Four Requests in the Last Week of June
It is 27 June, two business days before the half-year end. A listed leasing company's CFO asks treasury to execute a three-day sale-and-repurchase of PKR 900 million of government securities with a counterparty bank, with a simultaneous agreement to repurchase them on 2 July, 'to show a cleaner liquidity profile to the market'. Separately, the CFO wants a PKR 1.5 billion placement with a bank on whose board one of the company's directors sits, excluded from the single-counterparty limit report on the grounds that 'it is a group relationship'; the placement pays 200bp above the market rate. The same director chairs the Board Audit Committee. Treasury also finds that PKR 700 million placed in a nine-month term deposit with a 30-day put option has been presented in the draft accounts as 'cash and cash equivalents', and that the rate on a deposit with another bank was reset upward the day after a competing bank's quote arrived, although the deal ticket is dated before that quote.
1. For each of the four matters, state the correct accounting treatment or factual position, the ethical issue, and what the treasurer should do.
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1. The three-day repo. A sale with a simultaneous agreement to repurchase the same securities at a fixed price transfers no substantial risk or reward. Under IFRS 9 the securities stay on the balance sheet and the PKR 900m received is a secured borrowing, shown in financing activities, not operating cash flow. Economically nothing changes at 30 June except the label on part of the balance sheet. Done to 'show a cleaner liquidity profile', it is window dressing: it does not improve liquidity, it disguises it, and if the substance is not disclosed it deceives users. Treasurer's action: put the accounting analysis in writing and decline to describe the transaction as a liquidity improvement.
2. The related-party placement. Above-market pricing (200bp) combined with a common director is precisely what IAS 24 disclosure exists to catch. Excluding it from limit reporting on 'group relationship' grounds inverts the logic: related-party exposure is more concentrated and less negotiable at arm's length, not less. Action: include it in limits, require disinterested-director approval, disclose the terms.
3. The nine-month TDR with a put shown as cash equivalents. IAS 7 requires short-term, highly liquid investments with original maturity of three months or less. A put option affects liquidity but does not change original maturity. Action: reclassify as a short-term investment and correct the draft before it leaves treasury.
4. The re-priced deposit with a pre-dated ticket. This is the most serious item. If the ticket was created or altered after the competing quote arrived, the record is false - not a documentation lapse. Action: do not amend or re-ticket it. Preserve the original, note the chronology in a file note, and report it. A treasury that fixes a false record becomes part of the misstatement.
2. How should the treasurer escalate, and what documentation must exist? Address the Audit Committee conflict directly.
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Escalate on paper, in parallel, to people who are not conflicted. Verbal escalation is deniable.
- Written memo to the CFO setting out all four matters with the accounting and ethical basis. This is also the treasurer's protection: a contemporaneous record of having raised it.
- Because the CFO is the source of the pressure, copy the CEO and take the matters to the Board Audit Committee - but that committee is chaired by the director whose bank holds the placement. That conflict must be declared in the meeting and the director recused. If the committee cannot convene without him, refer the matter to the Board Risk Committee or the disinterested directors, and say explicitly why.
- External auditors: hand over the repo documentation, the classification memo and the related-party terms proactively. Withholding them and waiting to be asked turns a disclosure argument into a concealment argument.
- Whistleblowing channel if the internal route is blocked. Professional codes - integrity, objectivity, confidentiality, professional competence - require it, and the treasurer's duty runs to the financial statements and the shareholders, not to the CFO's half-year presentation.
Documentation that must exist: a contemporaneous file note of each request and each response; the original transaction tickets untouched; the delegation-of-authority matrix; limit reports exactly as first produced to management; and the classification analysis for the TDR. Backdating or re-ticketing converts a governance failure into a fraud, and the treasurer who participates loses the protection the record would otherwise give.