Lack Of Formal Written Policies Puts Treasuries At Risk

Policies vary widely by types of activities.

Putting a treasury’s policies and procedures into written form seems like a good idea, but not all treasuries have formal written policies to guide the various types of work they do, according to a survey by the Association for Financial Professionals.

The incidence of formal written policies varies widely by the type of activity, with investment management policies the most common. More than half (56%) of the 554 treasury practitioners AFP surveyed said their company has a formal written policy for investment management, while 20% said they have written guidelines or procedures for investing and 13% use unofficial operating standards or rules of thumb.

“Any time you’re dealing with money, it’s always good to have policies and procedures to be your backstop, well-documented procedures to make sure you’re doing things correctly and they’re reviewed by your auditors,” said Thomas Hunt, director of treasury services at AFP. Hunt described such policies as “a safety factor, something that you can fall back on and have confidence in, and that helps you when things get tough.”

AFP asked survey participants whether their treasury has formal written policies, written guidelines and procedures, or unofficial operating standards. Hunt says formal written policies have been reviewed and approved by the company’s senior management or board, while written policies and procedures are “more of an operating guide or help define the tactical approach for the procedure or task.”

After investment management, treasury governance was the area where companies were most likely to have formal written policies, with 39% saying they had a formal written policy, 38% written guidelines or procedures and 21% informal operating procedures. Treasury governance policies cover “who can do what in the organization,” including which executives can open and close bank accounts and who can issue debt, according to Hunt

More than a third (34%) of the companies had a formal written policy on customer and vendor credit evaluation and approval, while an equal percentage had written guidelines or procedures. And just under a third (32%) had a formal written policy on FX management, while 19% had written guidelines or procedures on this topic.

Dan Carmody of TreasolutionDan Carmody, managing director at consultancy Treasolution in Chicago, said he was surprised at the number of treasuries that did not have formal written policies. “It’s a best practice to have a formal approved policy in place,” he said.

Carmody, pictured at left, said he has seen a trend toward more use of written policies among treasuries with which he has worked. “Primarily since the financial crisis, there’s been a large push toward documentation of policies and procedures,” he said, adding that the practice aids treasury departments in a number of ways, such as the support it provides for the cross-training of personnel.

The executives surveyed overwhelmingly cited risk mitigation as the main objective of their FX and interest rate management policies (89%), investment management policies (87%) and customer/vendor credit evaluation policies (82%). But 73% said financial performance was the main objective of their cash concentration and forecasting policy, with just 54% citing risk management as an objective for that policy.

Hunt linked that focus on financial performance to the role forecasting plays in companies’ working capital management. “How efficient are you in using your cash? Forecasting is foremost in that. Just making sure that if there are any lumpy cash flows, you’re ahead of them, and you mitigate any uncertainty in the environment in terms of your cash needs, ultimately that’s going to drive your financial performance,” he said.

Investment management is not only the area for which treasuries are most likely to have a formal written policy, it is the area most likely to be overseen directly by the board of directors. Fifty-three percent of the practitioners said the board of directors oversees their investment management policy; the board oversees just 34% of FX and interest rate management policies and only 18% of cash concentration and forecasting policies.

“Liquidity has become so key through the financial crisis,” Hunt said. “The board’s reviewing it, the CFO is reviewing it. The last thing they want to say is we lost principal because we went for an extra 10 basis points.”

When it comes to putting a policy in place, Treasolution’s Carmody said one size does not fit all. “Oftentimes, policies have to be created,” he said. “It should really be customized to your security and organizational requirements.”

And in the process of writing the policy, “the more feedback you can get from other areas within the organization the better, like internal audit” Carmody added. Accounting should be consulted on policies that pertain to accounting, he said, and someone from the IT department brought in to help put together a policy related to the treasury workstation.

Hunt noted the strong tendency toward centralized policies. Sixty-nine percent of the executives said their company mandates enterprise-wide policies and another 15% say enterprise-wide standards are recommended. That’s even more pronounced among executives from companies with $1 billion or more in revenue, 82% of which said enterprise-wide standards are mandated and 11% said they’re recommended.

“It’s important to have all the finance people using the same standards and understanding the mandates that are coming down from the CEO and the board,” Hunt said. “The last thing you want to have is multiple policies – that’s when you have surprises, things you didn’t know you had, exposures you weren’t planning for.”


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