Some top-line advice about derivative risk management:
Good Governance
The Sarbanes Oxley Act of 2002 doesn’t say anything about not using spreadsheets for financial reporting. But, why take the unnecessary risk of using a spreadsheet for financial reporting if the manual workflow can be replaced by a solution? Most treasury departments use spreadsheets for hedging and risk management and compliance with hedge accounting under FAS 133 or IAS 39, which typically draws the attention of the audit firms and SEC.
Are you on an Audit Committee?
If you are fortunate enough to sit on an audit committee, then you should already be apprised of material weaknesses or significant deficiencies. You should also be informed of when the company is soliciting accounting advice from a non-audit firm. Unfortunately, by the time you find this out it’s usually too late!
Form a Market Risk Committee
If your company already hasn’t done so, best practices dictate forming a market risk committee at the board level. Most risk discussions at the board level are around enterprise risk like operational, legal, insurance, or reputation. However, there isn’t enough discussion around financial risk. After the wild ride of 2008, it would be your fiduciary responsibility to understand how your company measures its exposure to foreign exchange, interest rates, energy, commodities, and credit risk and how its protected against the worst case scenarios.
You can get the answers you need to the tough questions you need to ask. Your first question: Do you use Reval? Go ahead, ask. Reval can help board members who are not happy with the answers they get to these types of questions:
- Ask your CFOs if they hedge, and if they use spreadsheets to manage their risk and reporting.
- Ask the Controllers what the risk is of an error on any of these spreadsheets.
- How efficient is the month end process for reporting?
- Have you engaged accounting advice on derivative reporting?
- Is there any risk of restatement?
- What would happen if the USD fell back to 2007 levels? If oil rose back to $147?
As a board member, you should ask the right questions, and get the right answers. Especially when your reputation depends on it.
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