Account reconciliation is an underappreciated, yet critical, control to help ensure an organization's financial integrity. Weaknesses and inefficiencies in the reconciliation process often lead to mistakes on the balance sheet and overall inaccuracies in the financial close.
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Since the enactment of Sarbanes-Oxley in 2002 and other rules and regulations that have followed, ensuring the accuracy of account reconciliations has become increasingly important. In the past, if an external auditor found a material error during review of a company's financial statements, it could still be corrected by the company with an adjusting entry. In most cases, the controller wouldn't have to issue a restatement, nor would the auditor have to report the error.
With the advent of the Sarbanes-Oxley Act, the call for compliance has risen to another level. If the auditor finds a material error, the company may be required to disclose a failure of controls. And if the auditor finds a misstatement while reviewing the quarterly or annual Securities and Exchange Commission reports that the company cannot prove it would have found on its own, then the error is determined to be a material misstatement and a material weakness that could also require disclosure.
An efficient, accurate and timely financial close cycle (beginning with the account reconciliation process) can create a foundation for evaluating business performance, supporting organizational decisions and satisfying external reporting requirements. Automation of the account reconciliation process is a critical step on the road to achieving "balance sheet integrity" -- and ultimately a timely and efficient financial close. However, software alone will not ensure that account reconciliations are accurate. Following these best practices will set your clients on their way to error-free account reconciliations and a more efficient financial close.
1. Account reconciliations should be complete -- no account left behind!
• Ensure that all appropriate accounts are being reconciled, including new accounts.
• Ensure that there is an overall reconciliation policy and that it is adhered to company-wide.
• Ensure that each reconciliation includes a title, a description of the account, and procedures and/or instructions on how to complete the reconciliation (applicable contacts, reports to run or obtain, etc.).
• Documentation supporting the account balance should be included with the reconciliation.
2. Reconciliations should be accurate.
• The individual preparing and reviewing the account should have a basic understanding of what the account is used for and what should be used to support the balance. For example, cash accounts will most often need the general ledger and a bank statement in order to perform the reconciliation.
• Ensure that the correct, most updated balances are being reconciled.
• Ensure that the reconciliation actually supports the balance and is not just a repeat of the general ledger or a roll-forward of the balance.
• Watch for accounts that have unusual balances (such as an accrual with a debit balance or a receivable account with a credit balance).
3. Reconciliations should be completed and reviewed in a timely manner.
• Create due dates for the reconciliations.
• Have a mechanism to track the status of each reconciliation.
• Make the high-risk account reconciliations due early on in the close cycle to identify any potential problems.
• Review the unidentified differences and post the necessary adjustments while the accounting period is still open.
4. Reconciliations should support the appropriate accounting principles.
• Ensure that the reconciliations follow the principles such as historical cost, matching and full disclosure.
• Ensure that the reconciliations are objective, that they identify material unidentified differences, that they are consistent, and that the transactions behind the general ledger balance followed the convention of conservatism.
• Reconciliations should follow company policies.
5. The account reconciliation process should be constantly reviewed and improved.
• Review the account reconciliation policy to ensure that it accurately reflects the company's position.
• Review the overall process routinely to identify improvements that help drive quality and timeliness.
• Review the reconciliation procedures and instructions to ensure that they answer: What? When? Who? Why? And how much?
• Use standard templates for the various types of reconciliations for consistency and ease of reviewing.
Good tools and processes provide a framework for ensuring quality, accuracy and completeness. They provide a means to track assignments, due dates and work completion. A robust, automated account reconciliation process will focus the right people on the right activities and give management real-time information around the close process.
Susan Parcells, CPA, is a close governance and product specialist for account reconciliation and financial close software provider BlackLine Systems.