Deeper Focus on Treasury

One of the most obvious consequences of the financial scandals that have occurred in the past 18 months, although not related to COVID, is that the treasury has become a particular focus of attention. As with financial crises, there is always a series of measures, regulations, and other changes to adjust and correct what has not worked. This is the effect of the pendulum swinging back due to classic over-correction.

All excesses must one day be corrected

Correcting mistakes in finance is a matter of course, a must. Often a posteriori, the rules ensure the sustainability of the entire system. The primary correction comes from new financial regulations, such as EMIR, MiFID, CRA, BEPS, AML , and many others, which without excesses would not have seen the light of day.

The very nature of financial regulation is to correct an excess by preventing it. So, of course, the correction is often strong(er), applicable to all, including the innocent, and comes as an over-reaction. But in addition, we must not neglect the controls by national and international supervisors, including ESMA, for we Europeans. The guardians of the temple are there to ensure compliance with the rules and prevent excesses. But the indirect effects are also applicable to other stakeholders. I am thinking of the stock exchanges, external auditors, credit rating agencies (CRAs) and regulated markets. No one has an interest in other cases arising at the risk of compromising the entire system.

Let us bet that BaFin, after all its mistakes in the Wirecard affair, will make it a point of honour with the FREP to avoid any further unpleasantness and that the level of requirements will go up two or three notches. As with insurance, it is the abuses and frauds, along with the increase in claims, that explain the increase in premiums. When some companies commit fraud, for various reasons, the excesses end up being paid for.

It must be said that these past few months, without any explanation and likely not due to the health crisis, we have seen an increase in resounding frauds, the most symptomatic of which was the German payment company already mentioned. But the list seems long: names include NMC, Greensill, , Archegos, , Carillion, , Luckin Coffee, Nikola, and Sealed Air.

As the popular saying reminds us, ‘once burned , twice shy’. So, the major consequence will be to focus particularly on what can be a problem: treasury is unfortunately (or maybe fortunately) in the firing line.

Treasury profession under the spotlight

Treasury is the willing victim. It may have been developed, strengthened, automated and perfected, but it is still the source of problems. Take the example of the late Wirecard, the worst post-war financial scandal in Europe, the quintessence of fraud, the Michelangelo of fraud, where billions of so-called cash in accounts were lost.

The year-end audit reviews will be intensified, and we should be prepared for a thousand and one questions from the external auditors. In the same vein, IPOs are going to be reviewed very carefully and questions will be asked to prevent the impossible. The bar will be raised one or more notches. The treasurer will pay a heavy price in terms of additional work. The ‘stock market police’ (i.e., supervisors) will be attentive during stock exchange listing and the treasury will be the most important of all the points of attention. Nothing will be spared, I fear. By playing with fire, some financial arsonists have imposed restrictive rules to all. The innocent always pays for the dishonest. At the end of the day, the idea is to prevent risks.

Hybrid working makes it harder to detect fraud

The work split between home and office does not help the controls by auditors, stock exchange authorities and other controllers. The risk has increased, but the attention will also be adjusted in compensation. A consequence of COVID will perhaps be an impact on the level of controls. Let us hope that the confinements will not have allowed other frauds, not yet detected, and that the future will not hold other major surprises.

Here again, we must adapt to the circumstances and sometimes it takes a little time, which the worst dishonest people take advantage of. This is a risk to be considered, or to be prevented by adapted tools and reinforced controls. We always end up paying our debts, but also those of others, I believe.

Moreover, during COVID, we have seen an increase in IT fraud and cyber-risk. The health crisis has infected society. Unsurprisingly, the most widespread and impactful frauds since March 2020 were directly connected to the pandemic. It led to massive shutdowns in many nations, governments responded with a wide range of stimulus measures, including loans, enhanced unemployment benefits, direct payments to citizens and more. Some fraudsters were quick to exploit these government stimulus plans, while others used COVID as a premise for a plethora of cyber fraud and consumer fraud schemes ranging from phishing attacks to sales of counterfeit personal protective equipment, testing kits and bogus cures.

Practical implications for treasurers

The backlash will manifest itself in various forms:

1. The annual review of account balances and bank audits will be intensified heavily. Nothing will be forgiven or tolerated.
2. During IPOs, the due diligence of supervisors and stock exchange authorities will be intensified on treasury, critical point of finance and maximum source of risks, for example with the review of policies from A to Z, automated payments, the source of cash-flow forecasts and their reliability, the review of internal controls to be documented and tested regularly, the audit of IT systems, the revaluation of portfolios, the application of IFRS rules, the production of reports, etc.
3. Ditto for simple annual external audits, given the increased pressure on audit firms.
4. The review by rating agencies, which will be more precise and demanding at the risk of being ‘downgraded’.
5. The banks themselves will also be more demanding in their prevention of client risk.

The world will never be the same again...

It seems clear that the excesses of a minority will put all treasurers under pressure to show their mettle. These intensified reviews will put more pressure on treasurers than is entirely necessary. The good news is that CFOs will (finally) pay more attention to the treasurers, who are the pillars of financial reviews. This should also make it easier to validate investments in IT systems to automate, centralise and standardise treasury operations.

The focus on treasurers will be heavy on consequences and additional work, but beneficial in terms of recognition and positioning. Treasury must be put in its rightful place and recognised as the most important function in finance. As the saying goes, ‘every cloud has a silver lining’.

By François Masquelier, Chairman, ATEL and Deputy Chair, EACT