The heart of the matter – includes list of treasury management Web sites

The heart of the matter – includes list of treasury management Web sites – internal audit of treasury department

Linda Chesney

In many companies, the treasury department represents the sustaining force behind the organization. Internal audit reviews are essential for pumping up the value of this vital function.

As the operation controlling the flow of money through the organization, treasury management affects a wide range of corporate and employee initiatives. Effective treasury management can optimize cash flow and increase the level of funds available for corporate activity and growth. Conversely, poor treasury management can sap the lifeblood necessary for effective corporate performance. Internal audit reviews of treasury management are, therefore, crucial to organizational health.

While responsibilities vary from one organization to another, treasury personnel typically perform three primary functions: managing the organization’s cash, conducting loan and investment activities, and administering employee pension and other benefit plans. An examination of the key components of each of these three areas provides a basic plan for internal auditing’s checkup of the treasury function.


To some extent, organizations expand or fold as a result of how successfully they manage cash. Liquid assets must be readily available to pay debts or expand business. If no one monitors the availability of those liquid assets, which are primarily in cash, the organization risks losing everything. Effectively monitoring cash flow, taking advantage of technological innovation, and establishing positive banking relationships are critical factors in successful cash management.


To make informed decisions that are in the best interest of the organization, treasury personnel should understand how the activities of various corporate units impact the overall movement of funds. For example, treasury staff should closely coordinate with departments such as accounts payable and accounts receivable to forecast cash flow into and out of the organization. Such coordination is particularly important when it comes to electronic funds transfers and cash concentration.

Keeping an accurate check on cash flow levels requires current and timely bank reconciliations, including daily review of electronic funds transfers (EFTs). Immediate follow-up of EFTs is crucial since the Uniform Commercial Code Section 4a places the burden of proof for erroneous transfers on the customer, not the bank. If the bank accidentally, or even intentionally, transfers funds due the organization to another institution, the money could be unrecoverable if action is not taken quickly. Such problems can be compounded when the treasurer, in anticipation of receiving such funds, electronically transfers money to another organization. Because the anticipated funds were not received, the subsequent transfer to the other entity may result in a negative account balance and multiple bank charges. The company may have to go to court to recoup the EFT funds and other expenses incurred as a result of the erroneous transfer.

To minimize EFT risk, responsible personnel should perform wire transfers using repetitive or semi-repetitive templates and avoid nonrepetitive or open-ended templates. Also, legal staff should ensure wire transfer agreements are in writing and are not unfairly advantageous to the bank. Additional key controls over EFT include documentation of EFT procedures, separation of duties, physical controls over equipment and software, password controls, and periodic testing of the contingency plan.

Another important aspect of cash flow monitoring, particularly in organizations with dispersed operations, involves concentrating funds from outlying operations into one central bank account. This “concentration of cash” enables corporate disbursements for expenditures such as accounts payable remittances, payroll expenses, and debt reduction.

To concentrate funds, the treasurer uses a complex formula that is usually based on a percentage of reported funds from outlying areas. Accurate bank balances from the outlying areas must be communicated to the treasurer so he or she can determine how much and from which bank to transfer funds to the central fund.

If dispersed locations underreport balances, the company may incur opportunity costs as a result of not making maximum use of available funds. For example, if the treasurer transfers 90 percent of $10,000 rather than $100,000, the company will lose use of $81,000 ($90,000 minus $9,000) for at least one business day. Overreporting is also a problem and can result in negative bank balances, which, in turn, usually result in additional fees.

The following questions should be asked when reviewing cash concentration:

* What formula is used to concentrate funds? When and why is the formula adjusted?

* Does the formula consider any float associated with the deposited check volume and seasonal operating fluctuations?

* How are bank balances and fees monitored to ensure the formula is efficient and effective?

* Who is responsible for ensuring deposits are made in a timely manner? How is this monitored?

* Are there non-interest-bearing cash reserves in the organization? How is the amount minimized?

* Are the reserve amounts reasonable?

* What requirements are imposed on banks to collateralize their cash balances that exceed the federally insured amounts?

This last point is especially important, since collateralization is particularly difficult for fluctuating or zero balance accounts. Banks may not want to bother with collateralizing accounts that are intended to have no balance at all. However, if an account has the potential to exceed the federally insured amount, it is the treasurer’s responsibility to ensure the funds are adequately protected.


As with any business function, today’s cash managers must take advantage of proven technology if they want efficient and cost-effective operations. To stay abreast of new technologies, cash managers should network with peers inside and outside their organizations, read treasury literature, and maintain an open mind. Currently available – and increasingly indispensable – technology includes treasury workstations, which facilitate both efficient operations and cross-training of staff, and electronic commerce, which promotes timely funds movement through EFTs, direct deposit, and wire transfers.


Effective cash management is also affected by the quality of the organizations relationship with its bank. Positive bank relations can preclude or mitigate problems encountered with funds management and facilitate the acquisition and implementation of available technology. Cash managers need to develop positive rapport with key bank personnel while keeping their organizations’ best interests at heart. Professional courtesy can go a long way toward obtaining the best deals available.

When organizations and banks go to the negotiating table – naturally with their own interests in mind – large sums of money are often involved. One business deal may involve a multitude of issues. One concern may be more or less important than the other; and the two sides may not agree on a prioritization. When dealing with bank issues, it is important to realize that one negotiated negative, such as higher check fees, may be offset by positives, such as lower loan interest rates or innovations like electronic commerce.


A second key element of effective treasury management involves the organization’s borrowing and investing practices. Excessive borrowing negatively impacts a company’s financial leverage and may compromise its ability to repay debt. Ultra-conservative investing will handicap the organization’s profitability, while overly risky investments compromise assets and liquidity. The organization should establish a clear policy on how much risk it is willing to bear, and the treasurer should be held accountable for operating within those set limits.

The positive bank relations established to facilitate cash management may also foster favorable borrowing and investing terms, which are often negotiable. Cash managers can use their leverage with bank personnel to obtain below-market interest rates for borrowing and above-market rates for investing. Cash managers should call several banks to solicit bids, accepting the most advantageous one or combining several offers to achieve the desired terms.


Borrowing money is often necessary to expand or improve an organization, and it can be an advantageous activity when loan rates are less than investment return rates. In reviewing short-term borrowing practices, relevant questions may include:

* Are borrowing policies in writing? Do they adequately address corporate risk tolerance?

* What efforts are made to obtain the lowest cost loans?

* Is one short-term loan used to pay off another? If so, can lengthening loan maturities decrease rates?

Deciding the best time to borrow and the best time to abstain is not always easy. As the saying goes, “Practice makes perfect.” Treasurers need to find ways to balance the need to borrow money with the impact debt has on financial ratios used to assess the organization’s health.


Organizations can choose from a multitude of investment types. Treasury personnel should ensure that the funding and asset mix for the investments are adequate and appropriate; and they should monitor contract compliance, market performance, and fee payment to investment managers and custodians.

Before investing, treasury managers should consider economic variables like interest rates and investment length, as well as the organization’s risk tolerance level. Consequently, investment decisions should be made according to a clearly defined risk management strategy that is in line with organizational goals.

The fund trustees’ investment committee serves an invaluable role in investment decision-making. This group is primarily responsible for establishing corporate investment policy and selecting and monitoring investment managers. Its members also decide what investment types are acceptable and determine what type of investment manager would be best suited to the company. In selecting investment managers, treasury and committee personnel should screen candidates for conflicts of interest and consider the firm’s investment style, philosophy, and strategy.

Audits of the treasury, functions investment process should include reviews of:

* The minutes of trustee and investment committee meetings, detailing decisions that were made. Is treasury personnel carrying out the committee’s specified instructions?

* Custodian bank statements, which demonstrate movement between funds. Were the transfers directed and appropriately authorized?

* Investment manager reports, which are periodically sent to the organization. Is the investment manager performing according to benchmarks and contract terms? Are asset mixes in line with contract specifications?

Organizations face many challenges in making investment decisions. For example, a hot topic in recent years has been whether derivatives are worth the risk. The value of derivatives is based on an underlying asset or process. As such, derivatives can be useful tools for mitigating the risks associated with changing interest or currency exchange rates.

The failures associated with derivatives teach important lessons about managing investments. Organizations participating in derivatives trading must manage and supervise their use. In addition, contracts with investment managers should include restrictions in accordance with the organization’s risk policy. The individual responsible for monitoring derivative investments should report any material variances from the risk policy to the investment committee. Such safety measures are good practice for all investments.


Treasury staff employ the same process to manage the pension plan and employee benefits as they do to manage corporate loans and investments. However, auditors should be aware of a few additional concerns:

* Is the organization complying with applicable laws’ and regulations, such as those restricting contributions?

* Is the amount of contributions required per the actuary booked, transferred, and reported by external auditors?

* Does the corporation have a defined risk management strategy, and does the treasurer operate within the set parameters?

* Does the treasurer have clear and reasonable criteria for selecting, monitoring, and evaluating investment managers?

* Does the treasurer establish and monitor asset mix ratios?

* Does investment-contract language ensure compliance with corporate policy – including any policies on derivatives use – and compliance with contract terms?

* Does the treasurer regularly monitor funds movement to, within, and out of portfolios and plans?

* Does the treasurer carefully review the authorization, accuracy, and timeliness of fund transfers?

* Is there sufficient documentation for each fund transfer?

In addition, effective pension plan management requires treasury personnel to review actuarial reports to determine appropriate amounts to accrue in accordance with projections. Treasury management should also understand and determine compliance with legal restrictions on pension fund accounting and reporting.


Auditors should educate themselves on current treasury issues; identify the functions their treasury department performs; and focus on high-risk, high-payback areas. Testing compliance with accounting principles, laws, and regulations is important; but auditors should also look for opportunities to improve operational efficiency.

Many treasury managers administer functions involving billions of dollars every day, making the adage “For where your treasure is, there will be the heart of your business” seem especially relevant. Internal auditing’s involvement in the key areas of treasury management will give the organization a healthier “heart” through which its lifeblood of cash can be put to use most effectively and efficiently.

Treasury Management Web Sites













LINDA CHESNEY, CPA, CIA, is Senior Internal Auditor at Southern Methodist University in Dallas. You may reach her via e-mail at

COPYRIGHT 1999 Institute of Internal Auditors, Inc.

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