This lesson examines the risk management and internal control systems that ensure treasury operations are safe, sound, and compliant .

5.1 The Risk Management Framework

The treasury risk management framework follows a structured approach:

  1. Risk Identification: Identifying the sources and nature of the risks the organisation faces.

  2. Risk Measurement: Quantifying the potential impact of identified risks.

  3. Risk Management: Selecting and implementing appropriate strategies to mitigate the risks.

  4. Controlling and Reporting: Monitoring the effectiveness of risk management activities and reporting to stakeholders .

5.2 Types of Treasury Risks

The treasury function is exposed to multiple risks :

  • Credit Risk: The risk of loss from a counterparty failing to meet its obligations.

  • Interest Rate Risk: The risk of losses from adverse movements in interest rates.

  • Liquidity Risk: The risk that the organisation cannot meet its obligations when they fall due.

  • Exchange Rate Risk: The risk of losses from adverse movements in foreign exchange rates.

  • Operational Risk: The risk of loss from failed internal processes, people, or systems.

5.3 Internal Control Systems

Key internal controls include:

  • Segregation of Duties: No single individual should be able to execute, approve, and settle a transaction.

  • Authorisation Limits: Clear limits on the size and type of transactions that can be undertaken.

  • Independent Reconciliation: Regular reconciliation of bank accounts and transaction records.

  • Audit Trails: Comprehensive records of all transactions for review and audit.

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