The real issue with FAS 133 is not documenting the hedge! When FAS 133 arose, everyone was scrambling to figure out how to show effectiveness and document it properly.
Tools arose to support the process and the documentation as well as provide tools for testing this post trade activity. But the
root cause of many restatements are not the lack of use of those tools,
nor the incorrect use of derivative contracts, but rather what exposure
is being hedged.
Treasury
departments today are still overwhelmed by receiving data from the
controller and adding forecasts from the all too often overly
optimistic sales. Most treasuries that we talk to have
little confidence in the data that they use to come up with their
exposure, but they have often no collaboration in this very difficult
process and do what they are supposed to do: Calculate the exposure
given the data they are supplied. If the result ends up
not matching the hedges, then all the documentation and post trade
testing in the world won't help with receiving effectiveness under FAS
133.
A May 17, 2007 article in CFO magazine states that 1 out of 10 public companies are restating given "flat out misses". Let me put that in numbers. Out of roughly 14,000 publicly traded companies 1,420 have had to restate. You think that is high? From
what Professor Fireapps has seen, another 5,000 will restate over the
next 24 months unless the C level gives them tools and allocates
funding to fix the problem before it rises to the top.
The
CFO needs to own the FX process and support a cross functional and silo
collaboration to really understand the company's foreign exchange
exposure and institutionalize a process with proper controls and
reporting mechanisms. When the operational issues are fixed, then the
economic and compliance risks will fall into place.
