This lesson outlines the activities and controls required for a treasury department to carry out its role successfully, avoiding operational errors, financial penalties, or loss of reputation. Because treasury activities involve transactions with large sums of money, processes are often set up so that no one single person carries out an end-to-end transaction .

3.1 The Three Lines of Defence

A treasury department is commonly structured into three distinct areas to ensure robust internal controls :

• Front Office: Responsible for carrying out day-to-day analysis and transactions relating to the management of funding, risk, cash and liquidity . The front office identifies positions, obtains pre-dealing authorisation, executes deals, and inputs deals to the treasury management system .

• Middle Office: Only larger treasuries will have a middle office, often picking up some of the reporting and analysis type roles. The middle office monitors risk, ensures compliance with limits, and provides independent oversight .

• Back Office: Administers and supports the front office. Its main functions are to validate (confirm and verify), settle, and account for deals . The back office confirms trades with counterparties, settles deals by authorising payments, and accounts for transactions .

3.2 Segregation of Duties

Segregation of duties is a key management control designed to reduce the risk of error or fraud. It is sometimes referred to as the ‘duality’ or ‘four eyes’ principle . The objective is to involve at least two people in the life of a single deal, from initiation through transacting to settlement and reporting, in order to minimise the risk of fraud and undetected errors slipping through . Treasurers deal with large sums of money on a daily basis and the key operational risks to manage are those of fraud and error .