Portfolio Position Report – SOX Tests

//Portfolio Position Report – SOX Tests

Companies involved with managing a portfolio of financial or physical commitments must have a robust system in place to keep track of the obligations to that have been committed to sellers and buyers of these products. This pertains to primarily to Banks, and companies involved with commodity futures.

Based on my years of experience in the energy industry, I am passing along some suggestions for C-SOX best practices to ensure that Portfolio contracts are accurately reported within Risk Management systems.

Companies in the energy marketing industry must ensure that the commitments to supply customers are offset or matched, with contracts to purchase energy from suppliers. The Portfolio Position report provides summary information to indicate both sales to customers, and purchases from suppliers. Ideally, the sales will exactly offset the buys, but in reality, there is always an acceptable amount of variance known as the Open Position, normally expressed as a percentage of the total portfolio, and as an absolute nominal amount.
It is very important for these companies to manage the Open Positions – Long positions (purchases are greater than sales) and Short positions (sales are greater than purchases), both in terms of volumes, and financially. The Open position represents a risk to the company, because the underlying price of the commodity is volatile, and changes in commodity pricing can result in significant gains or losses.

C-SOX tests
1. Risk Management Policy – ensure that there is an approved policy in place which provides parameters around trading limits, Open Positions, Counterparty limits, and Mark to Market (MTM) calculations. Is the policy approved by the Board of Directors?
2. Portfolio Position report – ensure that there is a prescribed report that provides sufficient summary data for management to monitor the Portfolio on a daily or periodic basis. Are positions with supplier counterparties within prescribed limits? Are MTM calculations accurately calculated based on futures forward curves? Are the reports filed and available so that they can be reviewed at a later date?
3. Ensure that transactions are fully approved and accurately entered into the database – a sample of transactions throughout the year should be carefully reviewed. Was the transaction approved by the appropriate personnel as per the Risk Management Policy? Was it signed and dated by the counterparty? Does the pricing and volumes match the agreement? Was the transaction accurately entered into the database?

In addition to this, with recent changes to Canadian GAAP pertaining to financial derivatives, the MTM calculations of the Position Report will have a direct impact on financial reporting. What is the companies accounting policy – are they using Hedge accounting or MTM accounting? Either way accuracy of the Position report is extremely important, and must be carefully tested on an ongoing basis – not only for C-SOX, but for Operational purposes as well.
I hope this helps. Please contact Edelkoort Smethurst Schein CPA’s LLP if you require further assistance or explanation.

Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS). The firm is also registered as an IRS Certified Acceptance Agent.

All blog posts published on this site are for informational purposes only and do not constitute professional advice. Readers should contact a professional to discuss their individual situation. Neither the author or the accounting firm shall accept any liability for any reliance placed on the information posted.


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