Chapter Twenty Nine

Operations and Control Checklist

THE IMPORTANT ASPECTS OF OPERATIONS and control have been covered earlier. In this chapter, we discuss some of the key processes consolidated across all aspects of the Treasury function and provide an important checklist of items that need to be factored in as a step towards a more efficient, tighter, smoother operations process. A checklist for some of the key controls in the Treasury process is also provided online in the accompanying website.

Organisations may use this checklist as a basic core to build their checks, processes, and balances.

LIST OF PROCESSES

The processes of Treasury across various functions are classified in Figure 29.1.

FIGURE 29.1 Treasury Processes

A detailed list of Treasury processes is provided in Appendix F. This is a generic list of processes and can vary from firm to firm. An attempt has been made to distinguish by activity, and each of these processes will have inputs from some other process and can hand off to another process. It is important to draw out process maps for each of these processes and to document and ensure that the handoffs are appropriately controlled and fed.

RIGHT CONTROL AT TREASURY

The objective of a control is to ensure that the processes, procedures, systems, and policies that have been designed and implemented are being followed in letter and spirit and to determine if there are any chinks in the Treasury world that could cause potential damage, financial or otherwise, to the firm.

The control process, for example, is not expected to cover what happens when there is a breach of process, or an excess of a risk limit, or a liquidity shortfall, or a systems failure. The control review does not look at the corrective action to be done in these situations. Those should already be documented under the Treasury policy and the various process notes approved by management. The control process should look for instances where these are not being detected and whether the right procedures have been followed in the normal course of business or in the event of detection of exceptions.

Controls define the robustness of the process, which in turn determines the reduction in the chances of anything going wrong. In a way, control processes are risk reviews of the dependence of the entire organisation on Treasury processes.

Control processes work across various themes and can be classified as shown in Figure 29.2.

FIGURE 29.2 Classification of Treasury Control Themes

The infrastructure themes focus on the backbone of the Treasury function including technology, middle office, and information security.

The operations theme dwells on the various non-risk processes, including cash and accounts, investments, borrowing and lending, intercompany, reporting, reconciliation, and back-office activities.

Policy and organisation compliance includes front-office activities, roles, responsibilities, and regulatory aspects.

Risk occupies a separate section since it involves many complicated aspects, and auditing and reviewing of risk is a specialised activity in itself.

CONTROL CHECKS AND REVIEWS

Checks and reviews are designed to reduce disruptions to processes and functions or leakages in money flow owing to intentional or unintentional reasons. In some cases, the checks are post facto and management needs to be aware of the potential issues should any lapse be detected after it has occurred.

Periodicity

The periodicity and frequency of control reviews and checks must be designated by senior management and documented in the Treasury policy.

Self-Review and Independence of Main Review

Each unit must do its own quarterly review—a person independent of an activity must be designated to review the activity of another person. Each person or process must have its own checklist for control. Annual process and control reviews must be done by persons independent of the activities. Ideally the audit department or an independent control unit should be responsible for the process and control review.

Independence of Data Sources

The data for review should be obtained from independent sources as much as possible. Where physical records have to be assessed, the reviewer must determine the dates for the samples.

Sampling

In case of physical verification where system data cannot be used (e.g., manual deal tickets, invoices, etc.), the reviewer must decide on the samples and use a statistically verifiable measure. Also, it is important not to have dates close to each other in date-wise samples.

Reporting

Reporting of the results of the review should be directly to the Treasurer and the chief financial officer (CFO). Before the results are circulated to the board, the Treasurer must be allowed an opportunity to respond to the issues raised. An appropriate assessment of the responses must be made prior to the finalisation and circulation to the audit committee and other senior management. Each process can be assigned a rating with a corresponding degree of criticality. Table 29.1 shows example ratings.

TABLE 29.1 Recommended Rating of Each Process

Corrective Action

The reviewer must agree with the Treasurer on the corrective action steps to be taken along with the timeline for each. These steps must be tracked and a post-corrective verification done for each element that has been corrected.

SOME COMMON CAUSES FOR ERROR AND CONTROL LAPSES

Some common causes for lapses in control and possible errors are:

• No maker-checker in the process, or not followed
• Password sharing
• No independence of processing and transacting or review
• Data sources inadequate or not independent
• Handoffs process weak, especially manual ones or through e-mail
• System rights for front and back offices for the same employee
• Review process not rigorous
• Ageing of exception items not adequate
• Invalidated and unsecure worksheets used for reporting and tracking
• Lack of awareness of one function of the roles and responsibilities of other functions

Appendix G (online at www.wiley.com/go/treasuryhandbook) provides some of the control elements that can be used as a basis for a checklist.

The next case study highlights the importance of controllership in growth markets and practical and experiential learning from an industry veteran.

CASE STUDY: AN EXPERIENTIAL LOOK AT CONTROLLERSHIP AND GOVERNANCE OF TREASURY IN EMERGING MARKETS

This may be the case study that saves your career. Once, an old manufacturing controller gave me the greatest advice for a financial person: “If you want to get ahead, exceed your budgets; if you want to keep your job, make your forecasts, and if you want to lose your job, fail an audit.” While we are naturally inclined to the glamour part of our responsibilities, like strategy, portfolio management, or capital structure, we should only tend to those after the foundations are met.

Every business requires that management insure its fiduciary responsibility with controls. “Failing an audit” might not sound like a career-ending move, but it certainly will be a major detractor should there be theft or gross negligence. First, you must ensure that governance fundamentals are achieved for proper reporting and asset control. Thereafter, focus on understanding the business dynamics, which allows you to make your forecasts and, eventually, to add value through strategy and creativity to exceed your budgets.

Having been with multiple global Fortune 50 companies (IBM, Tyco International, Cisco Systems) and had the privilege to live and work on three continents (America, Europe, Latin America) over the past 30 years, I could share all sorts of wonderful stories of international capital, financing, and pricing relevant to Treasury, but the subject of this piece is an essential part of operations that all treasurers must first attend to.

Structure: Think Global, Transact Local

The emerging markets of the world have much higher multiples of growth than developed markets. Corporations that seek growth will establish business operations in the high-growth markets that are expanding their populations and gross domestic product per capita. However, these emerging markets pose a high-risk, high-reward environment. For every opportunity of outstanding growth, there are multiple other traps to be considered, such as local business customs, terms, regulations, and competition. For Treasurers, the allure of high yields on investments is surrounded with complicated currency risks: cash export regulations, tax implications, and financing requirements.

At first, basic Treasury activities to establish working capital will suffice with cash management from headquarters coupled with local banking relationships. Eventually, the local business will demand greater Treasury participation in accounts receivable, collections, payables, hedging transactions, credit management, financing major projects, reciprocal banking transactions, and government import/export relations. While it is alluring to maintain a centralised Treasury operation that supports basic activities, eventually the emerging markets will demand higher managerial attention owing to the complexity of working environments and growth rates and opportunities of businesses.

Having one centralised global Treasury team in a major financial centre is certainly beneficial for controllership purposes, but there is no substitute for local knowledge and participation. Hence, most major companies establish a central Treasury function for uniform strategy and policy setting but have local Treasurer presence in major emerging markets to gain competitive advantage. There are various structural models to consider based on the international importance of your business versus the local involvement required. A very high degree of international business will dictate that a company has a global perspective in its Treasury function; else, it will just have a national parochial view. On the other hand, it is important to establish the degree of local involvement of the Treasury function. For some companies, it is very low, particularly for exporters of capital goods. For other companies, it may be very high as local operations demand significant investment, significant headcount, and complex transactions.

Which one is best for your company?

The answer depends on the level of global business in your company versus the level of local Treasury involvement. The following Global Treasury Structure Matrix (Figure 29.3) should assist with the options.

FIGURE 29.3 Global Treasury Structure Matrix

Source and Copyright: Mick Lopez, Lopez L.L.C.

On one end of the spectrum, one would have a “national” Treasury team if business was mostly local. As the business becomes more global but does not require local involvement in transactions, then a central “global” function can be established. This is the case for Cisco Systems, which exports its networking products, priced in US dollars, around the world. They make all major decisions in their California headquarters, with some assistance from a small team in Switzerland. The “local” model is more appropriate for a company that is expanding into one or two new emerging markets in a significant way. For example, some large US agricultural companies establish secondary operations in the rich terrain of Brazil or major global energy companies explore Russian oil fields. They will need to have to have a local Treasurer team to supervise the large amount of investment and activity in those two countries. This Treasurer will usually report to headquarters but have a large amount of local freedom. As some firms grow into more of emerging markets, it makes sense to have a “regional” approach with several Treasury teams (e.g., Asia-Pacific, East Europe/Middle East/Africa, South America) that cover a larger geography with some local knowledge. Finally, large companies with most of their revenues from global customers that demand local involvement will require an “international” approach. This entails having a strong central Treasury team at headquarters but with delegation of local activities to some key regional Treasury offices. The main difference between a regional and an international approach is the level of centralisation of strategies and policies. The regional model is usually a stepping-stone for the international model as companies mature because a coordinated global strategy is required for effective Treasury governance.

Regardless of the model used, it is important that the global leader effectively set the Treasury strategy and effectively monitors its implementation. If every region or business unit has their own strategy, you run a high risk of ineffective Treasury operations and effectiveness. One group may be paying to hedge against one currency, while another is paying to hedge in its favor. Yet another group may be saving cash at low rates, at the expense of another that is borrowing at high interest rates.

The most basic controllership consideration for organisational design in emerging markets is to strive for segregation of duties. Given the relative small size of revenues in new emerging markets, affordability of large teams is rarely justified on an expense-to-revenue basis. Instead, the basis of affordability should be the high risk of loss if all Treasury activities are in the hands of one or few individuals. Certainly, a basic control is to have all major transactions reviewed and approved, in writing, by more than two people, but that is not always feasible with a high number of transactions.

To avoid opportunities for fraud, a small Treasury team in an emerging market should be complemented with assistance from other finance or operation groups. For example, the confirmation of Treasury transactions from the banks should be sent to another individual than the person doing the transaction. In this day, with all the digital imaging software, bank records can be easily manipulated by an individual. A currency trader could properly report all the losses, but keep half of the profits from trades as he moves them into his own account. The auditors could be fooled by documentation that has been expertly forged electronically; only an unusual confirmation from the bank would lead to suspicion. A simple request for the bank to send all confirmations to the accounting department, for quarterly reconciliation by the accountants, would provide a basic segregation of duty aspect. There are many more processes that require this perspective.

In summary, keep a very high level of strategic overview for your global organisational design but, at the local level, maintain a very high degree of checks and balances to thwart any person from opportunities to collude against the company’s financial well-being.

Structured Governance: Rules and Tools

Organisational culture drives the ethics of a company. The task of developing a strong ethical culture is the main responsibility of any corporate executive, for it is known in audit committees that the tone from the top is the single biggest indicator of corporate compliance. If a climate of integrity and honesty is repeatedly exalted by all levels of management, it will become part of the corporate ethos.

In emerging markets, the concepts of ethics may be entirely different. You must be wary of ingrained corruption in some countries, where it is acceptable in daily life to bribe a local politician for any kind of favor. The World Bank estimates that corruption accounts for losses amounting to 0.5 percent of the global GNP each year, and certainly, a higher percentage for emerging markets. If you are astray of the law, such as United States’ FCPA (Foreign Corrupt Practices Act) and United Kingdom Bribery Act, you could face criminal charges.

For Treasury, where there are large amounts of cash transactions, having ethics is essential. Ensure that the company’s corporate values clearly demand honesty, transparency, and accountability. These values should be visible to all and repeatedly mentioned. It is great governance practice to have dedicated channels of communication to the audit committee, especially to protect the identities of whistle-blowers—individuals who risk their careers to highlight corporate issues. Ethical training and annual certification are great concepts easily done through the Web. Sometimes businesspeople get caught up in a vortex for profit maximisation and must be reminded of the ethical parameters. Furthermore, every time corporate values and morals are tested, executives must be brutally consistent to get the message across. I have seen multiple cases before audit committees where high performers in the company have a small ethical misstep. Regardless of their importance to the profits of the company, the individuals should be reprimanded or terminated, because ethics are more important than profits. In any organisation. In any context.

All Treasury operations must have clear and established strategies, policies, and procedures. If they are not written down, they simply do not exist. Policies are the best insurance that a Treasurer can have. If a key employee leaves the company, you will find policies to be invaluable. If there are unusual circumstances, the policies will guide the team to do as expected. Employees are naturally hesitant to write down their daily process and procedures, for it is tedious work that constantly needs change. In a large organisation that had neglected its policies for years, we threw a “Saturday Policy Party,” where we invited the employees to come in exclusively to write their procedures and have some pizza, with fun games in the afternoon. In another company, we had a $100 bounty for every desk procedure. Finally, I insist that all transactional employees have updated procedures and checklists signed by their managers at their annual performance evaluation.

Documentation of segregation of duties in a Treasury function is fundamental. Ensure that you have clear delegation matrices and adequate supervision for basic control features. Even if you must leverage other finance or operations people, strive for key segregation of duties for basic controls. Even if you do, be wary of collusion. There is a famous case of collusion of a complete Treasury team of about a dozen individuals in a major tech company in Brazil in the 1980s. During this hyperinflationary era, the whole Treasury team conspired over years to sweep the funds on Friday afternoon into their own personal accounts, gain significant interest, and re-deposit back on Monday morning. The team was audited multiple times by headquarters, but they had covered the tracks well. They were only caught because of their own greed, as is often the case. The team cut off a former employee, who blew the whistle on them to corporate auditors.

The greatest advent for governance has been the emergence of integrated Treasury modules into enterprise resource planning (ERP) systems. However, the ease, flexibility, and economies of spreadsheet programs make them the most prevalent Treasury management systems today. The overuse of spreadsheets by management is a controllership nightmare. They are inherently unreliable, not integrated, and prone to calculation mistakes over time. Since minor errors in cash management can lead to huge expenses, integrated Treasury modules provide a greater degree of reliability. They are worth the investment for global reporting, even if parallel spreadsheet systems for analysis are maintained.

All of this is relatively easy to implement. You can hire the global accounting and auditing firms to consult for you to ensure that you have a proper set of desk procedures, controls, and segregation of duties. You can also leverage banking relationships for prevalent Treasury strategies and policies. All the large ERP firms and IT consultants can implement integrated systems. Finally, there are multiple consultants that specialise in Treasury matters, such as Aktrea Capital, that can assist, implement, or fine-tune basic governance.

Testing: Inspect to Get Respect

Good controllership entails establishing, measuring, and controlling processes. Once the processes and systems are established, the real work of controls starts. You should create a corporate culture where testing is expected and welcomed. In many societies, asking many questions and asking for documentation may seem intrusive or distrustful, so management must ensure that it is seen in a positive light and reward good behavior.

The usual test mechanism is to have corporate audits descend into emerging market Treasury teams for a couple of weeks. They will pore over policies and procedures to insure that they are being followed. That is why it is important that they be well established and written down. The audit team will also test for major transactions and cash balances. They will look at good COSO and SOX 404 practices. It is important to have these audits done on a random and consistent basis, to keep everyone alert. However, one cannot rely exclusively on them because they are not meant to detect fraud and, especially, because most corporate auditors are not Treasury experts.

The best-controlled environments have a large degree of continuous self-assessment. Each Treasury team should report against established control metrics (e.g., bank accounts reconciled, daily investments updated, accounts receivable collected) to compare various historical trends, forecasts, and benchmarks. It is a great idea to have individual checklists for daily activities, based on an annual calendar.

There is no substitute for the global Treasurer to come visit the Treasury desks at emerging markets. It creates great teamwork, and serves to educate both teams about the nuances of their different roles. I have found that more is learned from one dinner conversation than days of telephone conferences. Treasurers usually have a broader strategic perspective, but it is prudent to always inquire about the controls, postures, and self-audits.

Peer reviews are an excellent way to have a friendly approach to testing. Treasury teams from another region or headquarters will visit an emerging markets operation for a week or two. This is a great chance for teamwork, but also for cross-pollination of ideas. It is important to have the visiting teams perform basic audit tests to prepare for the real audits later in the year.

A very important safeguard is to have background checks on all your employees in Treasury. This is a very inexpensive cost in most countries and can save you from the embarrassment of hiring a professional thief. In one major company I worked for in the United States, I noticed that we had a contractual employee performing state sales tax returns and payments for over three years. I asked that she be made a full employee to recognise her “outstanding work over the years.” The employee came up with all sorts of excuses why she did not want to be a full-time employee, which required a background check. It turned out that she had a false identity and was a convicted felon who had been falsifying records and signatures to defraud our company. Last time I heard of her, Interpol had found her in Spain doing something similar. Had we had a background check, we would have avoided the losses.

If you suspect anything, it is better to have a deep forensic test performed by an outside expert. Consultants will dig deep into all the cash flow transactions and have a higher degree of finding fraud. In some countries, it may be prudent to have routine credit checks on key employees to see if they are financially secure. If warranted under special circumstances, you may have private detectives determine whether the lifestyle of your local team is justified by their salaries. We had a case in Southeast Asia where a new collections leader was performing extraordinarily, collecting very old accounts, but at a small discount that was justified based on the cost of money. Tipped off by an extravagant lifestyle, an investigation led us to a kickback mechanism where a part of the discount of the settlement was transferred to the employee.

From an operational perspective, you should also test your team to be ready for different situations. In emerging markets, it will just be a matter of time before there is a dramatic change in the environment. During the annual planning cycle, the Treasury team should have various scenarios for currencies, interest rates, hedge prices, and local regulations. It is almost guaranteed that there will never be an exact plan as one started with, but it is the process itself that creates the right thinking. Having played out policies under different scenarios is much better than having to do it when the situation changes.

Finally, prepare your team for the unexpected. One way to make it fun is to actually run random stress tests on the emerging markets Treasury teams. You can unexpectedly call the teams with a particular situation, such as a currency devaluation, major bank system failures, closure of repatriation of funds, or credit crisis. For a couple of days, you ask the team to work on the project after hours. You can actually make it a positive learning experience, and make sure you reward them.

Train to Retain—The Value of Great People

The mark of all high-performance organisations is great leadership and outstanding personnel. This is even more important in emerging markets because of the usual lack of qualified personnel. As markets grow, the demand for talent is much higher than the supply of the local pool.

There are some markets that are growing so fast that the local Treasury talent pool is just a revolving door of people from one major international organisation to another. CFOs quickly find that there is only a small set of individuals with fluent multicultural, multilinguistic, and international accounting knowledge. The local talent knows that every time they switch companies, they will gain a salary premium, so there are escalating payroll costs. However, of greater impact to the organisation is the perpetual loss of institutional knowledge every time the local Treasurer leaves for another opportunity. If companies just offer monetary compensation, employees are much more likely to leave for the next best offer.

Talent retention is probably the single biggest concern for continuity of Treasury operations in developing markets. In my experience, the best tool for establishing longevity of emerging market teams is to develop a very high degree of trust and respect. Management must be engaged with the local Treasurer.

For international teams, having clear and constant communication is essential for these teams can be thousands of miles away from headquarters. People who feel part of a global team are more likely to stay longer. Having personal contact also helps to establish bonds. These should actually be regularly scheduled in-person meetings in emerging markets and also at global headquarters. Consider a lengthy visitation period at executive housing for one or two quarters so that new employees from emerging markets get acclimated to corporate values and feel like part of the global team.

It is very common for new Treasury operations in developing markets to bring in expatriate leaders to set up the operations and establish the firm’s values and beliefs. While this certainly serves to get a qualified individual with great trust, it certainly comes at very high expenditure. When you add international assignment bonus, living expenses, family relocation, tax equalisation, and travel to an individual’s base salary, you may pay two to three times more than if they remain in their home country. The goal for expatriates would be to establish operations but quickly in two or three years, and establish a local leadership team in Treasury that can effectively take over at substantial savings. The local leadership will provide benefits of local relationships with government, customers, and banks that an expatriate will take years to gain. If local team members do not see a career path to the local Treasurer’s office, they may not be motivated to stay.

Career paths are never clear in this ever-changing world. However, they are a great motivational tool for young talent to stay with the firm. Having a Treasury role as part of a job rotation strategy for emerging market finance organisations is highly recommended. You will get a fresh set of talent every one to two years that will develop into great general finance managers later on. Give your local treasurers the chance to get closer to the business with an interim planning or business support role; they will be much more valuable when they return to Treasury operations. Allow local talent to apply for regional and global roles so that they feel that there is a career path with the company.

The world’s top talent knows the value of education, and they value companies that invest in it. If you can, establish training programs for the finance teams. For specialised Treasury skills, it would make sense to have your key personnel attend outside conferences and training forums to learn about the latest trends and, especially, to allow networking with other firms. Sponsoring high-potential talent to an international assignment or to a global MBA program would be a great investment on an individual that will always be remembered.

Moving Markets

Managing working capital globally is challenging, but especially in developing markets, where the opportunities are large but the perils are too. Global treasurers are wise to establish clear governance and controllership principles. Losing some basis points in a transaction will pale in comparison to a major ethical breach that can bring the whole company down. Saving some pennies in travel will be meaningless when the local Treasury teams leave due to neglect.

The lifeblood of a company is entirely based on the financial liquidity of its operations. Treasurers in developing markets can safeguard financial assets through sound governance. Corporate controllership requires establishing process, measurements, and controls. At the design stage, provide clear organisational structure, detailed policies, automated tools, investment in personnel and, especially, a consistent ethical corporate culture.

These could be the soundest investments you could hope to make.

Contributed by Mick Lopez, chief financial officer, Aricent Group, a growth company in technology and innovation services, with over 11,000 employees in multiple countries.

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SUMMARY

Investing in operations and control and ensuring that there is adequate infrastructure for both remains one of the key priorities for CFOs and treasurers. Some of these functions may not report directly to the Treasurer but they remain the key responsibility of the Treasurer. Ensuring continuity and smooth functioning of the Treasury and correspondingly the flow of money through the organisation, as well as ensuring that there is no slippage, will increase the chances that company will function in an incident-free and efficient manner.