Best practices for Account Reconciliations

Account Reconciliations are a critical internal control that validates the integrity of the Balance Sheet. Often underrated, neglecting this area leads to an increased risk of financial misstatement and fraud. Increased regulatory rules – through Sarbanes-Oxley and others – means that Balance Sheet Reconciliations should be a fundamental part of the internal control environment and be a key focus during month end close.

Investopedia defines a Reconciliation as “an accounting process that compares two sets of records to check that figures are correct and in agreement. Reconciliation also confirms that accounts in the general ledger are consistent, accurate, and complete.”

Account Reconciliations have in the past been dominated by the use of spreadsheets. Many still use them today, however integrated cloud-based tools are now on the market (such as Blackline) and provide opportunities to both streamline and automate processes.

BENEFITS OF ACCOUNT RECONCILIATIONS

Benefits of operating a well-defined and maintained process of Account Reconciliations are wide and varied, but the primary benefits can be summarised as:

1. Provides a framework for accountants to focus on exception handling.  Particularly for businesses who adopt reconciliation software, their preparation can be automated allowing account reconciliation accounts to focus on removing errors from the Balance Sheet.
2. By minimising time spent on performing account reconciliations, the CFO can reallocate resources to value-add services such as analysis, risk mitigation and business partnering.
3. The monthly close process can be reduced, allowing management to obtain more accurate financial reporting more quickly.
4. Reductions in external audit costs can be achieved when the Balance Sheet is clean and when account reconciliations are readily available. When software is used, auditors can access records remotely reducing onsite expense.
5. Account Reconciliations can be a valuable source of business process improvement opportunities. Difficult-to-reconcile accounts are frequently the result of inefficient underlying processes, and where accounts reflect a customer touch-point customer satisfaction score can be improved.

RECOMMENDATIONS FOR THE ACCOUNT RECONCILIATION ENVIRONMENT

Before considering templates of how an Account Reconciliation should be presented, it is important to consider the factors of the general internal control environment that can improve the success of your Account Reconciliation processes.

1. Creating an operating rhythm which defines when account reconciliations should be performed. Some accounts may need to be performed on a daily basis, but the overall rhythm should be aimed at creating a stable month end close process.
2. Prioritising the Balance sheet avoids the common pitfall of trying to achieve perfection. Cash accounts should be performed more regularly, whilst Retained Earnings accounts can be performed annually.
3. The use of standard templates provides a useful framework in which reconciliations can be prepared and reviewed in a standardised way. Different templates can be used depending on the type of balance being recognised.
4. Staff should be trained regularly on the objectives of an account reconciliation. Account reconciliations should be performed by someone not responsible for the underlying process in order to maintain segregation of duties and should be rotated to build general knowledge within the team.
5. The use of software  should be encouraged to deliver automation and consistency.

CREATING THE PERFECT ACCOUNT RECONCILIATION TEMPLATE

Now that you have created an appropriate Account Reconciliation environment, let´s know move on the principal components of a well-crafted Account Reconciliation Template.

1. Knowledge of the Account

• A summary of the account being reconciled should be included so that the reviewer and auditors have a good understanding of the account reconciliation they are reviewing. This is also useful for circumstances when the primary account reconciler is not available, and a stand-in needs to prepare it.  In case of a doubtful debt provision account this may include the accounting policy for booking doubtful debt provisions, the owner and location of the doubtful debt provision calculation, and other sources of independent information available to substantiate the balance.
• Usual accounting entries. These should be noted to support the summary of the account. For doubtful debt provisions this may be a manual entry booked at month end, then an automated reversal at the beginning of the following month. This allows unexpected entries to be identified more quickly and support the process of resolving differences.
• Expected Balance Range is useful for identifying accounts that may be outside the expected norm and require more immediate attention.

2. Evidence of GL Balance

• Evidence of the GL Balance should be provided (perhaps through a screenshot from the GL system). This ensures completeness.
• Accounts should be reconciled at the level of entered currency in order to be able to identify accounting entries booked in the wrong currency.

3. Appropriate external validation

• Evidence to support the validation of the GL balance should be obtained from outside of the GL system.  These typically fall within 3 different types…
  • 3rd Party Sources – e.g., GL Bank Balances should be supported by Bank Statements.
  • SubLedgers – e.g., Accounts Receivables and Payables could be supported by the separate Account Receivable or Accounts Payable system.
  • Roll-forwards – e.g., Capital could be reconciled back to cap tables.

4. Differences appropriately classified

• Ideally differences between the GL and external sources should be resolved at the latest during month-end close.  However it can be considered appropriate to carry forward differences during some closes with the objective of resolving them before the next important close.
• Differences should be classified as the following:
  • Timing Differences – differences that will clear automatically in the course of normal business.  Payments received by credit cards may take a few days to be credited to the bank statement.  Considered to be of no risk.
  • Closed Reconciling Items – differences that have been identified but have already been resolved by the way of an accounting entry in a future period.  Considered to be low risk.
  • Open Reconciling Items – differences that have been identified and are understood by the account reconciler.  The reconciler will know what to do to clear the difference, but has not yet been booked to the GL.  Usually of medium risk unless the size of the item represents a material misstatement of the Balance Sheet.
  • Unidentified Items – differences where the account reconciler has no knowledge of the why the difference exists.  This could be a payment made from a bank account for which the reason is unknown and could represent a potential P&L charge.  Considered high risk.

5. Timeliness

• Account reconciliations should be performed in a timely manner and in a frequency that represents the risk the account represents.  This supports the general prioritisation of balance sheet.
• Bank Account Reconciliations should certainly be performed on a monthly basis (if not daily) and should be completed fully before the month end routine is closed.

6. The Role of Preparer and Reviewer

• The roles of the Preparer and Reviewer, and the separation of duties for which is each responsible, should not be underestimated in a well-functioning internal control environment.
• The preparer (or pool of potential preparers) should be independent of the underlying process.  E.g., the preparer of bank account reconciliation should ideally not be the same person that is responsible for booking bank transactions to the GL on a daily basis.
• A reviewer (or pool of potential reviewers) should be independent of both the underlying process AND the preparation. The reviewer should have sufficient knowledge to both understand the reconciliation and challenge areas of concern.

THE MOVE TOWARDS AUTOMATION

Accountants have historically performed account reconciliations manually, with heavy dependence on the use of spreadsheets. It can be seen from all of the comments above that maintaining an effective account reconciliation internal control system using spreadsheets can be cumbersome and human resource intensive.

Thankfully providers such as Blackline and Trintech deliver exceptional systems that overcome many of the issues associated with the manual preparation of account reconciliations.

Benefits of Account Reconciliation Software

1. Integration with GL systems means there is no need to obtain documentary evidence for the account balance being reconciled.
2. Accounts can be assigned to preparers (or pool of) and reviewers (or pool of) ensuring accounting staff are clear about their roles and responsibilities.
3. Automation of reconciliations can avoid the need to prepare and review a reconciliation.  E.g., a bank statement feed allows bank reconciliations can be automatically closed without the need of anyone getting involved unless there is an error, or AP in the GL can be automatically reconciled to the AP subledger.
4. Automated matching allows reconciliation agents to focus on exception handling, therefore allocating resources to areas which need human involvement.
5. Timelines & deadlines can be built in to ensure reconciliations are performed on time.
6. Classification of reconciling items allows management to focus resources in areas where there is most risk, through standard reporting of outstanding unreconciled items with a P&L risk.
7. Account balances outside of the expected norm can be highlight for priority attention.
8. Account Reconciliations can become part of the month-end close process instead of an after-the-event task.
9. Account Reconciliations software can be integrated with other software solutions such Month End Close and Internal Controls testing.

HOW PENSAPOS CAN HELP YOU

Pensapos has extensive experience in implementing both manual and automated Account Reconciliation systems that have been proven to keep risk to an acceptable level. For further information on the practical support that Pensapos can offer via a 1 hour free consultation, please get in touch here.