Part 19 in the Continuous Accounting Series
My last blog focused on the importance of account reconciliation for detecting fraud and balance-sheet accuracy. Doing it right requires the proper training.
Many organizations train new employees on how to reconcile accounts with old, tired methods because “this is how it’s always been done.” Whether this is positive or negative depends on how much emphasis is placed on what a good reconciliation should be.
A good account reconciliation reflects five main characteristics:
- Assessment of the validity, correctness, and appropriateness of the account balance
- At a specific, verifiable point in time
- Documented by relevant calculations and clear and complete explanations
- With copies of supporting documents
- In compliance with company policy
If this is the way you have always done things, then you are in great shape. If not, here are some guidelines for producing quality account reconciliations.
- Some reconciliations include all of the general ledger detail. The right questions to ask are: Isn’t this just a replication of the general ledger? How does this assess the validity, correctness, and appropriateness of the account balance?
- Others provide the beginning balance and ending balance for the period and explain what changes took place – a roll forward, if you will. For these, it’s important to assess whether the changes are valid, and whether or not those changes should have been made.
- Management needs to make education a priority for both existing and new associates, so teams are clear on how a proper reconciliation should be done and to ensure that they’re all conducting them consistently.
How things are currently done
You’re already well aware that manual reconciliations are tedious and time-consuming. To outline just how involved it is, a typical reconciliation process is as follows:
- Find the previous month’s reconciliation, usually some type of Excel spreadsheet file
- Manually enter the current period balance into the spreadsheet
- Provide proof of the GL balance (print screen of ledger)
- Review previous supporting items in reconciliation to determine if they are still relevant
- Review GL activity for any new transactions that have posted to the account for the period to determine if they are appropriate
- Add new items to the Excel template
- Update any formulas in the spreadsheet, if applicable
- Accumulate all supporting documentation needed for the supporting items
- Print off Excel reconciliation, attach supporting documentation
- Provide to manager for approval, who reviews, signs off, and possibly sends to the next person for approval
- Once reconciliation is fully approved, place in a folder or binder and store either onsite or offsite
- Sign in on the reconciliation control log, if one is available
- Repeat for the next balance sheet account (and the next, and the next…)
The steps above are not all-inclusive of everything that needs to be done; some reconciliations are very straightforward while others can be far more complex.
Regardless of the simplicity or complexity of the account, certain steps listed above are required. This may not seem like a lot of work if you have, say, 25 accounts. But what about the teams with 250, 2,500, or even 250,000 account reconciliations?
Think about the amount of time needed to pull this information together manually – and the digging required when audit time rolls around. Will you be able to easily prove that all accounts have been reconciled, let alone provide copies of them to the auditors upon request? What if yours is a global organization – how do you keep track of all these reconciliations and the supporting documentation?
To take this to another level, what if you are the CFO, getting ready to sign off on the quarterly financials? Are you going to feel comfortable knowing that every account has been reconciled based on a checklist created and updated manually?
Formula errors in spreadsheets are another cause for concern. Studies have shown that 88% of analyzed spreadsheets contain errors. In another study, 63% of spreadsheets had errors. Worse, the study participants, nine highly experienced users, were “very confident” that their spreadsheets were correct.
For a process as important as account reconciliations, there are far too many manual steps and “what if’s” involved.
In the next blog, I cover why certain types of technology can help with the modernization of your account reconciliation and the benefits of risk-taking.