What could be hiding in your visibility blind spot?

By Bob Stark December 14, 2015

Treasury has been through a dramatic few years. The global financial crisis was a catalyst for many treasurers to take on greater responsibilities and raise their profile. At the same time, continuing globalization is extending treasurers’ liquidity and risk horizons more widely than ever. As the evolution of each company has differed, so too has the role of the treasury function. In many cases, this redefinition of treasury processes has been an organic process, making the line between treasurers’ and business units’ responsibilities unclear.

While this would appear to be less immediate an issue for companies with an entirely centralized treasury organization, there is no room for complacency, particularly if some payment and collection activities take place locally, as is often the case. If treasury defines bank account management policies, for example, who is at fault if the signatories on a local payment, collection or tax account are found to be out-of-date or fraudulent? Similarly, how is treasury enforcing common standards in payment and collection workflows and security requirements? Treasury may have an oversight role rather than operational responsibility for some activities, such as payment factories, but this involves a degree of accountability that treasurers may not be able to fulfil with confidence unless they have a detailed view, and ability to enforce secure and robust workflows, data transformation, exception management and reporting.

Without a clear operating model and defined responsibilities, tasks and obligations can fall through the gap between central or regional treasury and local business units, and errors, fraud and unidentified exposures missed. This is not a theoretical risk. According to KPMG’s report “Who is the typical fraudster” published in 2011, the typical fraudster is male, aged between 36 and 45 years old, works in a finance-related role, has been employed by the company for more than 10 years and commits fraud against his own employer. In other words, exactly the sort of person who is typically relied upon to prevent fraud in the first place.

Given that financial and operational integrity is crucial to treasurers’ reputation, both internally and externally, losses or embarrassments can severely damage the trust that many treasurers have developed amongst their internal and external stakeholders. “We didn’t know” or “it’s outside our remit” are unlikely to be credible or comfortable excuses when the board, investors (and probably the media as well) ask what happened.

It is not only activities beyond treasury’s direct control that can be murky. Even among treasuries with a high degree of cash and treasury centralization, and therefore a high proportion of accounts controlled by treasury, it is often difficult for treasurers to collect and collate timely, accurate information from banks in a consistent fashion. In some (although a declining number of) cases, banks cannot produce statements electronically. More frequently, companies that work with a large number of banks (or in some cases branches of the same bank) need to access multiple proprietary electronic banking systems, each of which has its own security protocols, authentication devices and file formats. Information then needs to be mapped into the treasury management system to provide treasurers with a view of global cash. For users of treasury management systems (TMS) that are installed on-site or managed internally, this can create significant resource overheads, particularly as interfaces need to be maintained as each system is upgraded. While using SWIFT to communicate with multiple banks through a single channel can help with this, not every bank, or bank branch is connected to SWIFT, and the cost benefit may not be sufficient for some companies.

Further reading

Ebook: four steps to 100% cash visibility
Ebook: Perfecting Cash Forecasting – Adding Business Value to the Organization

Even in companies with a highly centralized treasury function, there are often accounts managed at a business unit level, such as for local payments, collections and for regulatory reasons (e.g. for tax, customs and other government payments) over which treasury has no visibility or control. Amongst less centralized treasury functions, treasurers still need to maintain the same degree of visibility over cash and risk as their more centralized peers accurate global reporting or monitor risk limits, even if they do not control this cash. In these cases, the difficulty is that treasury is one step removed from the process of gathering this information. Electronic banking systems are typically maintained locally, so treasury is reliant on finance teams to send information to treasury.

The value of cash held in these accounts can be substantial, leading to significant currency and credit risks, but treasurers tend to be more concerned about countries where cash is ‘trapped’ as a result of capital or currency controls, and more relaxed about accounts in ‘established’ economies. In reality, some of the most volatile tradable currency pairs are G7 currencies, such as GBP-USD, EUR-JPY and GBP-JPY. The Russian ruble lost 40 percent of its value against USD in 2014, while the Ukrainian hryvnia, Belorussian ruble and Brazilian real have lost more than 20 percent of their value during the first three quarters of 2015. The EUR has seen a steady decline, while currencies in Sweden, Norway and the UK that rely on oil production as a large part of their economy have fallen by nearly 10 percent in 2015 alone. The potential for significant erosion of value therefore means treasurers cannot afford to be complacent about monitoring balances, and taking remedial action where possible, wherever in the world these balances are located, and in whatever currency.

While currency risk is one issue, there are other considerations too. Cash outside treasurers’ line of sight cannot be used for group liquidity purposes, potentially raising borrowing costs. This may not seem a major issue during a period of strong liquidity, but for businesses operating with tight margins, it can have significant competitive implications and raise questions amongst shareholders, debt holders and rating agencies. Furthermore, this cash may be either left in current accounts or invested in instruments or counterparties that fall outside treasury investment policies, leading to unidentified counterparty risks, and the potential for loss of capital as well as sub-optimal returns on cash.

Treasury centralization, with the use of common technology across both treasury centers and participating business units for the management of all accounts and financial transactions is a logical response to these challenges. The benefits of this approach are increased further if the technology is cloud-based, therefore transferring responsibility for maintaining bank communications and interfaces with other internal systems to the vendor. Liquidity management structures such as cash pooling, most commonly physical cash pooling (e.g. zero balancing) but also notional pooling also play an important role in reducing the amount of cash under the corporate sofa.

These solutions are not a panacea, however, for two key reasons: firstly, the process of centralization is rarely a one-off event. For example, business restructuring, mergers and acquisitions create new entities that need to be integrated quickly and efficiently into group treasury from both an operational/ oversight and liquidity management perspective, with the period before full migration often presenting the greatest risk. Secondly, treasury’s mandate for centralization can differ between enterprises. In some organizations, treasury has a mandate from senior management to enforce centralized control over cash, treasury and risk management activities. In others, business units have the ability but not the obligation to hand over cash and responsibility to treasury. Treasury therefore has to fight far harder for corporate cash, and convince local finance teams of the operational, liquidity and risk benefits that centralizing cash and risk in treasury offers. At the recent Fintech Cash and Liquidity Optimization conference in London, of which Kyriba was a sponsor, one panellist noted that they spent more than 30 percent of their time on this internal sales process, and that every new centralization process led to surprises, many unwelcome, about the cash balances, processes and risks that had been held locally.

Treasury is tasked to manage liquidity and risk, including market, credit or operational risks, but fulfilling this obligation is impossible without clear visibility over cash and exposures on one hand, and operational processes on the other. A clear organizational model and mandate is an important first step in achieving this visibility, but bank and account models, liquidity structures, treasury management technology and corporate culture all play a vital role. Risks that are invisible to treasury now will be exposed at some stage, and the moral of the Volkswagen emissions story is that it will happen far too late. Could treasury be involved in a scandal of comparable proportions? Environmentally and reputationally amongst consumers, probably not. In terms of impact on the share price, and damage to trust amongst shareholders, debtholders, credit rating agencies and the Board, absolutely.


This article initially appeared in GT News on December 14, 2015, under the title “What’s Lurking in the Dark?

Activate Liquidity.

Transform how you use liquidity as a dynamic vehicle for growth and value creation

Find out how