Treasury management: Issues and opportunities for internal audit

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Treasury management in India has become an increasingly specialized function due to regulatory relaxation, coupled with the increasing scale of treasury operations.

In today’s context, treasuries are expected to perform two critical functions:

  • Financial risk management
  • Financial supply chain management

Financial risk management, which includes currency risk management, commodity price risk management and interest rate risk management, is necessary to keep business margins insulated from market volatility.

On the other hand, the financial supply chain is focused on:

  • Reducing the cost of borrowings
  • Redeploying business cash flows efficiently
  • Optimizing the risk-return profile of investible surplus

On the other hand, the financial supply chain is focused on:

An optimal treasury function, therefore, can significantly reduce financial risks and financial costs of a business enterprise.

The role of the internal audit function has evolved from being a value preserver to a value enhancer in the business context. The landscape of treasury operations and expectations from an internal audit function is changing. Hence, the manner in which treasury processes and operations are evaluated requires a deep understanding of the treasury function.

The focus of treasury internal audit has traditionally been pivoted on the evaluation of operational controls and financial reporting risks. However, the evolution of the treasury function has brought other aspects of treasury management to the forefront. These include:

  • Impact of implementation of hedge accounting under AS-30 and IFRS on the accounting reflection of treasury cash flows
  • Risk-return profile as well as the tax-efficiency of investment instruments
  • Minimizing float across the business value chain and reducing the cost of borrowings
  • Viability and risk of using different hedging instruments
  • Managing regulatory compliance-related aspects, particularly related to foreign exchange  risk management

For more on treasury management issues and how an effective audit can add value (pdf, 12.3mb) to your business, download this report.