e-Forex Magazine | Standards | Treasury Best Practice the role of FX automation - Automation in Treasury - facilitating compliance with Sarbanes-Oxley.

Standards

Sebastian di Paola

Treasury Best Practice the role of FX automation - Automation in Treasury - facilitating compliance with Sarbanes-Oxley.

First Published in e-Forex Magazine January 2006

Sebastian di Paola

Partner, PricewaterhouseCoopers

Sebastian di Paola examines how automating FX trading can assist in meeting Sarbanes-Oxley compliance.

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In recent years, treasurers of international companies have had to learn to deal with significantly increased volumes of regulation. The combined effect of Sarbanes-Oxley for SEC registrants and IFRS for companies in Europe has forced many companies to focus much of their scarce spare resources on compliance issues. This has certainly been the case for many finance functions, and the treasury department has proved no exception.

In parallel with their Sarbox efforts, treasury departments have had to devote resources to integrating IAS 39s complexities into their risk management operations and will now have to deal also with the additional disclosure requirements contained in the IASBs latest standard on financial instruments, IFRS 7. In the meantime, more strategic initiatives, for example in the area of treasury technology, are being left on the back burner while efforts are focused on meeting the tight deadlines imposed by the new regulations. These efforts will not end there. Over time companies will endeavour to further fine-tune their processes, in order to reduce the cost of compliance. For many this may include replacing multiple spreadsheets or poorly integrated patchworks of systems with more automated and straight-through processing (STP) solutions.

Is it all worth it?

The cost of compliance with Sarbox has proved pretty staggering. According to a recent survey by Financial Executives International, large public companies spent an average of USD 4.4 million last year on compliance with Section 404 of the act. Commentators have been questioning for some time whether real shareholder value is being derived from these initiatives, and whether the capital markets will end up better off. Some non-US companies are now viewing the burden of complying with the SECs stringent compliance and reporting requirements, as outweighing the benefit of their US listing and there has been increasing talk of delisting from the US. A few companies have even chosen to do so and the SEC is now looking into ways to ease the compliance burden to stem the tide.

The question of whether the benefits of Sarbox compliance outweigh its costs is of course key, but in considering this question one should not lose sight of why these regulations have come into being in the first place. The genuine need to restore the confidence of investors and stakeholders in corporate reporting stemmed from major failures in both the US and Europe. Treasury has had its own share of disasters, many of which predate the Enrons and Parmalats by nearly a decade, including control failures at Orange County, Metallgesellschaft, Barings and more recently AIB and NAB. Already back in 1993, a G30 study on Derivatives practices and principles highlighted the need for a comprehensive and harmonised approach to accounting for financial instruments. It is this context which has spawned the regulations we face today, and it is difficult to argue that some sort of regulatory action was not needed.

As to whether these regulations meet their stated objectives or whether they drive change more in form than in substance, the jury is still out. However, it seems that recently the number of companies recognising that there is a silver lining to the Sarbox cloud is increasing. Some CFOs are beginning to see that there is a route to regulatory compliance that encompasses significant value for finance, and thence for the company as a whole.

What do companies have to do to comply with Sarbox

Most of the focus of companies implementation efforts is on section 404 of the Sarbanes Oxley Act. This section requires an annual report by management regarding internal controls and procedures for financial reporting, and an attestation as to the accuracy of that report by the companys auditors. In order for management to be able to provide this report, companies must undertake an extensive documentation exercise. This involves analysing processes with a view to identifying all controls which are key to ensuring the accuracy of information included in the financial statements and testing these controls on a regular basis to ensure they are operating effectively. This is easier said than done, as few companies have good process documentation, and even those that do, generally have not specifically analysed and documented their key controls, let alone determined how they will ensure these are working effectively.

No longer is it sufficient to produce a set of reliable financial statements. Indeed Sarbox requires that companies demonstrate that they have the controls in place to ensure that any errors are picked up and that assets are safeguarded against loss or material fraud.

What does this mean for Treasury / FX processes

Owing to the volume of risks and flows managed by the treasury function, treasury bears a significant share of the Sarbox burden.

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