The the Company’s objectives. They are responsible

The new regulations also mean an increase in the percentage of their salary that the employee can contribute to the scheme, Tesco have agreed to increase their amount of contributions inline with what the employee contributes. This means that they will be paying more into the pension pot but it also means that individual’s pensions will become larger creating a larger liability when they come to draw the pension.Appendix 2 is an internal company brochure on pensions. With reference to Tesco and the pension pot deficit that many companies are seeing, last year they took �200million of their profit and paid it directly into the pension pot to help reduce their liability. Probably a suggestion from the treasury to do this as not only would it reduce their liability in future years, but it could also increase the rate of return they receive from investing it for their employees, a risk versus reward pay off.One of the main factors that have started the pensions liability issue is the under performance of the investment that the pension managers made, this is not as a result of poor choice of investment but more of market performance. If pensions fund managers were to invest the same money into more secure investments like bonds they would be guaranteed their funds and normally plus some interest back at the end of the bond term. However, whilst this would reduce the liability because the employee knows their pension is safe and guaranteed, even if it is a smaller amount, this is often way less than the return one could get from investing in the stocks and shares.

The overall responsibility for internal control, risk management and setting of policies within Tesco rests with the Board of Directors; they have this controlling function to attempt to safeguard the Company’s objectives. They are responsible for identifying, evaluating and managing financial and non-financial risk and justifying the actions they take in response. The Board of Directors set out a treasury policy which should contain sections on derivatives, what instruments can be used and for what purpose.Basically is lays out in clear written format which type of centre they should be operating on, i.e. cost or profit, maximum exposure limits, treasurer dealing and authority limits, bank limits, valuation methods and rules and procedures for documentation, dealing and confirming deals and settlements. In particular the bank limits rules will eliminate collusion between the treasurer and a member of the transaction bank which thus reduces the risk and attempts to eliminate fraud.

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It also reduces the exposure of having all Tesco’s financial transactions going through one particular bank and that bank entering into financial difficulties.Recent developments in accountancy standards, IAS 39 and FAS 133, have forced Treasurers to keep meticulous records of all derivatives transactions and this has made controlling the treasury function easier. This enables the auditor, and anyone who needs to investigate the company, to see all the small details relating to any derivative transactions. These were brought about with the scandals like Barings Bank and Nick Leeson, and the Enron and Arthur Anderson scandal, along with the Sarbanes-Oxley Act.Personnel can also play an important part in the issue of controlling the treasury function because they can use factors like recruitment and selection to select the ‘ideal’ candidate and eliminate those with more dubious references. They can also use training to ensure that their employees are continually up-dated with the latest regulations and allows them to know what is expected of them in their job role. Again in personnel should be a rule that could be in the treasurer’s contract that stipulates they must take at least ten days of their annual leave in a consecutive period.

This is very useful as it allows someone else to do their job for that two week period and find any errors or fraud that may be occurring.Another method of controlling the treasury function is to set limits for dealers’ authority, individual bank limits, transaction limits etc. This enables the company to reduce any possible risk that might arise through one person having no dealing limits and no individual bank limits. Tesco use this method so reduce their risk as stated by one of the companies Directors “In our fast moving business trading is tracked on a daily and weekly basis, financial performance is reviewed weekly and monthly and the Steering Wheel is reviewed quarterly” Tesco Review and Summary Financial Statements 2005.Tesco carry out post-investment appraisals to ensure that policies, procedures and performance are being met by all individuals. They also make their treasury function produce reports on their policies at the end of each financial year, which are then not only reviewed by the Board of Directors, but by the internal and external auditors. This report is then used to review and amend any treasury limits and delegations.

This is very useful because with the external auditors playing a part in setting limits and delegations for the treasury, this means tighter controls and less chance of human error or fraud occurring.If the treasury and senior management is to receive daily reports as to any breach of credit limits, dealing limits, a list of all the deals done that day and any changes to standing data, this will enable senior management to spot any errors or fraud that is happening and produce immediate responses to stop and/or reduce this risk. Finally, one of the other methods that could be used to reduce human error or fraud would be to outsource the treasury function. This would be a drastic measure and probably costly as it would be a service you need expertise in. However, it would mean that the company can carry on with their main objectives and not have to worry about treasury policies, derivative policies, FAS 133 and IAS 39; it would also mean that they would not need to invest in state of the art technology to process instant transactions and record derivative details.

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