ERM: What is Treasury’s Responsibility?
While the biggest mandate for treasury post-2008 has been to deliver strategic value for the organisation as a whole, the need to establish controls and mitigate risk across the enterprise is also paramount.
When it comes to ERM, it is best for treasurers to begin with risks that are within their team’s immediate responsibilities, starting with effective management of cash and liquidity.
Liquidity Risk
Managing cash and liquidity is a great place to start, simply because it is so often a limiting factor for an organisation’s growth. Treasurers must know expected funding requirements with some certainty, so that cash deployment is optimised. Risking an overdraft is clearly unacceptable, yet having excess cash sitting in bank accounts is no longer accepted as good treasury practice either. It’s a difficult balancing act that necessitates cash forecasts must be accurate.
Accurate cash forecasts depend on three variables:
Financial Risk
While treasurers are often tasked with both interest rate and currency management, it is foreign exchange (FX) that now presents them with a bigger issue. Cash forecasting can improve exposure management by identifying – with more confidence – expected cash exposures in a basket of currencies. Similar exercises can be done to identify balance sheet exposures. Both areas allow treasurers to confidently improve hedge performance, by taking positions that cover a greater percentage of exposures and also allow hedges to be put in place over longer durations.
While shareholders may forgive a bad quarter due to FX losses, they are unlikely to offer their sympathies for back-to-back occurrences. Similarly, while gains from FX might appear positive on the surface, investors and analysts clearly know that an unhedged gain could very easily have been a loss, so goodwill won’t have been built because treasury gambled successfully with shareholders’ money.
Operational Risk
Operational risk used to be an afterthought for many organisations, which recognised implementing proactive monitoring, multi-layered controls and corporate governance was a good idea but not necessarily top of their priority list. Fraud and cybercrime have changed this thinking, as criminal gangs implement well-researched and perfectly-executed spear phishing schemes targeting treasury and finance teams at specific organisations.
Although the actual amounts defrauded may not bankrupt a global multinational, the knock-on impact from the loss of shareholder and customer confidence, combined with the possibility of fines and lawsuits are making chief financial officers (CFOs) and treasurers take notice. While internal fraud is not always as likely to make headlines, it can be just as financially damaging, as these schemes can often go undetected for a long time (the average being 18 months), with millions being skimmed through illegal payments.
Where treasury can have a major benefit on fraud reduction is by implementing security processes (for example multi-factor authentication, internet protocol (IP) filtering, digital signatures) and improved workflows, so that it isn’t possible to make transfers through unauthorized processes and channels.
Treasury should also work with the chief risk or security officer to establish and enforce standardised policies globally – especially regarding payments – to eliminate the exceptions that fraudsters are eagerly hoping to uncover. In addition to fraud prevention techniques, detection of unauthorised activities through proactive monitoring of data (such as bank balances or payment acknowledgements) and workflow changes (such as a new bank account signatory) is an absolute must.
The Value Chain
An organisation’s suppliers and customers aren’t always the people that treasurers play an active role with. Yet managing risk within the value chain can have a significant impact on a firm’s financial performance. Treasurers play a critical role in ensuring the wheels of the business continue to go round, in the following ways:
ERM presents many challenges for organisations, yet also offers opportunities for treasurers to become more strategic. ERM is a corporate-wide responsibility, yet in many ways it is a chance for treasurers to proactively contribute. Effective use of technology and visual dashboarding can enable treasurers to seize the opportunity afforded them and truly make a difference.