Monitoring key to foreign exchange dealing

Press, 18 December 1985, Page 38

Monitoring key to foreign exchange dealing

By

SIMON LOUISSON,

in

Wellington

Beware the foreign-ex-change dealer who thinks he is doing right by his company, is the message a visiting Australian accounting expert is bringing to New Zealand banks and corporations. Mr Peter Marriott, a manager with the accounting firm, Peat, Marwick, Mitchell and Company, in Melbourne, is in New Zealand to present seminars on foreign exchange accounting and control.

He says that in most cases losses did not occur through any malice or criminal actions on the part of the dealers. “In all the cases I’ve known or read about in Australia the dealer believes he has been doing the right thing. It’s not a case of the dealers trying to take the company down. “Some press reports suggest the Broadbank case may have been more sinister with insider trading and things like that, but normal experience is that it’s just bad judgement,” Mr Marriott says. Dealers are a unique breed of people who like to gamble and take positions. They have a very high price and are very slow to admit they have made a mistake. They honestly believe they can get back what they lost tomorrow, but unfortunately the problem snowballs, he says. Corporations are exposed to the same sorts of risks as banks.

“They effectively have positions in the market place; people are responsible for foreign exchange trading on their behalf. They face the same risk of their trader making unauthorised transactions.”

There are basically two risks faced — firstly, that the trader takes a wrong position, for which there is nothing that can really be done, and secondly where the trader goes beyond the agreed limits. It is in the second area where Mr Marriott sees the most scope for improvement in limiting risks. "If there is no monitoring procedure then you greatly reduce the chances of an exceeded limit being detected.”

Foreign exchange dealing is unique in that there may be no cashflow on transactions for up to 12 months. Such cases as the celebrated Dai-Ichi Kangvo

bank case, where unauthorised dealings of 20 billion yen ($43 million), took three years to detect The key to control is to segment the duties. In the Dai-Ichi case the same person who made the deals carried out the confirmations, Mr Marriott says. He advocates the establishment of separate dealing, support, and accounting units.

He also believes that both the currency limits and the profits should be monitored on a day-by-day basis.

“This gives upper management the opportunity to come in and make a decision if necessary.” The other thing that management has to overcome is ignorance, he says. “Unless people understand the market they can’t control it. It’s a new world. Unless you understand you can’t help to control and get the right answers.” The danger of foreign exchange is that it is the largest area of short-term risk and even if the company’s core business is flourishing, the company’s profits can be wrecked by bad foreign exchange management.

Even a 1 per cent movement on a S2OM position can result in a loss of $200,000, he says. On the matter of accounting for foreign exchange losses and gains, Mr Marriott is a strong advocate of companies accounting the profit and loss in the year which they occur. This is the way the Australian, United States, United Kingdom, and international standards recommend and it is the way New Zealand companies should do it.

“If they do not do this they may be painting too rosy a picture and not recognising the risks involved.”

He advocates New Zealand establish an accounting standard on foreign exchange movement so there is some authoritative guidance on the issue.