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Journey into the Unknown - Internal auditing in the treasury function

by Thomas Schräder, Partner, and Birger Wriedt, Senior Consultant, at PricewaterhouseCoopers, Düsseldorf

The sub-prime market has clearly shown that treasury risks were not adequately valued in the past. The internal auditing function therefore needs to work much harder in this area, say our authors.

In-depth monitoring by the internal auditing function is an important part of the internal control and management system. Internal auditing thereby supports senior management by means of independent auditing and advice. This provides a comprehensive and differentiated judgement of the risk position and contributes to the security, value growth and improvement of business processes. However internal auditing often only fulfils this duty for the traditional managerial business processes such as the purchasing, production and sales triad, or the connection between accounting and financial controlling.

In-depth monitoring by the internal auditing functions is an important part of the internal control and management system.

Treasury generally only manages to occupy a shadowy existence in the internal auditing plan. The scope and depth of the auditing activities mostly do not match the risk potential it contains. Recent key events such as blacklisted payments and bank accounts, incorrect accounting procedures, losses from the late discovery of trader speculation or entering into structured financial products as well as incorrect assessment of the risks of sub-prime investments, are reasons enough to investigate this phenomenon.

The reasons for the frequently neglectful treatment of treasury and the latent underestimation of the risk potential are very often manifold. The notorious understaffing of internal auditing does not for example allow an expansion of the necessary know-how of the financial processes and financial risks by an intensive concern with treasury. Whilst the introductory areas of activity are amongst the familiar subjects of managerial training and study, this is often not the case for treasury.

IT landscape and financial reporting of financial instruments

A factor that adds to the difficulty is that the treasury activity requires the auditor to have a large number of different qualifications. It is difficult for auditors to gain these in the necessary combination, breadth and depth on their own. In addition to identified knowledge of financial processes and risks, due to the great importance of treasury management systems (TMS) to most treasury departments, it is essential to have an extensive understanding of IT.

The same applies to the complex area of accounting for financial instruments. At many companies TMS are actually sub-ledgers, with all the associated needs. The principles for the accounting treatment and valuation of financial instruments, particularly derivatives, are now determined by the entries in TMS and mostly automatically transferred from there into the general ledger. With the increasing ability of TMS to handle the most complex accounting tasks such as hedge accounting for financial instruments under IAS 39, responsibility for the correct assessment is gradually being transferred from the accounting function to the treasury function. If an effective co-ordination process is not established between Treasury and Accounting, there is a risk, which should not be underestimated, as the accounting treatment of financial instruments is rarely required to be a core treasury skill. The often weak co-ordination between Treasury and Accounting in the days of German GAAP accordingly requires a new quality in times of treasury sub-accounts and new extensive disclosure requirements for financial instruments under IFRS 7.

Management of commodity price risks and usage of structured financial products

The range of duties of the treasury function is increasing. For example, the management of commodity price risks, if they were actively managed at all, was until recently the responsibility of the procurement departments and the price explosion of many of these commodities such as electricity, oil, steel or copper, has intensified the company’s awareness of how dependent they are on their success on these risks. In the same way as the treatment of traditional financial (liquidity, currency and interest) risks, responsibility for managing these risks is currently shifting towards treasury.

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