Page 234 - Accounting Best Practices

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11–22 Process Foreign Exchange Transactions over the Internet
These problems can be mitigated by implementing regional treasury manage-
ment centers, usually one per continent. By doing so, the treasurer can concen-
trate those treasury staff with the highest levels of expertise in the same locations,
while also achieving a much higher level of control over the underlying cash
pooling and foreign exchange transactions, not to mention better clerical tracking
of any resulting intercompany loans. By concentrating activities into this smaller
number of regional treasury centers, the treasurer can also more easily obtain on-
line access to the overall status of cash flows for the entire company.
The price of this increased level of efficiency is a considerable amount of
resistance by individual companies within the corporate conglomerate, since local
controllers and chief financial officers will be reluctant to hand over the adminis-
tration of their cash flows to a regional center that is outside of their control. Also,
such a high level of cash management calls for centralized information flows that
can only be provided by a companywide enterprise resource planning (ERP) sys-
tem, which is an extremely expensive system to purchase and install. Consequently,
the multinational optimization of treasury activities is so expensive that it is a rea-
sonable option only for the largest companies.
Cost: Installation time:

11–22 PROCESS FOREIGN EXCHANGE
TRANSACTIONS OVER THE INTERNET

Companies typically purchase or sell spot or forward contracts in foreign curren-
cies in order to hedge their transaction activities that involve other currencies.
However, this is a labor-intensive process involving calls to several banks to see
which ones quote the best price. In many cases, the accounting staff simply does
not have time to make a number of calls, and so chooses by default to deal with
the same bank every time, thereby sidestepping the chance to obtain lower prices
on its foreign exchange transactions. In addition, the incidence of errors in orders
placed by phone is high, due to communication or transcription problems.
These problems can be avoided through the use of an Internet-based foreign
exchange transaction site, such as www.currenex.com or www.gaincapital.com.
These sophisticated trading sites allow one to request prices from multiple banks
that provide executable live quotes using a reverse auction method. Under this
approach, banks offering quotes know the identity of the trader, but do not know
which other banks are bidding. This method results in the best price for a trader,
and in addition yields great efficiency in the trading process, since there is no need
to waste time making multiple phone calls to banks to obtain a range of quotes.
These on-line systems have other advantages, too. For example, one can
download information about a completed trade into the corporate treasury man-
agement system, as well as create audit reports detailing the results of each trans-
action. It is also possible to create reports that summarize trading patterns and