Month-end Integrity Vital in Changing Market Conditions
Treasurers have always been in the business of managing financial risk for the benefit of their employers. More recently, that focus has expanded to cover holistic risk management across the organisation, including liquidity, operational and country risk – all of which have a bearing on the modern treasury department.
Market conditions are giving the wider finance team a renewed impetus in cost management and treasury is a vital part of the picture. In a geographically diverse business, centralising both operational and technical specialist processes can clearly deliver on that objective. However, neither should be attempted without an assessment of the risk implications of the proposed changes. But suppose the finance director is discussing the intended change programme with you and suggests taking treasury operations team offshore, co-locating them with the finance ‘production’ team. What are your key concerns?
There are clearly a number of concerns that could be raised. Probably the top concern is how do you maintain the sound control environment that you established by supervising directly and ensuring segregation of duties through a standard workflow, with timely, secure communication of issues as they arose? Beyond that, where should the focus be? The integrity of the balance sheet is likely to be fundamental in that assessment, as it captures the future cash generation and funding requirements for the business.
In terms of detailed numbers generation, treasurers generally focus on cash. They also look to their mainstream finance colleagues to provide the consolidated accounting numbers investors rely on, as well as a view of the cash generation implicit in the account sign-off. That’s a fair segregation of duties but clearly Enron, Parmalat and plenty of other organisations over the years found, belatedly, that their balance sheet wasn’t as robust as they believed.
Let’s role-play for just a few minutes – bear with me, I know it’s a little far-fetched but, like all good dramas, you’ve got to let your mind go a little…. You’re reading the latest financial thriller about a corporate meltdown and this is the opening chapter….
A senior manager within Global Plc, a well-known public company, is sitting at his desk late into the night with the responsibility of account sign-off. This monthly roller coaster is the bane of the manager’s life, but this month it’s even worse because it is year-end.
The balance sheet of Global Plc is made up of literally thousands of accounts hit by millions of transactions resulting in assets and liabilities, which run into the billions. Some of the assets the manager is reviewing are highly customised transactions with clients and it’s difficult to agree a mark-to-market because… well there is no market. The only people that seem to enjoy this conundrum are Global Plc’s auditors, whose charge-out clock is ticking while they all try to agree ‘fair value’.
To further complicate the matter, the senior manager has been told that the cut-off data is incomplete because there are some cancellations which have not fed their way through yet. This job is hard enough without having inaccurate data.
The CEO is breathing down the manager’s neck because last month the trading statement told the City that everything’s fine, there’s a strong a balance sheet and prospects are looking good for Global Plc. The CEO, edgy at the best of times, is like a cat on a hot tin roof. He’s been working for the past three months on obtaining £100m of funding at the current share price levels and he’s banking on a clean and good-looking set of accounts. The existing shareholders won’t take a dilution at any lower levels even though the company seriously needs the funds.
The senior manager is concerned – there are a number of balances that don’t look right but he can’t put his finger on the problem. He’s suspicious of the business guys who are responsible for the transactions that pass through these accounts. How can people get paid an annual bonus on estimated P&L for transactions that stretch out 10 years plus? It’s a huge cultural issue within Global Plc: the business guys are paid significant bonuses on an annual basis and have zero interest in the long-term outcome of Global Plc.
The manager leans back in his chair and rubs his eyes. If only the board knew the challenge he faced on signing off these accounts. He has more chance of predicting when his bags are going to arrive from Terminal 5 at Heathrow Airport after his recent weekend trip to Rome. Maybe he should make his concerns apparent at tomorrow’s board meeting, but his concerns are currently unsubstantiated. The only thing he can do is rely on his people, which was fine when he could walk up and talk to them, but now that 50% of his department is offshore, it’s much more difficult and unnerving.
As treasurer of Global Plc what should your role be? Do you sit on the financial management board and opine that the financial controller needs to deliver a robust control framework? Or do you adopt a collaborative style by working with the financial controller, understanding differences appearing between your bank statement balances and the accounts, and co-operating to resolve those issues? Do you need to agree the mark-to-market adjustments around the value of funding instruments and investments appearing in the accounts? And is there a medium where junior staff can raise such issues so that senior management will notice? In other words your concern is with month-end close – an area fraught with challenges and subsequently inefficiencies in many finance departments.
In a recent survey, commissioned by Business Control Solutions, the greatest issue facing finance departments was found to be managing the daily flow of data and information. Ninety-four percent of respondents claimed to find departmental workflow very challenging. This was closely followed by difficulties in achieving visibility and efficiency of controls, which 79% of respondents said they struggle with. The survey, which was carried out in February of this year, also found that 76% of respondents are hampered by a multitude of manual processes and 58% are also troubled with the proliferation of disparate systems.
Given these findings, it’s no wonder account sign-off is tricky and time-consuming. These problems with multiple systems, which are used by different departments and account owners, increase the difficulty of obtaining a global view of financial positions. This, in turn, generates further manual processes in collating, aggregating and presenting financial, progress and management information reports.
The survey respondents (in this case financial institutions) do recognise that their future success relies on making improvements by combining visibility, ownership and control. Further survey results revealed:
Finance departments are undoubtedly facing tough times. As a result they need put in place an over-arching control framework that allows business owners to see the wood from the trees. For the treasurer in particular, having visibility of any uncertainties around the cash position, coupled with a clear business line split of the accounts giving direct understanding of who’s using how much of the organisation’s liquidity, is clearly beneficial.
Treasurers, with their explicit risk management expertise, are highly valued by their finance colleagues. During the recent years of expansion and growth potentially the principal focus for treasurers has been on external opportunity. The current environment may be an opportune time to demonstrate value more widely across finance and ensure that control requirements specific to the treasury do not get overlooked in the drive to contain costs. There is real value in a confident month-end close.
Business Control Solutions hosted an event at the Tower of London on 28 February 2008 to highlight the challenges for banks to reduce operating costs while improving control. Click here to read the whitepaper, which summarises the event as well as analysis of data collected during an anonymous survey of 35 delegates at the event: https://gtnews.afponline.org/whitepapers/whitepaper.cfm?id=23