With change, the traditional way of working for corporate treasurers, chief financial officers (CFOs) cash managers and other professionals will also have to shift. With legislators and regulators taking an increasingly proactive role, auditors believe your response to the changes they are bringing should address at least the following three areas of impact:
- Your role and responsibility.
- Your treasury systems landscape.
- Data integrity.
New rules and regulations force treasurers to take up different roles or to extend responsibilities – for example, into areas such as internal control and accounting. With the implementation of Sarbanes-Oxley in 2002, the treasury department started playing a key role in internal control and compliance. This role continues to expand with new regulations such as the single euro payments area (SEPA) and the European Market Infrastructure Regulation (EMIR) becoming fully effective from early 2014 onwards.
International Financial Reporting Standard (IFRS) 13, the fair value measurement, forces treasurers and internal accountants to work closely together on accounting for financial instruments. Accounting departments may no longer have access to all the data required to perform fair value calculations. Thus they often have to liaise with their treasury colleagues to come up with accounting figures.
At the same time, new regulations impose strict guidelines that affect many operational processes. They pose restrictions on how payments should be made (SEPA), how specific risks should be managed (EMIR) and how financial positions are to be valued (IFRS 13). Former internal control procedures may fail, such as input controls on payment files using hash totals comprised of old (numerical) bank-account numbers.
These changes in regulations affect a corporate treasurer’s way of working in other, less obvious ways. They may force treasurers to make trade-offs on which risks they want to manage and to prioritise objectives that could previously be met simultaneously. Clearing requirements force a corporate treasurer to make a trade-off between market risk (interest rate risk) and liquidity risk. Collateral requirements force a corporate treasurer to rethink the way they manage cash positions, since cash is often required as collateral. Vendors do not all share their development agenda, but plan according to which upgrades and enhancement projects can be scheduled comfortably. Others find it safer not to be a beta-tester for their vendor. In the meantime, quite a few treasurers still call upon good old-fashioned spreadsheets to comply with regulators’ demands. With that they reintroduce a trade-off between getting the job done and proper IT governance.
Limits of Technology
That brings us to changes in treasury management systems (TMS). With the mainstream adoption of new ways of working, corporate treasurers have access to newly developed, flexible and proven technology without an obligation to spend ridiculous amounts of money on system selection and implementation. However, although new technologies offer many benefits to many different users, they do not provide instant gratification. They also require organisations to rethink their operational processes and methods of internal control. For instance, data security and going concern will need to be addressed differently by those who decide to adopt software-as-a service (SaaS). Whatever they choose, treasurers should be aware of the impact their decisions have on their organisation as well as on their individual role.
Closely related to the comeback of spreadsheets is the issue of data integrity. Relevant data for valuations comes from different systems within the organisation and third parties. This raises not only the issues of consistency, relevancy, accuracy and sufficiency, but also of the integrity of interfaces. These issues reach a whole new level, as data providers may no longer be fully aware of the data that treasury departments require.
To offer a specific example: the market data required for a valuation depends on the critical terms and overall credit enhancements – such as the International Swaps and Derivatives Association’s credit support annex (ISDA/CSA) – that a corporate has put in place. So when a derivative is collateralised, the overnight indexed swap (OIS) curve is needed for discounting. In the case of a cross-currency swap, it is the discount curve adjusted for the cross-currency basis spread that needs to be used. Without the correct data, banks might misprice new deals without it necessarily being evident. This is bad enough, but without the correct curve for the propose situation it is impossible for treasury to reliably value deals for accounting purposes, causing misrepresentation in financial statements. Given the increasing complexity of valuations, ensuring that organisations collect all the market data and apply them correctly will be a key element of the treasury’s responsibility from now on.
All in all, there is a lot of food for thought. This blog doesn’t pretend to have all the answers; indeed this writer doesn’t even believe there are black-and-white solutions for these issues. It all boils down to an organisation’s appetite for change and risk. What is important is to really think things through before making a decision. The treasury team should be able to evidence that it has signaled the above issues and have addressed them in a way that fits their own views, but also is in line with all rules and regulations. It is my firm belief that all these challenges in essence provide opportunities (as opposed to challenges) to treasury and enable treasurers to provide more value to their organisations. For those who believe otherwise, please be assured that your auditor is more than that annoying risk-averse laggard, and can be a valuable liaison in finding and exploring new routes to success.
Have a good 2014!
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