Managing the black ink and red flags of FX
By Wolfgang Koester

COMPETITIVE EDGE Managing the black ink and red flags of FX Quantifying foreign exchange risk is harder than you think. BY WOLFGANG KOESTER A S A BOARD MEMBER of a multi- national corporation, are you being told that the weak dol- lar has resulted in increased corporate revenues and profits? Today, the multitude of risks associ- ated with foreign exchange exposure has largely been masked by the long- term decline of the U.S. dollar relative to other major currencies. Rather than highlighting flaws in accounting and foreign exchange exposure management processes, U.S. multinationals have regarded these surprises as a "gift." In reality, no surprise is a good surprise when you are talking about accounting practices. While windfalls from the weak dollar have allowed many CFOs to cast a blind eye to irregularities that typically plague multi- currency accounting and foreign exchange risk man- agement, the trend can't con- tinue forever (just ask fellow board members or CFOs of Canadian or Asian multina- tionals). "Foreign exchange ex- posure management is the Wolfgang Koester is CEO of Rim-Tec Inc., a risk man- agement solutions firm. Its subsidiary, FiREapps^", provides foreign exchange ex- posure management technologies (www. toughest job in finance " says former Mi- crosoft CFO John Connors — and with good reason. Positing a confident, well- informed response to any of the follow- ing FX-related questions is no easy task for any corporate board member, or for any member of their organization: • Do I clearly understand the gross currency exposure of the company? • Do I understand the actions the com- pany is taking to reduce that exposure? • Do I understand the real risk that the company is managing towards? • What controls are in place to ensure that the process is well defined, and what benchmarks are in place to ensure that policies are effective? Getting to the truth behind these questions — a reliable, quantifiable for- eign exchange exposure value — is even harder. To truly understand your company's FX risk, you need to dig deep and push internal auditors, or your CFO's treasury and controller organizations, to answer more pointed questions about their practices and policies. 1. What is the level of con- fidence in the data provided by the controller and used by the treasury organization to manage foreign exchange ex- posure? Ask your FX manager how confident they are in the data they use to manage foreign exchange exposures. The like- ly answer: "Not very." Setting up multi-currency accounts for re-measurement in ERP systems is a very complex pro- cess. Despite the talents and best efforts of most finance organizations today, the limitations of these underlying accounting systems mean that most are — literally — set up to fail. 2. How does your treasury organization calculate foreign exchange exposure? The limited ability of ERP systems to address foreign exchange exposure has forced companies to rely on error- prone manual data entry practices and complex spreadsheets. Over 90 percent of these spreadsheet models have major flaws that can affect the bottom line by more than 5 percent. Today, automated foreign exchange exposure management tools are available to solve this part of the equation, but they still must rely on the integrity of data that flows "upstream" from the controller's organization. 3. How often does your finance organi- zation analyze foreign exchange exposure gain/loss, and how does it benchmark its results? For companies where international commerce represents 20 percent or more of total revenues, the answer should be "monthly." Board members should ex- amine the results of that analysis and how the controller verifies that the gain/ loss on currency exposures is as expect- ed, within the corporate risk tolerance. It is common for companies experiencing multi-currency accounting challenges to find a loose correlation between their hedging actions and expected results, with wide degrees of variance from month to month. Elevating foreign exchange exposure issues to the executive level is a critical first step in properly quantifying and managing foreign exchange risk. When you consider the potential impacts of foreign exchange to your company's fi- nancial future, it becomes clear that for- eign exchange exposure should be man- aged as an enterprise risk. As such, you and your company executives need to play a critical role in defining corporate risk tolerance and ensuring that policies, accounting practices, and policy over- sight are properly implemented. Corporate board members who turn today's gift of currency-related profits into an opportunity to correct underly- ing accounting issues will prosper in the long term. Those who continue to ignore their company's foreign exchange expo- sure management processes will have thrown a golden opportunity (and its associated profits) out the window. • The author can be contacted atwk@fireapps. com. 18 DIRECTORS a BOARDS

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