Treasury controls (#170)
/In this podcast episode, we discuss the controls relating to treasury activities. Key points made are noted below.
The Need for Treasury Controls
There’s a key difference between the treasury area and every other part of the company, which is that just one transaction in the treasury area can potentially bankrupt the company. For example, an employee is authorized to wire funds on behalf of the company, so he wires all of the company’s excess cash to his bank account in the Cayman Islands. And that’s it, the company is toast.
Preventive Controls
So in this case, the system of controls has to focus on preventive controls much more than detective controls. Since the company can be wiped out by just one case of fraud, you have to prevent fraud from ever happening, which calls for what might appear to be some pretty oppressive preventive controls. Such as requiring multiple approvals for every wire transfer. Or having the bank call the company president for confirmation before any wire transfer is processed. Or only issuing wire transfers from a separate bank account, which is only funded with enough cash to pay for each specific wire transfer. These are all preventive controls.
Another preventive control that a lot of companies don’t think about is to install a debit block on the company’s bank accounts. This means that no outsider can use an ACH debit transaction to remove cash from an account. Or, if you have a supplier who insists on being paid with an ACH debit, set up a separate account that’s designed to handle the ACH debits, and only fund the account with enough cash to pay for the expected amount of these debits. That way, if a fraudulent debit hits the account, the company won’t lose very much money.
Detective Controls
These controls are designed to keep the company alive by avoiding large improper cash transfers. Now this doesn’t mean that you don’t bother with any detective controls. A detective control is designed to catch a problem after it’s already happened – which in this case is like locking the door to the henhouse after the fox has made off with your chickens. Nonetheless, a detective control can at least point out situations that you can guard against in the future with more preventive controls.
So some detective controls that might help are to conduct a daily bank reconciliation, and to have the internal audit staff review the trail of authorizations for all wire transfers.
Investment Controls
So far, we’ve only been talking about controls related to electronic transfers of cash. But what about controls for the investment of funds? It’s quite possible that the treasurer can invest excess cash in funds that are really risky, or not very liquid. If they’re risky, the investment value can decline – a lot, and the cash is lost. Or, if the investment isn’t liquid, the company may have to wait a long time to get its cash back.
It can be difficult to outright prevent these types of investments. But you can at least make it quite clear that the company only invests in the safest possible investments. One option is to have the board of directors approve a policy that states exactly which types of investments are allowed, and possibly which ones are not allowed.
Another option is to have an investment procedure that requires the treasury staff to make sure that the period of an investment doesn’t exceed the forecasting period of the cash forecast. By doing so, you ensure that all investments are limited to the period of time over which you can predict the need for cash.
OK, another option is to go bureaucratic and create an investment form that has to be filled out and approved, possibly by several managers. By doing so, the worthiness of an investment can be examined in advance. And, since they’re signing off on the investment, they’re also becoming responsible for the outcome.
A final thought is to not actively engage in any investment activities at all that require the manual movement of funds. Instead, you could enter into an arrangement with the company’s primary lender to roll over all available cash into overnight repurchase agreements. This is automatic, and the investment is very low risk. On the other hand, you won’t earn much of a return on overnight repos.
Now, another treasury area that may be in need of controls is borrowings, especially in the area of the line of credit. One issue is to make sure that the bank’s records of the amounts outstanding and the related interest expense match those of the company. It’s quite possible that they don’t, since a loan payment could have been credited against the loan account of some other customer of the lender. Or, the lender may be charging a different interest rate than the company agreed to. I’ve seen both. To guard against this, conduct a detailed monthly reconciliation of the lender’s loan statement to the company’s loan liability account.
Another problem, which I’ve seen multiple times, is that a company has an asset based line of credit, and the amount of assets available as collateral on the loan drop so far that some of the loan must be paid back – usually unexpectedly. This can cause quite a scramble at the company, possibly to the point where it runs out of cash and may even go out of business.
To keep this from happening, there should at least be a monthly comparison of the outstanding loan balance to the borrowing base associated with the loan. Better yet, do this comparison as part of the weekly cash forecast, so management can see in advance if there’s a risk of having to pay down a loan in the near future.
And one more control over loans is to have the treasurer sign off on each loan repayment or drawdown. By doing so, someone can cross-check that there’ll actually still be enough cash on hand after a loan repayment is made. Or, that a loan drawdown is actually justified. Otherwise, a company might find itself with either too little cash or paying interest on too large a cash balance.