Think businesses are struggling with volatile exchange rates? Spare a thought for the auditors. For many businesses, nirvana is a world where foreign exchange rates are stable thus removing the uncertainty of what funds you are going to receive or pay in foreign currency. Imagine it, no budget rates to agonise over. No sleepless nights stressing about where the next shock will come from to adversely move the exchange rate. No need to understand complex option products because everything could be covered on a spot basis and converted as and when the funds come in or need to be paid.
Unfortunately, this utopia doesn’t exist. In fact, it seems further away today than ever before as pressure mounts on auditors. Although global FX markets have always been volatile, pre-Brexit and pre-Covid UK importers and exporters, enjoyed one of the more stable currencies. So much so, that when the shocks of Brexit and Covid arrived these businesses were left exposed to the currency swings, and quickly had to upskill and understand the available options to mitigate the unwanted volatility.
Now the focus on exchange rates is an ever presence. How much has Sterling moved against the Euro or the US dollar? What product should I be using; spot, forwards or maybe options? Can I still achieve my budget rate? What about my cashflows? Have they changed with Covid? Many questions. Potentially not so many obvious answers.
Auditors learning new tricks
Not only are companies struggling with this environment, but auditors too are also having to learn new tricks. Historically, many of their clients haven’t had to worry about valuing financial instruments at year end, because they haven’t had any. If they did, they mostly relied on valuations provided by their banks or currency broker.
The world has now changed. Volatility is, of course, good news for banks and currency brokers selling foreign exchange. Moving exchange rates means companies are hedging more, and not just spot deals. Currency brokers are particularly good at selling more complex option products, especially when there is uncertainty with the direction of exchange rates.
Many auditors are now scrambling to firstly understand the hedging instruments their clients are entering into but secondly, and more importantly, how to value them. The auditor needs to be able to validate the information the client is providing to them.
Financial instruments as pressure mounts on auditors
This is the bad news. In our experience, financial instruments are not well understood by auditors and, mostly, they haven’t needed to understand them. Those days are now gone as the use of derivatives to hedge foreign exchange exposure becomes prolific. The good news though is whereas it used to be complex and costly to value financial instruments there are now tools available to easily verify these valuations. And it doesn’t need to be expensive.
Volatility in exchange rates might be the friend of the bank and currency broker but it doesn’t need to be the enemy of the company or the auditor. Now they can access tools that make their life easier and, for the auditor especially, they can complete an important aspect of the audit engagement that might have historically been ignored.
Hedgebook Audit is designed to value financial derivatives during audit. Fast, intuitive and most importantly, independent, Hedgebook Audit puts powerful valuation and reporting tools directly in the hands of audit teams, ensuring fair values are calculated quickly and recorded accurately.
Contact us here to find out more.