CASE STUDY: WHICH DESK SHOULD LOOK AFTER THIS ISSUE?

The CFO of a European technology company was in a quandary. The books in

the control system and the Treasury system were showing different numbers.

The Treasurer, who had claimed a massive savings as a result of his hedges, had

resigned when the controller reported that the hedging process over the past two

years had actually lost the firm a lot of money and that the objectives of achieving

stability and visibility of financials were not being met. The week after the Treasurer

had quit, one of the dealers came to the CFO with a problem: A hedge transaction

that the Treasurer had done earlier in the month as part of the hedging program

that had also been reported in the GL system (ERP) had come up for maturity, but

the bank had no records of the supposed transaction. Similarly, a payment that was

supposed to have gone for an earlier hedge settlement through the electronic system

had shown a confirmation, while the bank was still asking for the payment to be

made.

The Treasury team was responsible for the transactions and interface with banks

and for accounts and liquidity management. Any entries to be passed were done

so by the controller s team based on reports issued by Treasury. The control team

members were not experts on Treasury decisions and products; they left decisions

to the expertise of the Treasury team, agreeing in the spirit of teamwork to help

pass the entries in the back end. Implementation of a state-of-the-art Treasury system

had assisted the process. Entries were now mostly automated except for a few

processes, where the front end or dealers still handed over reports and the transaction

entries in the ERP were then be passed by control based on these inputs.

The CFO immediately requested an independent review, and after two weeks,

he received the report. Sifting through the points, there was one thread that was

common: the differences between the various elements, systems, or desks on their

evaluations, numbers, and balances. The reconciliation process had gone awry. The

ERP (GL system) and the state-of-the-art Treasury system that the company had

invested in on the Treasurers recommendation were showing completely different

numbers on account balances and hedging transactions. Transactions reported on

the Treasury system and whose mark-to-markets were being correctly reflected

in the accounting books were not present in the banks reports. Limit excesses by

traders had been checked (the checklists had been ticked) but not reported, since

the checks had been done by the traders themselvessystem and banking reports

would come in to the dealers who would perform the verification to the best of

their ability.

The CFO called the controller and the senior members of the Treasury team. All

of them had done their day-to-day operational jobs to the best of their abilities,

but when the time came to discuss reconciliation, the answers were ambiguous.

Owing to direct system handoffs between the Treasury system and the ERP, no

one had felt that there was a need for reconciliation. The banks offer to integrate

their systems with the Treasury system had been rejected owing to incremental

implementation costs. Hence the activity had remained with the Treasurer and his

team. Limit checks were designated a noncritical activity by the dealers and hence

were not factored into reviews on automated system reportswhere they had

been built, the recipient e-mail addresses listed the dealers themselves, and postmigration,

the addresses had not been changed. The inbox of the Treasury team

members was thus flooded with over 100 reports that kept being flushed to the

Unread reports folder and purged whenever the mailbox exceeded its limit.

The solution again was simple: The reconciliation process had to be done, regularly.

The question was, by whom?

Would it be done by the front office, giving it access to the back-end systems

as well? Or was it a back-end task, reconciling tasks after the entries had been

passed? Or was it worthwhile to invest in a middle office, which would be responsible

for all the reporting and the reconciliation, independent of the activities of

deal origination, decision making, and booking in the firms ledgers?

What is the issue discussed in the case?

Who is the main responsible unit for this problem and why?

What do you suggest to avoid such problems in the future?