamental and control improvements – strive to dematerialize processes to increase efficiencies and automate process controls and audit points.
• Efficient and cost-conscience operations – automate the routine and manage the exception.
• Strategic-centric subject matter expertise – develop expertise beyond core competencies.
• Improved communication and customer satisfactions – adopt a self-service ideology.

¹ “Sarbanes-Oxley Section 404 Work Looking at the Benefits,” pgs. 20-21. Rittenberg, Larry & Miller, Patricia, The IIA Research Foundation.

² Sarbanes-Oxley Section 404 Work Looking at the Benefits,” pgs. 1-2. Rittenberg, Larry & Miller, Patricia, The IIA Research Foundation.

³ “Treasury Operations Survey 2005 Results,” Ernst & Young in conjunction with The Association of Corporate Treasurers, pg 3.