Question

One of the main objectives of management is to control the financial operations of the business to ensure shareholders wealth is maximized. Imagine you are given the job of the Chief Financial Comptroller/ Financial Accountant of a financial institution of your choice:

• Based on the financial institution of your choice identify no less than three aspects of a framework you need to use to effectively control the financial operations of the financial institution. Develop clear and cogent arguments of each aspects of your framework you identified to ensure the controlling function of management is performed effectively. (Marks 4)
• Develop no less than three recommendations of how the financial institution of your choice could improve the framework you identified above to improve/ strengthen the controlling function of management to control the financial operations.  (Marks 4)

Answer 1

1.Financial risk management:

Effective management of financial risk (credit, foreign exchange, interest rate, and commodity) across the business by treasury and finance teams to reduce net interest costs, financing charges, foreign exchange effects and credit losses. Features of good practice:

• Full visibility and management of the currency effects on business operations including both direct transactional cash flows and indirect exposures

; • Widespread understanding throughout the business of the risks around foreign exchange, commodity and credit; • Centralised visibility and policy setting for commodity price risks;

• Effective treasury operations to manage financial risks, hedging exposures and providing efficient financing to the business; • Robust group risk management policies in place with measurable objectives;

• Clearly defined responsibilities for reporting exposures, managing risks and executing policy with aligned performance measures at treasury and business units;

• Centralised counterparty credit policies; • Strong control environment in central Treasury including segregation of duties, and • Straight-Through Processing of treasury transactions.

2.Cash management

Effective management of cash and banking arrangements within the business operations by finance teams to reduce net interest costs and financing charges. Particularly important in more highly leveraged businesses.

Features of good practice:

• A culture of “cash is king” in business finance operations;

• Treasury / finance management has visibility over cash both current and forecast, and is involved in decisions relating to cash throughout the business supply chain (discounts, terms etc.);

• Centralised banking relationships with a small number of designated transaction and relationship banks. Processes set up for monitoring bank performance, services etc;

• Use of in-house banking capabilities and payment factories to reduce bank fees; • Automated cross-border cash pooling in place;

• Finance takes advantage of supply chain and receivables financing where appropriate; • Minimal idle balances around the Group, and • Low levels of trapped cash.

3.Internal Audit:

The growing complexities of operating in a global environment, advances in technology, and faster pace of business combined with stricter accountability for accurate financial reporting and increased regulations has led companies to view risk management and internal controls as fundamental to their business operations. Many internal audit functions have therefore adopted wider risk and control responsibilities which include assessing the effectiveness of financial and operational controls as well as providing assurance on compliance with laws and regulations.

Features of good practice:

• Independent and objective function with a prominent stature across the organisation with clear reporting lines to the CEO and Audit Committee.

• Cultivates active two-way communication with the key stakeholders e.g. key management, auditees, external auditors, credit rating agencies.

• Clearly defined role that is aligned with the strategic objectives of the organisation and coordinated with other risk and controls functions within the organisation and goes beyond internal controls / financial controls to other areas such as integrity of reporting and operational efficiency.

• Provides assurance over the risk management process and evaluates the effectiveness of internal controls. Continually monitors changes in the risk exposures and amends the audit plan accordingly.

• Utilises technology to maximise audit effectiveness e.g. integrates IT audits with traditional audit programmes; deploys a number of technologies to assist with data extraction and analysis; uses audit software to automate issue tracking and reporting.

• Regular and clear reporting on systematic risk and control related trends arising across organization to key stakeholders. • Proactively leverage internal audit knowledge and expertise and make it readily available to senior and business unit managers e.g. provides advice on business process and best practice, utilises global knowledge management database to share experiences emerging issues across the IA function

. • Established quality assurance programme that includes internal reviews (e.g. peer group review, feedback questionnaires) supplemented periodically by an external review (e.g. 3-4 years).

4.Insurance

Insurance is an integral part of our risk management approach as it is an instrument to manage the financial consequences of risks. The choice to obtain external insurance cover depends on the cost efficiency of the instrument. The coverage of insurances is monitored and benchmarked regularly