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 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 Treasurer’s 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 themselves—system and banking reports would come into 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 reports—where 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 were 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 firm’s ledgers?

1. What is the issue discussed in the case?

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

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

Answer rating: 100% (QA)

1 The issue discussed in the case is a conflict between the CFO of a European technology company and the Treasury System In this case the Treasury The system is showing different numbers regarding the ... View the full answer