Hope is not a strategy for managing FX risk.

For many CFOs of multinational corporations, there is a very disconcerting, yet all too common, ritual they must endure every quarter. They must pull back the cover sheet on their financial statements and determine if they got burned by foreign exchange.

Even after spending millions of dollars on multicurrency general ledger systems, foreign exchange remains a murky and confusing concept. In the vast majority of cases, CFOs do not fully understand or appreciate the challenges of foreign exchange. As such, they have continued to ask their already lean treasury organizations to do the best they can with spreadsheets, emails and dogged determination.

In reality, this is not a strategy, this is hope. A company not actively and holistically managing its foreign exchange exposures is hoping it won't get an unpleasant surprise in its next earnings report.

The Challenges

If you consider the different skills and knowledge required to effectively manage foreign exchange, you begin to appreciate the challenges involved. Understanding currency markets, swaps, forwards, options, interest rate differentials and how to work effectively with financial institutions is actually just the beginning.

You also need a working knowledge of the treasury and controller functions, as well as the nightmarish subject of inter-company payments. You are also expected to impact the design of and adherence to risk management policies. And, since you are unable to single-handedly collect all of the exposure data from around the company, you must be a virtuoso coordinator and diplomat.

Then, there are the spreadsheets. FX exposure spreadsheets are the most complex and error-prone spreadsheets in accounting and finance. They must be continuously updated with rates for each currency exposure, and they must capture exposure data for each entity. Finally, they must accurately calculate exposures on a net basis to determine what, if anything, should be hedged or un-hedged.

In working with clients, FireApps has seen enumerable variations of spreadsheets for calculating exposures. They all share complexity and errors. When auditing client spreadsheets, material errors are often found that can have significant compliance and economic impacts.

Simply transposing which currency is long and which is short can result in a multimillion-dollar miscalculation of exposure. Unfortunately, these types of errors can go undetected for years.

The GL systems and data used to define exposures are major contributing factors to the hidden risks within foreign exchange operations. It is not unusual for a company to have its GL system improperly configured to reflect the company's true balance sheet exposure.

Even when a company uses a single GL system, it is quite common to find inconsistent treatment of accounts across subsidiaries. In multi-ERP (enterprise resource planning) system situations, the risk and complexity rise exponentially. In fact, this is such a complex area that most auditors are ill-equipped to audit system configurations for FAS 52 compliance.

The Business Impacts

Treasurers and CFOs need to step back and perform a comprehensive evaluation of the risks represented by these challenges. Most corporate treasurers and CFOs are primarily concerned, and rightfully so, with eliminating volatility risk and its effect on earnings. Nevertheless, you must also consider compliance, operational and other economic factors.

From a compliance perspective, you need to consider compliance with policy and regulations such as FAS 52 and 133. With the complexity of FX spreadsheets and their impact on financial statements, you must also factor in the ever-present burden of Sarbanes-Oxley compliance.

From an operational perspective, you must consider whether you are focusing resources on core competencies and value-added activities. Chances are, you are still using manual processes and spreadsheets and not making the most productive use of your resources. Furthermore, employee turnover poses risk. Manual processes for foreign exchange typically rely on one or two key people. If they leave unexpectedly, it can take a company several months to recover.

From an economic perspective, beyond mitigating risk to earnings, you have to understand the cost-effectiveness of your currency program. Are you getting the best prices from banks? Are you buying the right products? Are you able to identify the most cost-effective way to reduce exposure through natural hedging, inter-company settlements and cash management?

Fortunately for corporations, there are applicable best practices to contend with all of FX risk factors. With increasing acceptance of software-as-a-service for treasury operations and co-sourced or outsourced FX management, companies can now gain access to world class currency risk management professionals and proven exposure management practices.

With the right processes and systems in place, CFOs no longer have to simply hope they won't get burned by currency volatility when they review the next quarterly report. They can guarantee it.

Wolfgang Koester is the CEO of Rim-Tec Inc. (www.rim-tec.com), which developed FiREapps, a provider of foreign exchange exposure management technologies.