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Table of Contents Fall 2015 • www.canadiantreasurer.com

Departments & Columns 4

Industry Watch

Events

The Cross-Functional CFO The modern-day CFO wears many hats and depends on successful relationships and strategic processes to drive decision-making

Securing Your Company’s Success Five anchors to safeguard your enterprise’s crown jewels

Finance Roles and Relationships Five best practices for the CrossFunctional CFO

The Strategic CFO Modernizing the budgeting, planning and forecasting processes to gain deeper insight and drive better decision-making

9 Features

Trendwatch A look at the intricacies of China’s financial system

Industry Report Payment transformation options are migrating north

Compliance Rising to the challenge of rising compliance costs

Risk Management Innovations rewards have their risks

Tax Matters Top tax mistakes for SMBs

In the next issue: Insights into the current trends on managing and mitigating enterprise risk

Fall 2015

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Industry Watch

Internal audit of the future is flexible, nimble

Internal audit departments need to demonstrate flexibility and agility to address today’s complex and dynamic business challenges, but a report from The Institute of Internal Auditors (IIA) finds much remains to be done. The ‘2015 Global Pulse of Internal Audit: Embracing Opportunities in a Dynamic Environment’ cites data from a recent global survey of internal audit practitioners that finds most audit departments are far from flexible in adapting their audit plans to better handle unexpected and fast-paced changes in risks. The free report urges chief audit executives (CAEs) to take a broad view of risks and flexible audit planning and to have the boldness to expand internal audit’s domain and the courage to handle political pressures. “Internal audit is in an unprecedented position to show our stakeholders we are capable of operating and thriving in an emergingrisk landscape,” said IIA President and CEO Richard F. Chambers, CIA, QIAL, CGAP, CCSA, CRMA. “This new Global Pulse report, however, suggests that many of our internal audit colleagues must change their approach audit planning to meet today’s fast-moving business challenges.” The report, released today at The IIA’s annual international conference, look at more than just audit planning, also examining of how enterprise risk management, integrated and sustainability reporting, and political pressure will affect the profession’s future. In each area, the report’s analysis and recommendations are based on results from the 2015 Global Internal Audit Common Book of Knowledge (CBOK) survey, which tapped the views of more than 14,500 internal audit practitioners from 166 countries, including the United States and Canada. For example, in audit planning, the report recommends making the traditional audit plan more flexible in order to respond to emerging risks. Indeed, the report concludes that the current business dynamic demands near continuous risk assessment to provide true assurance. Yet only 23 per cent of respondents to the CBOK survey reported they practice such continuous risk assessment. What’s more, a scant 16 per cent indicated that, “their audit plan process is flexible enough to respond to emerging risks immediately.” The report, produced by the IIA’s Audit Executive Center, also acknowledges the political pressures that CAEs currently face, but points out that independence, board support, and a high quality internal audit function are crucial to combating such pressure. CAEs, the report states, “should be free from the control of those they need to audit.” However, nearly 1 in 3 survey respondents said they report both functionally and administratively to management, making it more difficult for those CAEs to avoid political pressures.

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Fall 2015 Volume 25 Number 16 Publisher / Corporate Sales Mark Henry mark@canadiantreasurer.com Editor Karen Treml karen@canadiantreasurer.com Contributors Xerxes Cooper, Chief Financial Officer, IBM Canada John Davis, Head of Citi’s Payments and Receivables business in Canada David Drury, General manager, IBM Global Technology Services in Canada Gillian Gerrish, AVP, Commercial Underwriting Manager, General Liability, Chubb Insurance

Nancy Harris, Senior Vice-President and General Manager for the Canadian Market, Sage Jason Henderson, Managing Director, head of Global Banking and Markets, HSBC Bank Canada Robert Hull, founder and chairman of Adaptive Insights

Creative Direction / Production Jennifer O’Neill jennifer@canadiantreasurer.com Photographer Gary Tannyan President Steve Lloyd steve@canadiantreasurer.com For subscription, circulation and change of address information, contact subscriptions@canadiantreasurer.com Publications Mail Agreement No. 40050803 Return undeliverable Canadian addresses to:

Circulation Department 302-137 Main Street North Markham ON L3P 1Y2 t: 905.201.6600 • f: 905.201.6601 info@canadiantreasurer.com www.canadiantreasurer.com Subscriptions available for $40.00 year or $60.00 two years. ©2015 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada Reprint permission requests to use materials published in Canadian Treasurer should be directed to the publisher.

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THE CROSS-FUNCTIONAL CFO

Securing Your Company’s Success Five anchors to safeguard your enterprise’s crown jewels By David Drury and Xerxes Cooper

aced with the pressures of a growing and rapidly changing landscape, executives from companies of all sizes and sectors must focus on their organization’s strategic priorities and hone the ability to adjust to the realities of uncertainty, volatility and complexity. Companies exist in a new competitive horizon, where each day, approximately 2.5 quintillion bytes of data are generated. To put that in perspective, that’s more than 500 million DVDs worth every day. And about 90 per cent of today’s available data was created within the past two years. Adding to this perplexity is the fact that all that data now originates from diverse sources – with 80 per cent unstructured. Data is coming at us simultaneously from texts, tweets, blogs and YouTube videos to sensors, traffic cameras, and more. The point is, data must be managed at all times and it’s paramount to everything CFOs and executives do – now more than ever. So how do we keep it under control and better protect the data that is relevant to an organization’s health? There are a number of factors to consider, but the groundwork starts from strengthening your enterprise’s defenses. Preserving instrumental parts of the body is mandatory to surviving in a data-driven environment. Implementing the correct, most efficient cyber security is necessary to understanding the entire picture of your company’s current health.

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THE CROSS-FUNCTIONAL CFO While this may not seem difficult to decipher, stats and recent cases reveal that more attention from top-level staff is required. The ‘2015 IDC Report: Determining How Much to Spend on Your IT Security’ states that Canadian companies currently spend, on average, 9.8 per cent of IT budget on IT security – while the ideal spend is actually 13.7 per cent of the IT budget. Cyber-attacks are growing – targeting our workplace and identifying new vulnerabilities as we speak. This year’s Ponemon Institute cost of data breach study revealed that in Canada, the average per capita cost of a breach is $250 and the average total organizational cost is $5.32 million as a result of countless attacks compromising more than hundreds of millions of personal records. Globally, the average total cost of a data breach for the participating companies increased 23 per cent over the past two years to $3.79 million. These attacks include stealing and tampering lucrative

property, such as spreading malware and fraudulent emails to acquire sensitive information. However, in addition to the large financial losses that follow, equally as important is to recognize the negative impact these circumstances have on brand reputation. The same Ponemon study described 2014 as being “remembered for … highly publicized mega breaches”. Last year, several companies suffered from major data breaches, leading to the release of confidential data and information of employees, their families, emails, salaries, and more. As a result of these breaches, a company’s credibility and practice come into question, and various parties involved are often subjected to threats, extortion, and humiliation. Even worse, multiple reports speculated these attacks took place months prior to being known. IBM studies and research shows us that on average it takes

companies eight to nine months before they detect a breach. But, that’s only the tip of the iceberg. Numerous big-box stores were hacked last year, targeting millions of credit card numbers, information, and personal data. And more recently, frightening news of national security breaches are being reported, both from our neighbours and right here at home.

So where does this all leave us? Larry Ponemen, the founder of Ponemon Institute, positioned the wake-up call as “an enterprise-wide issue, not just a technology problem” - and that’s exactly what business leaders need to embody. Executives need to realize that risk with such a profound impact on a company requires more than just IT experts – it requires action from empowered decisionmaking staff as well. And that includes the office of finance. In today’s age, where brand reputation and customer loyalty is at the center of

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THE CROSS-FUNCTIONAL CFO every business, leaders must be diligent in the steps they take to appropriately manage risk. Quite frankly, identifying and establishing the proper security system prior to an attack is what makes the difference of a company that’s here to stay. Outlined are the five key steps every organization needs to achieve to reduce risk and harm from a data security breach:

It takes the entire company to maintain a risk-aware culture – having only a couple of employees follow standard procedure isn’t enough to prevent a cyber intrusion. For Canada, 48 per cent of security incidents were attributed to the result of employee errors and internal system glitches, according to this year’s Ponemon Institute study. To prevent this from reoccurring, training and awareness programs on security measures must be established and available to everyone at work – including departments outside of IT such as sales, marketing and human resources.

new devices are not considered more strongly as points of security weakness. IBM personnel use Maas360 from Fiberlink, an IBM company, to identify, control, and secure all mobile devices accessing the enterprise. The system follows a containerization approach – ensuring corporate data and personal data remain separate. But reality is, even with the toughest BYOD technology solutions – your company is still at a risk. Similar to the first recommendation, education is critical for your employees. Define which uses adhere to your company’s policy and clearly outline the business’ conduct guidelines.

2. Be responsive

4. Go for quality not quantity

The longer it takes to counter an attack, the more costly the outcome will be – that applies to both your company’s money and reputation. In essence, time allows the breach to progress and escalate the issue to greater heights. Immediate and impromptu responses for what appears to be spontaneous attacks also tend to require a hefty sum of money. The key to prevention is having a rigorous incident-response plan in place, and always monitor what is happening across your infrastructure.

Proprietary data takes up a very small portion of your overall information – specifically less than two per cent – but it can represent as much as 70 per cent of your market value. This data includes trade secrets, intellectual property and confidential business plans and communications. That’s why overseeing quality content is crucial. As a leader, ensure your parties have fully identified the crown jewels of the company, then build a program to safeguard these assets. Data has become the new natural resource, so it’s imperative to keep your managers accountable and on-guard.

1. Build a risk-aware community

3. Protect your devices Personal technology in the workforce has become a common preference for employees, with many latching on to Bring-Your-Own-Device (BYOD) programs – offering members the power to go beyond traditional workstations and use their own smartphones, tablets and other devices. That being said, these programs can often leave the company’s assets more vulnerable to outside activities. According to the IDC report, it’s striking how these

…data must be managed at all times and it’s paramount to everything CFOs and executives do – now more than ever.

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by the time an attack has been identified, it’s already lodged itself deep into the system. Big data analytics tools have the ability to trace suspicious behaviour before the alarm goes off. Applying analytics to business data drives new insights and positive transformation in the organization. It provides automated, real-time intelligence and situational awareness about the state of security to help mitigate an attack. Integrated solutions help prevent highly sophisticated threats by implementing the right tools to protect and provide predictive analytics – all in a significantly decreased amount of investigation time. Studies have shown an influx of data breaches on a national and global scale – proving to be, not just an IT issue, but a challenge that affects all parties. Regardless of whether it’s driven by social, political or personal motives, cyber threats are evolving, and therefore C-level staff especially need to raise awareness across the board. This is what needs to happen for executives to leverage their resources, make more strategic decisions and gain competitive edge in the 21st century. Prepare your enterprise with the correct utilities and exemplary practices – strong security practices are pivotal to ensure the longest survival and future growth. David Drury is the General Manager for IBM Global Technology Services in Canada. Over his 31-year career with IBM, Drury has taken on leadership roles as a Systems Engineer, a Client Director and the Vice President for Financial Services. Drury also serves on the board of directors for the Ontario Research and Innovation Optical Network (ORION), the Foundation Fighting Blindness, and as chair of the Board of Governors, Junior Achievement of Central Ontario. Drury’s focus is on advancing the role of IT for his clients’ organization, using emerging technological solutions and collaborative leadership.

5. Use your resources A reoccurring theme in the digital age is this: data is growing quickly and exponentially. Therefore, using old methods to analyze data and predict a security breach has become a significant global concern. Organizations need to acknowledge the fact that sifting through data manually simply isn’t an option anymore. Previous cases have shown that

Xerxes Cooper is the Chief Financial Officer for IBM Canada. Prior to taking on the role, he’s served as Director of Finance for Software Group, Controller for Global SWG Services and Controller for Global GTS Consolidations in the U.S. Xerxes has extensive experience in pricing consolidations, planning and delivery across many business lines, along with his collaborative style and creative mind.

Fall 2015

THE CROSS-FUNCTIONAL CFO

Finance Roles and Relationships Five best practices for the cross-functional CFO

n today’s improving economy and increasingly regulated business environment, the focus of chief financial officer has shifted from austerity-driven reductions to fostering growth and change in an enterprise-wide operating model. In the wake of the global recession, 91 per cent of CFOs said their roles have expanded far beyond accounting and finance, according to a recent Robert Half Management Resources survey. “CFOs continue to tackle the day-to-day finance-function tax issues, internal controls and regulatory compliance, but more and more they are being called upon as strategic contributors at the leadership table,” said

Fall 2015

David King, Canadian president of Robert Half Management Resources. “Compared to a few years ago when businesses were focused on cost containment and stability, in the current more optimistic period of growth, the CFO is increasingly involved in areas of the organization affecting both the top and bottom lines, such as sales, business development, and operations.” Today’s cross-functional CFO is becoming more involved in everything from investor relations and capital allocation to hiring decisions. Here are five best practices for senior executives to keep in mind as their roles continue to evolve and expand:

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THE CROSS-FUNCTIONAL CFO 1. Develop a strong compliance program One of the legacies of the global financial crisis is that CFOs are under pressure to comply with a growing number of complex mandates. According to Benchmarking the Accounting & Finance Function: 2014, the fifth annual report by Financial Executives Research Foundation (FERF) and Robert Half, the majority (96 per cent) of surveyed Canadian finance executives believe their compliance burden will either increase or, at a minimum, stay the same in the near future. As CFO, it is critical to identify your company’s key compliance risks and develop a robust program to address them. You may need to step up regulatory compliance training for your team and/ or make new hires. Taking these steps will help you not only avoid potential penalties, but also improve stakeholder relations.

2. Team up with human resources In today’s corporate climate, it’s increasingly important for CFOs to collaborate with the HR department. To remain competitive and boost the bottom line, companies need to attract the best talent with above-average salaries and in-demand benefits. After hiring, comes the need to retain key members of that dream team. In the Robert Half Management Resources survey, 20 per cent of CFOs said outside of traditional accounting and finance responsibilities, their role has expanded most into HR over the

past three years. Today’s challenging hiring environment is a big driver of this expansion.

3. Offer input on capital allocation and portfolio management More than ever, CFOs are playing a role in corporate portfolio management and capital allocation. According to the 2015 Finance Priorities Survey by FERF and Protiviti, capital management is already a top priority for finance executives. As your organization focuses on growth, it might be time to shift capital allocation strategies and take the reins of portfolio management. When it’s time to make tough decisions, offer your strategic input about which business areas to grow and which ones to pare down.

4. Develop stronger professional relationships Effective CFOs do not stay within their finance and accounting silos. To drive enterprise-wide change, you need internal buy-in, which comes from deepening relationships with managers in all business units. For greater collaboration, make time to meet regularly with key employees up and down the organizational chart. External relationships are important, too. Today’s CFO maintains good investor relations through sustained communication, including via social media. Professional networking is a superb way to grow your business, stay abreast of industry news and development; and while

many CFOs are opting for the ‘virtual handshake,’ face-to-face meetings remain indispensable, Robert Half management experts say.

5. Contribute to enterprise performance management The cross-functional CFO makes strategic decisions that will help drive growth, improve investor relations and enhance the organization’s performance management. In fact, according to the 2015 Finance Priorities Survey from FERF and Protiviti, finance executives ranked performance management as a top priority. Today’s CFOs are taking a more holistic approach by managing and improving related processes – including strategic planning, budgeting, forecasting and stakeholder relations – which demonstrate an intent to strengthen overall corporate performance management. Today’s finance leaders are balancing more priorities than ever before. As the executive’s role continues to expand and diversify, the cross-functional CFO will become a more powerful driver of organizational change. This article is provided courtesy of Robert Half Canada, parent company of Accountemps, Robert Half Finance & Accounting and Robert Half Management Resources.

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The Strategic CFO Modernizing the budgeting, planning and forecasting processes to gain deeper insight and drive better decision-making By Robert Hull

ur recent ‘CFO Executive Survey’ revealed many interesting trends related to the way today’s CFOs think about their roles and responsibilities within their organizations. Of particular interest was that the majority of respondents said they view their responsibilities similar to those of navigators, firefighters, traffic cops, and psychologists. All of these roles are responsible for timely risk management and ensuring the general wellbeing of groups of people. So while CFOs may not put out actual fires or take responsibility for the physical safety of others, they do feel a great sense of accountability to ensure the financial health and stability of the broader organization. That overarching sense of accountability is partly a result of the shift in the role of the CFO to match the business world’s rapid pace

Fall 2015

of innovation, specifically to evolve from a tactical finance professional into a decisionmaker, strategist, and business leader. In our survey, 84 per cent of survey respondents said “thinking and acting strategically” was the most important skill a CFO needs to have in today’s market, followed by the ability to “adapt to internal and external changes,” at 64 per cent. There is no question that the role of modern CFOs is shifting to a more strategic one. Yet no matter how much the role transforms, it will always be a position deeply rooted in budgeting, forecasting, reporting, and analytics. The CFO is responsible for providing essential insight into operational impacts on cash-flow and overall financial health. This process must be streamlined, provide an efficient quality control check for both potential and anticipated fiscal performance, and clearly indicate how much capital is needed, for what, and when. The level of leadership and influence

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Regulatory THE CROSS-FUNCTIONAL news CFO that finance leaders and teams can provide is directly correlated to their ability to provide timely, accurate historical data to managers across the organization, to engage those managers in a dialog regarding future activity in their functional areas, and to provide an efficient process around this data gathering and dissemination process. The more efficient this process is and the less time finance spends simply managing data, the more time finance will have for analysis, insight, and engagement in strategic decision making across the organization. Yet far too many companies are still using labour intensive and error prone tools to complete these crucial tasks. The result is added risk, drained resources, and missed opportunities for the finance team to take a more strategic leadership role within the organization. So how can CFOs lead a more streamlined and collaborative budgeting, forecasting, reporting, and analysis process to deliver critical financial and operational information to the right people across the organization?

Stop the spreadsheet sprawl and embrace the power of automation The answer starts with automation. Datadriven decisions are no longer optional for modern organizations. Within today’s information-heavy, highly complex companies, data-driven decisions are essential to success. That data must be consolidated from multiple sources, must be timely, and must include both historical data as well as future projections. As CFO, you are responsible for providing accurate, timely data and you cannot afford a “spreadsheet sprawl” in which your management team is forced to rely upon shared spreadsheets and emailed reports, all with little or no version control and no means of creating an ongoing dialog among team members. Studies have shown that nearly 90 per cent of spreadsheets contain errors. By continuing to manage your budgeting, forecasting, reporting, and analysis processes through heavy use of spreadsheets, CFOs are subjecting their analysis to human blunders, compromising the integrity of the data

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that ultimately lands in the hands of executive decision-makers, and relegating their finance teams to a role of tactical data manager. The effectiveness of Excel as a personal finance tool is undeniable. When it comes to fundamental business finance functions, using a spreadsheetcentric system is time-consuming, error prone, and a productivity killer. Just as a surgeon uses best-in-class tools to perform an operation, a successful CFO must be equipped with best-in-class solutions to find, measure, and deliver the right data, to the right people, at the right time. Such a solution should promote prompt and decisive action by providing a comprehensive, 360-degree viewpoint of operational and financial analytics. The ability to take prompt and decisive action based on collaborative, fact-based analysis is a main reason why so many of today’s organizations are embracing modern FP&A technology. Specifically, they’re switching their legacy systems over to cloud-based solutions. Shifting to a cloud-based corporate performance management system gives finance teams access to data from anywhere, more efficiently consolidates and centralizes financial information, and makes it easier for users to create accurate budget and forecasts with deeper and more valuable analysis. In turn, the comprehensive information the CFO is able to provide fellow executives leads to faster, more informed decisions. And the efficiency gains in process turn into time spent thinking and acting at a more strategic level within the organization. Modern, cloud-based performance management solutions can provide many critical capabilities to finance teams looking to reposition themselves in a more strategic role. Specifically, such a solution can provide: 1. Increased process efficiency. Automated consolidation of data, drag and drop reporting, browser-based data entry, and workflow management tools all help to streamline budgeting, forecasting, reporting and analysis. Time saved is time available for more productive pursuits. 2. Visual analytics and dashboards. Finance teams are comfortable with numbers. Non-financials managers

may not be. Providing them with visual representations of data can help to better engage them and provide them with the insight they need to make more informed decisions. 3. Scenario analysis. Finance teams need to be able to evaluate multiple possible outcomes by varying key business model drivers. Creating and comparing scenarios is much more efficient with a modern performance management tool, allowing rapid scenario creation and comparison without creating version control headaches for finance. 4. Self-service reporting and analysis. Data is only useful if it can be accessed readily be all management team members. Browser-based, drag-anddrop reporting tools make report creation and data interrogation possible for management team members without putting the burden on finance teams to support such requests. Drilldown capabilities allow managers to bring the data to life, drilling into areas of concern and finding new insights that illuminate better decision making.

Change the conversation: analytics for all To lead more strategically, CFOs need to bring their teams and the organization as a whole to a new level of budgeting, forecasting, reporting and analysis. Outdated systems such as spreadsheets hinder that progress by making the process inefficient, error-prone, and not collaborative. Cloud-based performance management solutions can provide much needed relief and can enable analytics beyond the finance organization. In doing so, CFOs can elevate their role within the organization to a more strategic level by shifting time spent by the finance organization away from low-value data management tasks to more value-added data analysis and more collaborative business forecasting overall. Robert S. Hull is founder and chairman of Adaptive Insights, an intuitive, cloud-based solution for corporate performance management. Prior to founding Adaptive Insights, Hull served as CFO for a number of market-leading software companies, including LoopNet and Risk Management Solutions.

Fall 2015

Want to know more about regulatory issues and changes? Looking for insight into the changing role of financial executives? Interested in what products and services are available to ramp up your performance metrics?

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Trendwatch

The Internationalization of the RMB On the intricacies of China’s financial system By Jason Henderson

ith China expected to achieve capital account convertibility within two to three years, the clock is ticking for global investors and corporations who are yet to learn the intricacies of China’s financial system. China is the world’s second-largest economy and its largest trading nation. In 2013, its share of global GDP as well as global trade was 12 per cent.1 But China’s economic prowess is not yet matched by its financial firepower. As of 2011, China had less than a three per cent share of global holdings of overseas assets and liabilities, even when its large holdings of foreign exchange reserves are included.2 A great wall separates China’s capital markets from the rest of the world, hence foreign investors have limited exposure to China’s stocks and

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bonds, and Chinese investors are generally restricted to investing in domestic assets. However, in recent years, China has embarked on a mission to liberalize its capital account. It has created, and subsequently widened, various investment channels that allow foreign capital to flow into the country. With the Qualified Foreign Institutional Investor (QFII) scheme, the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, and the northbound trading link of the Shanghai-Hong Kong Stock Connect programme, foreign investors are gaining increased access to China’s markets. This will lead to greater inflows and, when A-shares are finally included in emerging markets indices, the effect will multiply. Foreign investors who become familiar with China’s

Fall 2015

Regulatory Trendwatch news domestic markets now can be ready to make the most of this seismic shift in global equities when it happens. Meanwhile, with outbound investment schemes such as the Qualified Domestic Institutional Investor (QDII) scheme and the southbound trading link of Stock Connect, China is introducing a new – and potentially enormous – source of capital to the rest of the world. The Chinese are keen savers: the country’s household savings amount to nearly 50 trillion yuan,3 or almost US$8 trillion. This clearly has profound implications for capital markets around the world. Global investors and even issuers should also take the time to understand China’s domestic bond market. It’s the third-largest in the world, but is small relative to China’s huge economic output – China’s outstanding bonds amount to 5.1 per cent of the world total, yet China’s economy contributes 12 per cent to global GDP. Also, the corporate bond market in China remains underdeveloped, representing around 25 per cent of total bonds outstanding – much less than the figure in developed markets.4 Beijing has plenty of incentives to grow its debt capital market. A welldeveloped bond market would provide long-term investment instruments with fixed returns to an ageing population; give the middle class an additional investment vehicle with which to diversify their portfolio; and create a less costly but more efficient channel of funding for Chinese corporations. This will not just be for domestic borrowers. China has encouraged the issuance of

Fall 2015

panda bonds – onshore bonds, denominated in Renminbi, issued by foreign companies – thus making it easier for multinational corporations to raise capital onshore. China’s bond market has huge growth potential, and it’s increasing likely that it will overtake Japan’s to become the world’s second-largest. Finally, the liberalization of China’s financial system will affect the way companies manage their liquidity in China – particularly as part of a regional or global cash management strategy. Again, the sooner foreign companies understand this, the sooner they will benefit from it. As Canada’s second largest trading partner, China’s capital markets present a real opportunity for Canadian companies and investors to tap into the fastest-growing economy in the world, thus contributing to our long-term economic health. In fact, as part of the recent launch of the Renminbi clearing centre in Canada, Canada was awarded RMB50 billion of RQFII quota, which will enable local investors to gain direct access to the growing Chinese bond market. The internationalization of the RMB is one of the most significant financial events of the 21st century, and Canadian businesses and the economy as a whole will benefit from Canada’s position as the first RMB trade and investment hub in the Americas. For years, multinational corporations with operations in China had to face the issue of ‘trapped cash’ – the inability to freely remit their funds to their regional treasury centers outside Mainland China. But that is changing. Beijing now allows greater freedom

for global companies to move yuan in and out of China, which achieves two goals: a renewed push to redenominate China’s trade with the world in Renminbi; and encouraging treasurers to buy more yuan investment products. For most companies, the biggest step forward is a ruling that allows companies to repatriate their profits. Foreign-owned companies can now lend accumulated Renminbi holdings to their parent or subsidiary companies overseas. Foreign companies, including those from Canada, were once discouraged from doing business in China by the difficulties involved in getting cash in and out of the country. But these new regulations are helping to make “trapped

cash” a thing of the past. Gradually, the wall separating China’s financial system with the outside world is coming down. With China expected to achieve capital account convertibility within two to three years, global capital markets are bracing for China’s financial integration with the world. For foreign investors and corporations, it’s better to get a head start. Jason Henderson is Managing Director, Head of Global Banking and Markets at HSBC Bank Canada. 1 The rise of the redback III, HSBC Global Research 2 http://www.bankofengland. co.uk/publications/Documents/ quarterlybulletin/2013/ qb1304prereleasechina.pdf 3 http://www.bloomberg.com/news/ articles/2014-08-15/china-s-saversdivert-record-2-1-trillion-to-wealthproducts 4 The rise of the redback III

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In a world of Big Data, fragmented marketing channels and the rise of social media, how do you ensure that your organization is driven by hard data rather than just gut feel? How do you leverage your customer information most effectively? How do you incorporate Analytics in general, and Predictive Analytics in

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industry Report

Payment Transformation Options are Migrating North While most companies still rely on cheques for the majority of supplier payments, new payment digitization services offer the potential for substantial savings. By John Davis

ith both the Bank of Canada and the International Monetary Fund (IMF) downgrading their Canadian economic outlook in October, finance professionals are more challenged than ever to find efficiencies to strengthen their companiesâ€™ competitiveness. Challenging times create a need for leaders to broaden their influence in their organizations, and finance professionals need to drive change to strengthen the competitiveness of their firms. The most impactful opportunities involve full transformations of existing processes as opposed to incremental improvements. Looking at a process end-to-end and re-engineering it can often create step change improvements, but finding the time to look for these opportunities and make changes, amid unrelenting day-today demands on time and budget, is difficult. To help address this need, outsourced options have arrived in the Canadian market that enable leaders to implement transformations of the economics and risks of current payments

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without distracting internal staff from their core mandates.

The status quo Paper-based processes and cost structures represent an opportunity to reduce cost and risk, where finance professionals can implement change to create value for their businesses. Finance professionals have made real progress on invoicing workflow, cash position information, and forecasting. Arguably, progress has been made in the payments space as well, but the pace of the adoption of electronic B2B payments lags retail payments substantially. You donâ€™t need to look far to see examples of paper and manual processes that distract finance staff from more strategic activities and create little value for their firms. A number of factors reinforce the status quo, and keep the old world of paper and manual processes in place. Nearly a billion cheques are used in Canada annually according to the Canadian Payments Association (CPA).Payment process transformation efforts need to address the reasons things are the way they are in order to result in lasting change. Ubiquitous

Fall 2015

Industry Report acceptance is certainly a primary driver of the prevalence of paper, as is the fact that many business’ payment processes are still built around cheque issuance. Supplier banking information is not needed to write a cheque, and mail float still creates some additional working capital. To transform paper payment flows to digital, acceptance, routing information, working capital impact, security, and inertia need to be considered.

“Cheques introduce significant fraud risk in terms of alteration, and a cheque itself contains many pieces of useful information for a fraudster …” Cost and risk implications Cost, control and risk are the major drawbacks of cheque payments. A 2015 payments cost benchmarking survey by the Association for Financial Professionals (AFP) shows that cheque payment costs are typically more than five times the cost of electronic payments, with the typical issued cheque costing $3 as opposed to the typical next-day electronic funds transfer (ACH in the U.S., EFT/AFT in Canada) costing 56 cents (including internal and external costs). Cheques introduce significant fraud risk in terms of alteration, and a cheque itself contains many pieces of useful information for a fraudster, including the company’s logo, address, and bank account number along with the name and sample signature of an authorized officer. Indirect costs related to handling and problem resolution of cheque issues can be difficult to assess, and are unpredictable in terms of amount and frequency. While float is often perceived to be a benefit of cheque usage, float is less valuable today than it has been in previous higher interest rate environments. Additionally,

Fall 2015

the cost of supplier calls to Accounts Payable departments (AP) to make payment inquiries, leading to hours of non-value added activity by AP staff, are not usually factored in, resulting in an overestimation of the net benefit of mail float. For large companies with higher volume payments, Citi data suggests that the gap between the costs of cheque and electronic payments is closer to 9X, driven by the greater scalability and efficiency of electronic payments at high volume, the costs of fraud targeted at large companies, and the costs of mitigating this risk. In these cases, migrating from cheques to electronic payments is likely to result in between 65-85 per cent cost savings – a dramatic improvement that finance professionals can achieve, with ancillary risk reduction benefits. The picture improves further for companies with meaningful volume of low-dollar payments, as these can often be moved from cheques to credit card payments as opposed to moving them to EFT/AFT/ACH. In addition to the cost savings noted above, moving small payments (<$10,000) from cheques to virtual card payments earns the company a rebate of 0.75 per cent to 1 per cent of the total value of those small payments made, turning what used to be a cost stream into a revenue stream. Depending on the number of payments being made, Citi has observed that companies can achieve cost savings of $50-150,000 from efforts to migrate their payments from paper to digital. Cheque volume is falling organically at 6.3 per cent annually according to CPA statistics. CPA modernization efforts may accelerate this, but they are several years away from delivering meaningful savings to corporates. Simply waiting for this change to happen won’t result in meaningful near-term cost efficiencies. Since most large companies in Canada are presented with this same opportunity, it is best resolved through an outsourced approach where best practices can be shared and cost efficiencies gained, as opposed to in-house efforts that tax scarce resources and achieve neither the scale nor experience advantages that a wider effort can bring.

Addressing the challenge Reducing reliance on paper-based payments has been a challenge for finance professionals because converting a large supplier base (accustomed to receiving paper payments) to electronic payments is as much a marketing and IT challenge as it is a finance challenge. Payment digitization initiatives may require: 1. An outreach program via email and telephone to drive supplier conversion to electronic payment acceptance. 2. Validation of supplier bank details, and security to protect supplier information. 3. A customized supplier portal to enable suppliers to maintain accurate information on an ongoing basis. 4. Ongoing optimization of the payment mix from a single payment file to maximize cost savings. 5. Automated notification to suppliers when payments are made. 6. Access to historical transaction information and payment reconciliation support.

Challenges in marshalling crossfunctional resources can make an insourced payment digitization program difficult for finance professionals to get off the ground. In the United States this has led to the creation of a number of payment digitization services, offered by banks and technology companies. Canada lags in commercialization of payments digitization services, but services like Citi Payment Exchange have recently arrived in the Canadian market to close this gap. Payment Exchange and services like it have been in place in the U.S. for several years. Outsourced payment digitization services can enable corporations to transform the economics and risks of their payment process, without distracting limited internal resources from other key priorities. By leveraging an outsourced payment digitization model, proven to create cost efficiencies and reduce risks, finance professionals can deliver a win that will strengthen their organizations’ competitiveness and their profile as leaders. John Davis is the Head of Citi’s Payments and Receivables business in Canada

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Compliance

Compliance Costs Are Rising: How Your Company Can Rise to the Challenge C

ompliance costs are rising in Canada and show no sign of slowing down, says ‘Benchmarking the Accounting and Finance Function’, a white paper from the Financial Executives Research Foundation (FERF) and Robert Half. Almost all (96 per cent) of Canadian executives surveyed for the benchmarking report said they believe their compliance costs will increase or, at the very least, stay the same in the near future. The reasons for this pessimism are many: new privacy laws, recent modifications to anti-corruption and bribery legislation, and ongoing compliance with Bill 198 (Keeping the Promise for a Strong Economy Act). Threequarters of Canadian companies polled for the benchmarking report agreed that simplifying regulations would ease their compliance burden. The 2012 Red Tape Reduction Action Plan aimed to do just that, but only four per cent of executives said they believe compliance demands will ease over time. However, despite compliance costs and pressure, your bottom line is not doomed. Here’s some advice for how organizations can thrive despite evolving and increasing regulations:

to use their resources to train existing staff and bring in interim compliance experts. And organizations of any size can benefit from beefing up automation, compliance training, and staffing. Whatever your annual revenue, it’s essential that your accounting department identify key regulatory risks and ensure the infrastructure – technology, staff, business systems, and so on – is equipped to deal with your particular compliance burden. If not, revamping your internal regulatory program should be your number-one priority.

Recognize risks and weaknesses

Hire smart

Subject to more regulations, larger companies and multinationals should focus more on streamlining operations and hiring additional risk and compliance officers. Smaller companies, meanwhile, might want

A majority of global organizations polled (89 per cent) for the ‘Robert Half Financial Services Global Report: Navigating Change in an Evolving Regulatory Landscape’ said they struggle to find the staff required to

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Stay on top of changes Since regulations have a way of changing and multiplying, it’s important to develop a compliance training program to help your accounting staff stay informed. Strategies can include paying for online courses, bringing in consultants for customized instruction, attending conferences like the Canadian Institute’s Regulatory Compliance for Financial Institutions and joining the Association of Canadian Compliance Professionals. You can also test your staff regularly to see whether they’re up to date, which helps reduce human risk factors for non-compliance.

deal with regulatory change. A specialized staffing agency can help with the important task of recruiting in-demand employees. To get ahead of the compliance curve, you need the right personnel. Talk to a specialized recruiter to see whether your company can benefit from hiring a project consultant, interim professional, full-time compliance specialist, or a mix of those roles.

Streamline operations Are you still reconciling accounts manually? If so, you’re among the 66 per cent of Canadian companies polled in the benchmarking report that do so. To boost productivity and better meet compliance requirements, companies of all sizes can benefit from using specialized software for reconciliations. Issues such as sloppy controls and inaccurate reporting can result in hefty fines and penalties and can damage to your company’s reputation. Since finance executives do not expect their regulatory compliance burdens to ease anytime soon, take action now to keep compliance costs under control. Even though training, hiring, and automating require an investment of time and money, not doing any of these things could be more expensive for your organization in the long run. This article is provided courtesy of Robert Half Canada, parent company of Accountemps, Robert Half Finance & Accounting and Robert Half Management Resources.

Fall 2015

Coming events

2015 Events

Vendor Classified Integrated Payments Solutions

August 2-5 Retail Solutions Providers Association RetailNOW 2015 Orlando, FL www.gorspa.org August 11-13 tppEXPO 2015 The Pre Paid Press Expo Las Vegas, NV www.prepaidpressexpo.com August 20-22 CAIRP Annual Conference 2015 Whistler, BC www.cairp.ca September 14-16 IFO Canada Annual Canadian Financial Operations Symposium Vancouver, BC www.financialops.org/ canada2015 September 21-23 CUMA CUMA Ontario Annual Conference Collingwood, ON www.cuma.ca September TBA Celero Solutions Canadian Financial Technology Conference www.celero.ca September TBA Canadian Finance & Leasing Association Conference 2015 www.cfla-acfl.ca September TBA 3rd Women in Payments Symposium &Payments Business Magazine Awards Night Toronto, ON www.womeninpayments.ca

October 4-6 Members Meeting Smart Card Alliance Phoenix, AZ www.smartcardalliance.org Oct 7-8 Smartcard Alliance NFC Solutions Summit 2015 Phoenix, AZ www.smartcardalliance.org Oct 12-18 Sibos Annual Conference 2015 Singapore, MY www.sibos.com

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October 13-15 BAI BAI Retail Delivery Conference 2015 Las Vegas, NV www.BAI.org October 18-21 Association of Financial Professionals AFP Annual Conference 2015 Denver, CO www.afponline.org October TBA American Bankers Association Marketing Conference 2015 Orlando, FL www.aba.com

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Mark Henry, mark@canadiantreasurer.com

October TBA RIMS Canada Horizonsâ€“Annual Conference Quebec City, QC www.rimscanadaconference.ca October TBA 2015 Global Finance Conference For Finance Executives Toronto, ON GlobalFinanceConference.com

Visit us online www.canadiantreasurer.com

Fall 2015

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RISK MANAGEMENT

Advanced Manufacturing: Innovation’s Rewards Have Their Risks By Gillian Gerrish

alk onto an advanced manufacturer’s factory floor, and you’ll see hallmarks of progress. Sophisticated operating systems. High-precision equipment. Highly skilled employees. What you may not immediately recognize is the increased operational risk to property, data, and customers that comes along with this progress. From automotive to aviation, advanced manufacturing plays an important and growing role in the Canadian economy. With increasing R&D capabilities, new domestic production facility expansion, and many new government incentives meant to bolster our countries manufacturing segment such as FedDev, Ontario’s Advanced Manufacturing Fund (AMF), the trend is poised to continue. Highly connected, R&D-focused, and agile, today’s advanced manufacturers look much different than they did just a few years ago. As their operations change, so does the possibility of property damage, injury, data theft, and business interruption. If you are responsible for managing the operational risks of your advanced manufacturing firm’s operations, now is the time to take a fresh look at your risk management and insurance program. Has it evolved along with the innovations your company has introduced? The Organisation for Economic Co-operation and Development (OECD) breaks down innovation into four major categories: process, organizational, product, and marketing. Advanced manufacturing innovation spans all four. Is your company pioneering new

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developments in these areas? If so, consider the implications.

New process, new property risks New tools and techniques can help maximize efficiency and minimize down time. At the same time, these advances can also lead to significant new property and business interruption risks. For instance, robotics can help package products or even weld car bodies, but replacing high precision equipment destroyed in a fire is costly and time-intensive. Prototypes represent another significant property risk; a damaged prototype is not easily replaceable and can significantly set back your time to market for a new product. If your business has employed new tools and techniques such as these, here is a sampling of questions to explore: ◉◉ Have you modified your property values to adequately address high-valued, highly specialized equipment, and one-of-a-kind prototypes? ◉◉ How does your insurance policy value the cost of physical damage to R&D property or prototypes? ◉◉ How does your insurance address the business interruptions that are caused by R&D property damage that lead to new product delays?

Organization innovations: The hazards of ‘just-in-time’ Just-in-time sourcing becomes more complex when your products incorporate advanced materials that are only readily available from a small group of suppliers. For example, an automotive manufacturer obtains a state-ofthe-art thermoplastic polymer for injection

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RISK MANAGEMENT moulding from a supplier whose main factory is located in Asia. The factory is destroyed in an earthquake, halting the manufacturer’s production and leaving the manufacturer scrambling to find another supplier. Unfortunately, new suppliers cannot provide the same quantities of the polymer, creating a production bottleneck. If you employ justin-time sourcing of specialized raw materials: ◉◉ How does your organization plan for unexpected availability of hard-to-obtain advanced materials? ◉◉ For what length of time does your business interruption insurance cover you if you are unable to produce your products, and continue to do business?

High-tech products – new high-complexity risks Another risk management consideration for manufacturers that use advanced materials is the potential impact of these materials on employees and customers. For instance, nanotechnology is used to waterproof or otherwise protect some product coatings. Although testing of nanoparticles may indicate they are safe, longer-term effects sometimes arise. Claims can sometimes take years to surface. Is your liability insurance designed to respond to unexpected future injury claims? In the area of advanced products development, one of the most discussed new risks, stems from the vast amount of information being collected and communicated as integrated technology and functionality of products expands. Operational risk concerns arising from Big Data and the Internet of Things (IOTs) are becoming realities for advanced manufacturers. Today’s factory floors are increasingly digital and connected with automated processes, sensor data, and predictive software. Who’s at risk? If your products, equipment, and other elements of the factory typically communicate with one another to maximize manufacturing efficiency and minimize bottlenecks your company may have increased cyber exposures. Manufacturing operating systems may be focused more on

Fall 2015

productivity than on cyber security. Cyber criminals or even insiders could exploit weaknesses to steal intellectual property or launch a denial of service attack. Such scenarios may sound futuristic, but they’ve already happened. In Germany, hackers broke into the system controlling a manufacturer’s blast furnace. The company was unable to properly shut down the furnace and sustained massive damage. Your customers are at risk, too. For example, suppose a glitch in the control software embedded in production machinery you manufacture for others causes the product to work incorrectly, and your largest customer loses weeks’ worth of both production revenue and incurs significant costs resolving the issue. The customer, in turn, sues you for breach of contract. How does your Errors and Omissions liability coverage respond? Or suppose hackers can exploit flaws in your product’s software and find entry to your networks in the process because of interconnectivity. They can steal financial information such as driver’s licence or Social Insurance Numbers (SIN), or bank account or credit card information. A data breach like this can lead to loss of competitive advantage if trade secrets are leaked or worse, loss of customer confidence in your operations and advanced products if they aren’t viewed as “secure”. Companies in the health care field face even more unique risks. Hackers could exploit a weakness in the software used in an insulin delivery pump—and due to their tampering, dozens of patients could receive the wrong dosage of medication. Theft of medical information is another unsettling possibility. In addition to the financial costs of addressing stolen records, patients’ health can be jeopardized if an impostor’s health information is mixed with their own. If you rely heavily on multiple networks to run your manufacturing operation: ◉◉ Do your operating systems have data security controls that are comparable to those used in your IT systems? ◉◉ Do you have a plan for protecting customers’ personal or sensitive information and for responding to a cyber attack if one occurs?

Marketing: A cyber thief’s playground If your products are marketed and sold online, you may face challenges related to securely transmitting and storing customer data. As credit card processing becomes a day-to-day exposure, so does the increase in your organization’s potential cyber vulnerability. Theft of sensitive data by means of cyber attack is a regular news item. According to a 2014 Ponemon Institute report, Exposing the Cybersecurity Cracks: Canada, 36% of Canadian companies surveyed experienced at least one substantial cyber attack in the previous year. The report also revealed that 27% of companies that had lost sensitive or confidential information did not know specifically what data had been stolen. If you sell your products online, or have other cyber exposures, your risk assessment should address the following: ◉◉ How prepared is your firm to respond to a cyber attack aimed at stealing sensitive information? ◉◉ If sensitive data is stolen, will you know what data has been affected? ◉◉ What types of losses does your cyber insurance address?

Manage your risks for today and tomorrow If your firm is on the cutting edge of manufacturing, your best defence is a good offence. The process, organizational, product and marketing innovations that were barely imagined a decade ago can also carry risks not anticipated at that time. Engage experts in your industry and in technology to re-evaluate your operational risks and to develop a plan to prevent or minimize losses. Then talk to your insurance broker and carrier to ensure your insurance program is aligned with your evolving operations. An updated risk management strategy, coupled with an insurance program that helps safeguard your forward-looking operations, can make it easier to focus on your business at hand. Gillian Gerrish is AVP, Commercial Underwriting Manager, General Liability, for Chubb Insurance Company of Canada in Toronto, ON. She can be reached at ggerrish@chubb.com.

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Tax Matters

Top Tax Mistakes for SMBs Avoid costly mistakes at tax time By Nancy Harris

t’s a best practice, a good mantra, and it’s accurate – when you fail to plan, you plan to fail. This is especially true when it comes to tax preparation. According to the recent ‘Sage Business Index’, one of the most challenging aspects of running a business in Canada is dealing with high tax rates. How can these businesses reduce their risk of paying more than they need to in taxes? The answer lies in the planning.

Failing to plan Tax preparation should be a year-long process, not a last-minute fire drill. The key to minimizing tax payments is to plan early and give the issue ongoing attention throughout the year. Additionally, after filing, business owners should meet with their accountant or financial advisor to determine their plan for the following tax year. View taxes as any other regular business practice and review the plan quarterly. Planning ahead will allow you to have ample time to file a tax return before the deadline, eliminating the unnecessary expense incurred as a result of interest and late fee penalties.

Forgetting to double check Regardless of how cautious you think you may be, no one is perfect and it’s always a good practice to have someone double check your work. The smallest mistake can cost you real money and while it seems like common sense, it happens often. Depending on the extent of the error and the tax implication, Pierre Normandeau from Talbot & Associates suggests filing a voluntary disclosure with the Canada Revenue Agency. Normandeau describes voluntary disclosure as “a program designed by

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CRA to encourage taxpayers to correct mistakes on a tax return and avoid penalties.”

Doing it alone There are many software options available to help small business owners manage payroll, finances and taxes. However, when it comes to taxes, there are a lot of rules and restrictions that must be fully understood, too. Small business owners don’t need to be experts in the field of tax, instead they can rely on an accountant to help guide them. In fact, businesses can deduct expenses for accounting and legal fees - including fees incurred preparing and filing taxes. Accountants can assist you during tax season and act as trusted advisors throughout the year. Rushing to the finish line is never a good idea. Slow and steady will win the race and it’s absolutely not worth being a slave to your taxes in the weeks and days leading up to your deadline. Accuracy is important and mistakes can happen when you are rushing to meet a deadline. Small business owners that make this mistake will likely miss steps or miscalculate returns – all of which can lead to higher payments. Start planning early to save yourself money and stress around tax time. As senior vice-president and general manager for the Canadian market, Nancy is responsible for building the Sage brand and growing market share in Canada. Her responsibilities include driving the strategy and day-today operations for the small business portfolio, including Sage 50 Accounting—Canadian Edition and Sage One— Canadian Edition. For more than 25 years, Nancy has been leading product marketing and strategy. She’s also worked for technology companies that specialize in software as a service for more than 15 years.

Fall 2015

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Coming Soon Your guide to the world of telematics in Canada

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