Corporate Treasury Review - Sample 2

8/13/2019 Corporate Treasury Review - Sample 2

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Corporate Treasury ReviewComp any XYZ



2

Table of Contents

Executive Summary

Objective and Scope

Summary of Procedures Performed

Acknowledgments

Background

Action Matrix

Appendix: FX Strategy/Background



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Executive Summary

• Treasury department policies and procedures are outdated in all areas (cash management, wire transfers, foreign exchange,treasury accounting, subsidiary procedure-related policies). Formal, written cash management or treasury accounting policies donot exist.

• Cash management operations at Subsidiary Corporation could be combined with Company XYZ Inc. treasury.

– Excess cash balances at Subsidiary (occasionally as high as $X million) are not automatically transferred to Company XYZ Inc.for investment.

– General ledger investment accounts are not adequately reconciled. Until recently, general ledger investment accounts were notreconciled to broker statements or treasury records.

– General ledger investment transactions are not accurately recorded. During our review, we noted two booking errors whereinvestments were recorded into the wrong general ledger account (no adverse financial effect). In each case, the dailytransaction report prepared by treasury was incorrect. Adjusted journal entries were made to reverse each error prior to ouridentifying the error.

– Authorization letters sent to counterparties identifying those approved to make foreign exchange transactions are outdated andinclude former Company XYZ Inc. employees. These employees are, technically, still allowed to initiate transactions on behalfof Company XYZ Inc.

• Foreign exchange exposure hedges are not formally approved. Policy requires written documentation from the chief financial

officer of all hedge contracts.• Confirmations sent by counterparties are received directly by those persons who execute foreign exchange hedging transactions.

• Management reporting could be improved in all areas (specifically, investments and foreign exchange hedging). Treasury currentlysubmits single page documents to executive management with little detail of key treasury measures (e.g., yield, portfoliocomposition, foreign exchange exposures, etc.).

• Reconciliations of the Yen bank account should be reviewed by the treasury manager to ensure they have been properly prepared.This review should be documented.

In general , t reasury depar tment con trols surro unding cash m anagement , wire t ransfers , investments and foreign exchangehedging fun ct ions are less than adequate. The fol lowing pr imary oppo rtuni t ies for impro vement have been ident i f ied throughinterviews and process o bservat ions with t reasury personn el and l imited t ransact ion tes t ing.

Please see the Action Matrix section for further details.



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Objective and Scope

• Objectives:

– Assess and evaluate the adequacy of the overall financial control environment

– Assess and evaluate the adequacy of significant financial and accounting controls

– Identify opportunities for process and control improvement

• Scope:

– This review was limited to the corporate treasury operations at headquarters.

– Period of review was for (Insert Month) XXXX.

– This project did not include a review of the strategic alliance/partnership investments managed outside of corporatetreasury.

– The following processes and functions were reviewed:

* Limited detailed testing was performed

Cash Management

Wire Transfers*Investments*

Foreign Exchange Exposure Management*



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Summary of Procedures PerformedWe performed the fo l lowing dur ing o ur rev iew:

Obtained and reviewed available Company XYZ Inc. corporate treasury policies and procedures relating to cashmanagement, investing and foreign exchange exposure management

Interviewed key treasury and accounting personnel

Observed performance of key treasury processes

Performed detailed testing of outgoing wire transfers and investments

Reviewed domestic and international cash and investment account reconciliations

Reviewed investment manager statements

Analyzed calculation of Yen exposures for Q2-YY

Analyzed foreign exchange hedging forwards and options for Q2-YY

Evaluated the overall internal control environment

Compared Company XYZ Inc. ’s practices with best practices for selected treasury operations

Reported on observations and management action plans



6

Acknowledgments

We would like to thank all Company XYZ Inc. employees that assisted us in our work during this project. We received

input and assistance from the following personnel:

Corporate Treasury

Name A Treasury Manager

Name B Cash Analyst

Accounting

Name C Accounting Clerk

Your help isKEY to the success

of this project!

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General Background

• During the fiscal XXXX/YYYY internal audit planning process, executive management identifiedtreasury operations for review in the fiscal XXXX/YYYY audit plan. Treasury operations were lastreviewed in August XXXX by audit services.

• Corporate treasury is responsible for the following functions for both Company XYZ Inc. and CompanyXYZ Inc. International:

• Cash management and short-term investing – Bank account management, including bank lines of credit and other types of financing as

required by Company XYZ Inc.

– Foreign exchange exposure management

– Risk management, including coordinating insurance coverage

– Credit and collections

• Treasury personnel, including one full-time treasury manager and one part-time treasury analyst



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Background: Cash Management & Wire Transfers

• As of (Insert Month) XXXX Company XYZ Inc. had worldwide cash and investments of approximately$XXX million (see graph on next page).

– Treasury personnel perform cash management functions for both Company XYZ Incorporated andInternational entities. Company XYZ Inc. subsidiaries perform cash management operationsindependent from corporate treasury. Subsidiaries’ excess cash is transferred to corporate treasury(at corporate’s request) for investment.

– Treasury maintains a Yen account with Bank A for Yen accounts receivable and accounts payable

activity. Yen account balances are not invested due to low Japanese interest rates. Foreignexchange exposure in the Yen account is hedged (see FX background).

– Cash management activity is monitored on a daily basis.

• The Company XYZ Inc. treasury department currently utilizes System A for all incoming and outgoingwire transactions.

• Treasury personnel hold releasing and approval capabilities within System A. Each individual mayperform only one of these functions for each transaction.

• In the case of a system failure, alternate wire transfer procedures have been established. Wiretransfer information may be directly called into the appropriate bank. A safewire card is utilized by thereleasing party to ensure that only authorized personnel are transferring company funds. Oncereleased, the wire information is confirmed by another authorized individual with system approvalcapabilities.



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Company XYZ Inc. Consolidated Cash Balanceas of (Insert Month) XXXX

(in millions of dollars)

Total Consolidated Cash= $ XXX million

Short-TermInves tments

Company XYZ22%

Other2%

Short-Term Cash15%

Company A28%

Company B17%

Company C16%



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• Wire templates have been established within the System A system. Dual authorization is required for the creation ofsuch templates. In addition, dual authorization is required for all template changes.

• To process a wire, a wire transfer sheet must be signed and approved by certain Company XYZ Inc. employees, basedupon the current company signature authority policy. Exceptions to this rule exist for overnight investments and payrollpayments, which do not require such approvals.

• Wire information is reconciled to the general ledger on a monthly basis by Company XYZ Inc.’s general accountingdepartment.

• The matrix below details those persons authorized to initiate and approve wire transfers with their respectiveprocessing limits.

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User Dollar LimitsPer Transaction

Dollar Limits PerUser Per Day

Other AccessLimitations

Name A, Treasury Analyst Release = $X millionApprove = $X million Up to $X million None

Name B, TreasuryManager

Release = $X millionApprove = $X million Up to $X million None

Name C, Finance Manager Release = $X millionApprove = $X million Up to $X million None

TOTAL LIMITS PERCOMPANY XYZ

Release = $XX millionApprove = $XX million Up to $X million N/A

Wire Transfer (System A ) Authorization MatrixUsers & Approval Limits



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Background: Investments

• Excess cash for both incorporated and international accounts are invested daily in overnight money

market accounts held with Bank A. Excess cash from money market accounts is invested short-termwith external money managers (Company A, Company B and Company C).

• Company XYZ Inc .’s current investment policy (last updated (Insert Month) YYYY) is conservative;however, a more aggressive policy has been developed and submitted to the board for approval. Allmoney managers are required to adhere to this policy in all investments. All short-term investmentsare made through money managers.

• All current short-term investments have a maturity of less than four months.

– Of the $XXX million in cash, approximately XX% is held in short-term investments. The remainingX% is short-term cash, consisting primarily of the Bank A Yen cash and overnight money marketaccounts.

– The following page displays the short-term investment portfolio by instrument type.

• Maturing investments are automatically transferred into a money market account held by themanaging institution. From there, the money is either rolled over into another short-term investment or

wired back to Company XYZ Inc.• Investments are recorded at cost. Cost-to-market value adjustments are minimal due to the short

duration of investments.

• Company XYZ Inc. participates in approximately 10 strategic alliances/partnerships. In some cases,dollar investments have been made. These alliances/partnerships are managed at the executive level(CEO/CFO) and are independent of corporate treasury.



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Background: Investments

Short-Term Investment Portfolio

by Instrument Typeas of (Insert Date), XXXX(in millions of dollars)

Short-term portfolioincludes all Company A,Company B andCompany C investments.

Average combinedtaxable equivalent yield as of (Insert Date),XXXX is approximately

X%

Gov’t Treasuries 22%

Commercial Paper

and Other1% Gov’t Agencies 2%



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Background: FX

FX Hedging ResultsQ1-XX thru Q3-YY

*Based on forecasts

Q1-XX Q2-XX Q3-XX Q4-XX Q1-YY Q2-YY* Q3-YY*

Average Net FXgain/(loss) = $XXX,XXX

($3,000)

($2,000)

($1,000)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

( I n T

h o u s a n

d s

$ )

FX Translation Gain/(Loss)Impact of Hedge Gain/(Loss)NET FX GAIN/(LOSS)

• Company XYZ Inc .’s foreign currencyexposure management program isprimarily focused on managing itstransaction exposures.

• Transaction exposure resultsoccur mainly from nonfunctionalcurrency, Yen denominated

receivables and payables.• Yen foreign exchange forward

contracts and Yen put and calloptions are the primary hedginginstruments utilized.

• Treasury has concluded that no othersignificant foreign currency

exposures exist at Company XYZInc. that require hedging.

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Best Practices

INSERT BEST PRACTICEPAGES HERE



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Appendix: FX Background/Strategy

FX Stra tegy & Process Overview

• The treasury manager receives biweekly information regarding forecasted intercompany Yen activity from Company XYZInc., its Japanese subsidiary. This information is utilized by the treasury manager to determine Company XYZ Inc .’sexpected monthly Yen cash position and net Yen balance sheet exposures for each month through the end of the fiscalyear. If the Yen cash forecast indicates months in which excess Yen will be available, the treasury manager will sell Yenforward to reduce this foreign currency exposure.

• The decision on whether to sell any excess Yen forward is made by the treasury manager based on his analysis of thecurrent foreign exchange market conditions, particularly the current trend in the Yen exchange rate in relation to themost recent accounting Yen exchange rate and his level of confidence in the Yen forecast.

• Company XYZ Inc. is typically long Yen.

– If the Yen has been weakening against the Dollar, and the treasury manager expects this trend to continue, he willconsider selling any excess Yen forward (thus reducing Yen exposure and minimizing expected translation losses).

– Additionally, the biweekly Yen exposure update performed by the treasury manager might result in changes in theforecasted Yen cash position. Such changes in the forecast, depending on their significance, can result in additionalforward Yen sales to keep the hedges in line with the adjusted exposures.

– Yen foreign exchange options are utilized to hedge any remaining net unhedged Yen exposures. The strategy utilizedby the treasury manager in this area involves the purchase of a Yen put option (maturity date of quarter end, strikeprice equal to current Yen exchange rate and option amount equal to remaining unhedged quarter end Yenexposure). At the same time that the treasury manager purchases this Yen put option, he will also sell a Yen calloption that has the same maturity date and strike price. The amount of Yen covered by this written call option is set atthe amount necessary so that the option premium received by Company XYZ Inc. from the sale of this call optionexactly offsets the option premium paid by Company XYZ Inc. on the purchase of the Yen put option. Additionally,according to the treasury manager, Company XYZ Inc.’s unhedged Yen exposure will always remain in excess of theYen covered by the written call option ( i.e., the written option is “covered” in that Company XYZ Inc. maintainssufficient Yen positions).



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Appendix: FX Background/Strategy

– Yen Fluctuation

◦ The purchased Yen put option protects Company XYZ Inc. in the event of a weakening Yen. In this scenario,translation of the Yen balance sheet exposure will result in a remeasurement loss. The purchased Yen put optionwill increase in value, resulting in a gain that will offset the remeasurement loss. The written Yen call option willexpire worthless.

◦ In the event of a strengthening Yen, remeasurement of the Yen balance sheet exposure will result in a gain. Thepurchased Yen put option will expire worthless. The written Yen call option, however, will be exercised by thecounterparty, resulting in a loss for Company XYZ Inc. on the option exercise. This loss incurred from theexercise of the written call option will be offset by the remeasurement gain on the Yen exposure (the Yen

exposure remeasured should exceed the Yen covered by the written call option, as described above, resulting ina net gain).

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Corporate Treasury Review - Sample 2

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