Compulsory Reading Flashcards
AWA
* Board policy / delegations
AWA Board Policy / delegations
- no substantial risk to be taken
- stop losses to be put in place
- transactions to be related to AWA underlying exposure (ie should be selling $A buying yen)
Delegations from BOard to Management
- Put in place appropriate accounting & other record systems & internal controls
- HIre necessary staff; ensure compliance with board
- Advise auditors of wishes & intentions
AWA: What went wrong (time line)
AWA: What went wrong (time line)
- Nov 85: Koval in charge of FX
- Mar 87: AWA reports $30m profit
- Jul 87: Profit overstated / actually $30m loss
- Sep 87: Loss revised to %50m
- May 98: Koval charged with 49 counts fraud
- Dec 06: Extradition application
- May 10: guilty 4 counts, 1 year prison, fine $4.7m
AWA: Issues & Control weaknesses identified (10) (Trading positions)
AWA: Issues & Control weaknesses identified (10)
- No internal limits
- Deals not recorded in company accounting system
- Open positions as high as $850m
- Positions wrong way around
- Transactions executed on bulk basis & did not tie back to underlying exposure
- Historical rate rollovers used (ie, if deal to be settled today at 80c, but market is 72, he would roll forward, add the forward points, deal gets further out of money)
- Many positions had high MTM losses
- Koval confirmed own tickets
- Deal tickets missing for some transactions
- Banks had warned management of high losses being rolled over
AWA Issues & Internal COntrol Weaknesses (7) (managerial)
AWA Issues & Internal COntrol Weaknesses (7) (managerial)
- Mgmt failed to understand trading activities & positions
- Oversight not adequate
- Illegal trades concealed
- False info given to auditors on extent of positions / losses
- Internal controls poor
- Internal audit poor
- Weaknesses in internal controls not reported to Board
AWA
* Background AWA (Amalgamated Wireless Australasia)
FX Losses
- Imported electrical parts from Japan, 6 months between ordering parts and delivering of elec equip.
- Imports $100m / pa
- Hedging conducted up to 2 years in advance
- 1985, 23 year old Andy Koval in charge of FX hedging, company changed approach to profit centre
- Koval encouraged to trade & offered signif bonuses for profits
- Global limit $200m offered (ie 2 x the company’s total exposure)
Greenpeace - Background
Greenpeace - Background
- June 2014 announced EUR 3.8m loss due to FX deals
- “serious error of judgment in Internal Finance Unit acting beyond limits of authority and without taking proper procedures”
- GP raises donations in 40 countries, therefore natural FX exposure
- Had also experienced FX loss in 2008 and had also implemented procedures then to reduce risk.
HOW CAN THE TREASURER ADD VALUE
4 ways to add value following the crisis
- Create flexibility (the greater the uncertainty, the greater the need for flexibility). be nimble, act flexibly
- Deliver performance: fit & efficient companies capture opportunities
- Build capability: invest in talent
- Drive efficiency - become more competitive when economy emerges into growth phase again
HOW CAN THE TREASURER ADD VALUE
- ambidextrous leader (4)
- Need for flexibility while performing
- Be at heart of strategy formulation, but ensure liquidity & solvency
- Connect to emerging trends, but consider internal business needs & company strategy
- Financial governance and policy, but be nimble
HOW CAN THE TREASURER ADD VALUE
- insightful leader (2)
- Need insight to market, position of suppliers / partners / customers
- Financial risks (c/p & liquidity) and operational risks are topics of boardroom discussions
HOW CAN THE TREASURER ADD VALUE
- active leader / optimistic leader (2)
- Governance & intervention = daily activity
- processes need to be rigorous and tested
- grab opportunities, build capability, capture efficiency to deliver performance
HOW CAN THE TREASURER ADD VALUE
- Strong balance sheet is usually a company’s most valuable asset
HOW CAN THE TREASURER ADD VALUE
Financial Risk
- counterparty risk
- liquidity risk
- Interface with market gives clearer view of changing dynamics of financial risk
- Counterparty risk
- clear understanding of exposures across company, actively manage them
- Netting risks and exposures at central company level (understand risks and offsets) (can reduce risk and sustain business activity) - Liquidity risk
- Importance of cash (used to be considered inefficient, now is vital to maintain liquidity in market disruption)
- Market agnostic/ price evangelical (take funding opps when they arise, try not to be trapped in ST window)
- Funds are available globally. Flexibility in location and timing of funding.
HOW CAN THE TREASURER ADD VALUE
Operational Risk
1. Treasurer at heart of decision making process
2. Treasurer in position to see all of company’s CFs
Operational Risk
- Treasurer at heart of decision making process
- Stability of understanding, organisation & robust policies - Treasurer in position to see all of company’s CFs
- daily company health, areas that are declining, early indications of change etc
- Insights born of central cash oversight
