What Is Treasury Management?

Treasuries are the custodians of cash in a business, they

control this through 1) the amount held and 2) its liquidity.
The two levers of this are through the sheer size of the balance
sheet and the relative stickiness (liquidity) of assets and
liabilities held. Their management of this enables the basic
fundamentals of an organization: allowing teams to operate
and conduct activities by ensuring that there is cash on hand,
be it in the petty cash box or an opportunistic M&A raid.

In addition to enabling business-as-usual (BAU) activities,

treasuries partake in the macro-financial direction of a
company and oversee the execution of company-wide
strategies. For example, if the board decides to buy a business
or expand into new territories, Treasury will help to determine
the fit of the company from a balance sheet perspective and
find the cash (or issue stock) to purchase it ultimately.

By actively managing liquidity, treasuries ensure that

businesses stay alive, save money, and can respond quickly to
change.

Areas Covered by a Treasury

The basics of treasury management can be distilled into five
critical responsibilities.
ASSET LIABILITY MANAGEMENT (ALM)
ALM concerns the blend of assets and liabilities that sit on a
balance sheet and the subsequent mismatches between tenor,
currency, and interest rate (cost). Companies hold a range of
instruments on balance sheets, which behave with varying
characteristics. How they interact with each other and
represent the overall position could be metaphorically
described as being similar to the concept of Beta in portfolio
management.

ALM is most relevant for treasury management in banks

because their fundamental purpose is based upon the gearing
dynamic of borrowing and lending money. The graphic below
demonstrates generic balance sheet compositions for
corporates and banks and, as you can see, banks are generally
more leveraged through their increased use of liabilities
relative to equity capital.

Examples of items that constitute a balance sheet

Because it’s generally cheaper to borrow short-term liabilities
and invest in long-term assets, there is a natural tendency for
companies to stretch this funding mismatch to a limit. This
can all come crashing down during market flashpoints when
credit dries up and liabilities become harder to roll. An ALM
function monitors this liquidity horizon, prescribing limit
buffers and advising on any changes that can be observed in
advance.
Optimizing assets and liabilities in a proactive manner
increases profitability and business opportunities. This is not
just in the domain of banks; here are some examples of
companies using treasury management to assist business:

Direct to consumer vendors (e.g., supermarkets, eCommerce)

that have negative cash conversion cycles and offer consumer
credit services.
Share repurchase schemes enacted at opportunistic periods.
Factoring receivables to gain a competitive advantage by
winning new customers with attractive payment terms.
FUNDS TRANSFER PRICING (FTP)
Treasuries are mini-banks for their own companies (or banks)
and must price up the liabilities on hand for use in everyday
asset-generating activities. The FTP reflects the cost of
liabilities and is charged to a business unit when it wishes to
originate a new asset. Unlike the widely-known cost of debt
figure, which can be represented as a standalone loan or
benchmark bond yield, the FTP represents a fully-loaded cost.
By that, I mean that it is the overall weighted average cost of
all liabilities plus the internally shared costs of the business
minus treasury profit.

How do funds transfer pricing, or FTP, curves work?

Funds-transfer pricing is the process of costing a balance
sheet and then setting the requisite prices for asset creators or
liability gatherers to pay or earn for their respective tasks.
Without this, there would be a free-for-all, with profitability
and balance sheet structure left to its own devices.

TRADING AND HEDGING

The responsibilities of hedging company-wide interest rate
and FX risk sits with the treasury function, who will use
derivatives to balance the books. Depending on the
sophistication of the business, these risk management
strategies can range up from FX spot trades to long-term
interest rate swaps.

For example, I worked at a bank with predominantly GBP-

based liabilities, but with assets written in EUR. A sudden
change in either currency would distort the risk, in terms of
the proportions of the balance sheet and the relative
profitability of deals. To counteract this, we would trade
cross-currency swap derivatives to “crystalize” the asset
positions into GBP to retain parity.

PORTFOLIO MANAGEMENT
Treasuries are financial asset managers for their company,
investing spare cash that sits on the balance sheet to generate
a return (and thus, lower FTP). This is often a very creative
exercise that involves the search for yield, liquidity, and
capital efficiency. Braeburn Capital, for example, is the asset
management arm of Apple, a company that regularly has
reserve treasury funds of over $200 billion!
INTEGRATION/PROJECTS
Overseeing all parts of the business and being agnostic
towards any specific business line will usually put the treasury
as a useful tool for integrating acquisitions into the company,
or for spearheading IT transformation initiatives.
What is an external audit?
Tax authorities are permitted to investigate the accounts of
tax-paying individuals and companies, even if they have
submitted tax returns and annual accounts. This investigation
consists of registered visits to your company’s office or home.
Traditionally, this type of verification visit is referred to as
an external audit. However, since tax authorities generally
tend to pursue investigations against businesses more
frequently than against individuals, the term audit is much
more common, even if this term might give a false impression
that only companies and businesses can be audited.
Note
An external audit or operational inspection may also take
place entirely through electronic form. In this case, the auditor
from the relevant tax authorities only requires access to the
account’s digital data.
Whether it’s the federal, state or local tax authorities who are
investigating you, the tax authorities are always required to
provide ample notification to the persons/companies
concerned either in writing or by telephone (often both) about
the planned inspection and the date the investigation is due to
commence. They will inform you what types of tax
documents, tax allowances or premiums will be reviewed or
for how long the audit period (typically three years) is
scheduled. The tax office can also inform you which tax
auditor will be responsible for the audit. However, this is not
a mandatory disclosure.
Definition
The external audit (also known as an external audit in the field
of tax law) is an in-depth inspection and review of tax-
relevant matters. The tax authorities are responsible for
initiating and carrying out an audit and are also responsible
for assessing the income taxes of the persons or companies
under investigation. The aim of an external audit is to ensure
taxation uniformity.
Why and when will an audit by the tax authorities take place?
All American citizens and individuals who work and earn
money in the USA are required to pay taxes. In order to
comply with this obligation, all tax-relevant matters are
subject to the control of tax authorities at the federal level
(IRS), as well as state and local level, depending on where
you live. The necessary materials for this control and
investigation are handed over to the relevant tax authorities in
the form of an annual (or quarterly) tax return. These can
be complicated to file leading to avoidable mistakes, and an
unclear tax status for many. The external audit can help
clarify the tax status and liabilities of a taxpayer.
As previously mentioned, anyone can be investigated,
whether it’s a private company, individual trader or
freelancer. However, most investigations are audits on large
companies, and the rule of thumb is that the larger a
company, the more likely they are to be audited. In
addition, there are several factors that increase the likelihood
and frequency of an audit:
 Tax return seems implausible
 Tax return is filed too late
 Taxes are paid late on a regular basis
 Profits fluctuate wildly from previous year
 Turnover or profits are unusual for the size of the
company/industry
 Labor costs are disproportionately low
 A previous audit resulted in significant tax repayments
An overview of the audit procedure: process, duration, etc.
Audits can be divided into roughly three stages:
Investigation registration and examination order
First and foremost, the tax office will register their audit.
They will inform the party being investigated of the upcoming
investigation and where it will take place. In general, audits
take place either on the premises of the party concerned, or
their tax adviser. However, if you cannot provide the auditor
with a place of employment, for example, then the audit may
take place at the tax office. Parties under investigation will
receive an appointment for the start of the investigation,
however, it can be postponed through consultation with the
tax office if your accountant or tax adviser is on vacation at
that time, or if you are busy processing a large order, for
example.
At least two weeks before the audit begins, the tax authorities
will send you the investigation order document, which
defines, among other things, the relevant period being covered
by the audit. In some cases, however, the examination period
may be more than three years – for example, in case the party
being investigated is under suspicion of a criminal offense or
administrative offense. The order also tells you which taxes
the auditor wants to consult during their visit, so that you can
gather and arrange relevant documents in advance.
Executing the audit investigation
The second phase is the actual execution of the audit. This
takes place at the agreed-upon location during normal
business hours. You are obliged to grant the auditor access to
your premises or property. Typically, the auditor visits your
company first before the actual audit begins, regardless of
whether it takes place at your home/office, your tax adviser’s
premises or at the tax office.
You must provide the auditor with one or more contact
person(s) for the entire period of the audit. The auditor can
contact them if they have any questions or want to consult
certain books, business documents or other financial
documents from the accounting department. The duration of
this operational review can vary wildly depending on the size
of the company and the scope of the documents required:
from one to two working days up to several weeks,
anything is possible.
It is imperative that you comply with requests for
participation as soon as possible. If the auditor finds evidence
of a criminal offense during their audit, they will immediately
report it to the relevant authorities.
Final meeting
The final phase of the audit is the final meeting. The head of
the tax authorities often participates in this interview,
alongside the auditor. In order to prepare for this meeting as
thoroughly as possible, you should ask the auditor for
a written notification in which they list their findings,
including relevant references as well as the number of tax
repayments. Together with your tax adviser, who is also
permitted to attend this meeting, you can review the agenda
for the meeting in advance and work out arguments against
any potentially unfavorable findings.
Note
The final meeting does not have to take place if the
investigation does not result in any significant findings, or if
the auditor or tax authorities fail to schedule the meeting.

What is the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act (or SOX Act) is a U.S. federal law that aims to
protect investors by making corporate disclosures more reliable and
accurate. The Act was spurred by major accounting scandals, such as
Enron and WorldCom (today called MCI Inc.), that tricked investors and
inflated stock prices. Spearheaded by Senator Paul Sarbanes and
Representative Michael Oxley, the Act was signed into law by President
George W. Bush on July 30, 2002.
Major Provisions

The SOX Act consists of eleven elements (or sections). The following are
the most important sections of the Act:

Section 302

Financial reports and statements must certify that:

 The documents have been reviewed by signing officers and

passed internal controls within the last 90 days.
  The documents are free of untrue statements or misleading
omissions.
 The documents truthfully represent the company’s financial
health and position.
 The documents must be accompanied by a list of all deficiencies
or changes in internal controls and information on any fraud
involving company employees.

Section 401

Financial statements are required to be accurate. Financial statements

should also represent any off-balance liabilities, transactions, or
obligations.

Section 404

Companies must publish a detailed statement in their annual reports

explaining the structure of internal controls used. The information must
also be made available regarding the procedures used for financial
reporting. The statement should also assess the effectiveness of the
internal controls and reporting procedures.

The accounting firm auditing the statements must also assess the
internal controls and reporting procedures as part of the audit process.

Section 409

Companies are required to urgently disclose drastic changes in their

financial position or operations, including acquisitions, divestments,
and major personnel departures. The changes are to be presented in
clear, unambiguous terms.

Section 802

Section 802 outlines the following penalties:

 Any company official found guilty of concealing, destroying, or

altering documents, with the intent to disrupt an investigation,
could face up to 20 years in prison and applicable fines.
  Any accountant who knowingly aids company officials in
destroying, altering, or falsifying financial statements could face
up to 10 years in prison.

Benefits to Investors

After the implementation of the Sarbanes-Oxley act, financial crime and

accounting fraud became much less widespread than before.
Organizations were deterred from attempting to overstate key figures
such as revenues and net income. The cost of getting caught by the
United States Securities and Exchange Commission (SEC) had exceeded
the potential benefit that could result from taking liberties with the way
that financial documents were presented.
Thus, investors benefited from access to more complete and reliable
information and were able to base their investment analyses on more
representative numbers.

Costs to Businesses

While the Sarbanes-Oxley act benefited investors, compliance costs

rose for small businesses. According to a 2006 SEC report, smaller
businesses with a market cap of less than $100 million faced
compliance costs averaging 2.55% of revenues, whereas larger
businesses only paid an average of 0.06% of revenue. The increased
cost burden was mostly carried by newer companies that had recently
gone public. A more granular view of the compliance costs experienced
by businesses can be found in the chart below:
Repercussions

Due to the additional cash and time costs of complying with the
Sarbanes-Oxley Act, many companies tend to put off going public until
much later. This leads to a rise in debt financing and venture capital
investments for smaller companies who cannot afford to comply with
the act. The act faced criticism for stifling the U.S. economy, as the
Hong Kong Stock Exchange surpassed the New York Stock Exchange as
the world’s leading trading platform for three consecutive years.