If history is any guide, corporations can expect a serious increase in internal fraud, legal disputes and regulatory action ahead as a result of the current U.S. economic crisis. Now more than ever, CFOs and compliance officers must take careful measures to strictly follow financial risk management standards and ensure new employees have spanking clean records. So says Peter Turecek, senior managing director of New York City-based fraud and litigation consultant Kroll Inc, which has released a new report citing sharp increases in arbitration claims by investors seeking to recoup losses after Black Monday, Oct. 19, 1987, and following the market downturns of 1991 and 1992.
Demand for litigation support and asset tracing work for companies with failed investments has increased, and so has white-collar crime enforcement, says Turecek. The Securities and Exchange Commission (SEC) pursued 115 enforcement actions related to securities offering frauds compared with 68 in 2007 and 61 in 2006. An FBI official recently told Congress the agency expects fraud investigations at major corporations to jump from 38 cases to hundreds as the crisis deepens.
Internal fraud is more prevalent than many expect, Turecek says. "Often we'll get a call from the CFO or compliance person saying our bookkeeper was terminated and something looks off," he says. More of these cases– perpetrated by those who are usually first in and last out, and don't go on vacations–are discovered during massive layoffs.
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Treasury fraud increases in tough times, too, says Jeff Wallace, a partner at Greenwich Treasury Consultants, though these cases aren't generally acknowledged. "In the treasury department, someone may somehow direct the money to his own pocket, or traders doing foreign FX deals with a bank at off-market rates might get a kickback from the bank's FX traders," says Wallace, who focuses on financial risk management consulting. Company-wide layoffs that touch typically short-staffed treasury departments can also weaken internal treasury controls over operations.
To mitigate this risk, Wallace suggests creating employee hotlines for reporting fraud or instituting the "classic technique" of bonding treasury officials, which protects a company from an individual conducting fraud and insures against employee theft. However, he notes, "if the CFO or treasurer wants to move money, it is going to get moved regardless."
Pensions: Companies Shifting Allocations
The slumping stock market has many companies re-evaluating their asset allocation strategies to shore up their pension plans. Nearly two-thirds have shifted the mix of plan assets, with nearly half moving away from equities, according to a report from SEI.
Plan sponsors are turning to bonds as well as alternative investments like hedge funds, says Jon Waite, SEI's Institutional Group's chief actuary. "There are more asset classes for sponsors to invest in. They're starting to understand those classes and include alternative asset classes in their portfolios"
Three-quarters of U.S. companies surveyed said they have moved out of equities and into bonds or alternatives, with 12% considering or implementing interest-rate swaps and 6%, inflation swaps. Even if the market rebounds, Waite says plan sponsors won't return to the one-size-fits-all asset mix of 70% domestic stocks and 30% bonds. Instead, plans will become "much more customized for each company's situation," he says.
Taxes: Stimulus Corporate Breaks
While many Americans are pinning hopes on the Economic Recovery Act of 2009 (the former "Stimulus Act" signed by the president on Feb. 17 in Colorado), the pickings are slim for struggling large corporations, says Hank Gutman, director of KPMG's federal tax legislative and regulatory services group.
Companies with earnings of less than $15 million will be able to carry current losses back five years, but Gutman expresses "disappointment" that a provision allowing all companies to do the same was dropped.
Even so, Gutman says the act contains some provisions to which large companies should pay attention. One measure lets companies depreciate capital investments at 50% for the first year. The problem, he notes, is that to qualify, a firm must be prepared to make an investment this year, must have the funds on hand to invest, and must have an income from which to make the deductions.
"These days, how many companies can meet all those requirements?" he asks. Finally, Gutman says another stimulus act provision offers energy companies a "substantial subsidy" in the form of tax credits for certain renewable energy investments.
Survey: Overstretched, Understaffed
A new study of the treasury departments of 35 large U.S. corporations finds that operations are stretched thin at a critical time, setting the stage for innovation and new product offerings from banks and treasury service vendors.
The unprecedented global financial crisis has turned treasury departments, once supporting players in the corporate hierarchy, into central actors in strategic planning and operations. Yet, according to the survey and report from Boston-based financial services research consultancy Aite Group, most corporate treasuries remain thinly staffed and overstretched.
Though the majority of U.S. corporates maintain more than 20 banking relationships, with one in five having more than 50 banking relationships, nearly half of the treasury departments surveyed had only seven or fewer people on staff. Only a third had more than 10 people.
"In the current economic environment, senior management is not likely to want to expand treasury staffing," says Aite study author analyst Judson Murchie. "Yet treasury's importance to the company is growing exponentially." This, he concludes, opens the door for banks to offer services, such as multi-bank reporting and bank-linked treasury workstations that would simplify routine treasury operations and free existing staff for more strategic activities.
There is a lot of room for improvement when it comes to treasury departments and their banks. Murchie says that while it may be understandable in the short term that companies worried about access to credit would want to maintain a large number of banking relationships, longer term, this can be inefficient and costly. The study finds that two-thirds of treasuries surveyed are spending more than $900,000 a year on bank fees, with 15% of the treasuries spending more than $12 million annually. Reducing the number of banking relationships, Murchie says, would make managing those relationships simpler, while reducing costs
The Aite study finds that many corporate treasurers are anticipating a move toward expanded use of electronic banking, with more than half of the treasurers surveyed saying they expect to see electronic payments expanded, and more than a a third saying they expect to make greater use of online banking services. A third also foresees a move to real-time balance reporting.
Murchie urges corporate treasurers not to wait for banks to offer them better or more extensive services, saying, "Treasury is evolving, and treasurers need to pressure their bank providers to evolve with them."
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