Account reconciliations are part of the basic building blocks of financial processes and controls. It’s something everyone expects to just be there and work without much thought. Many financial managers assume that if they don’t hear anything about account reconciliations from their staff; then all must be well.
Very often this is simply not the case.
Through our decades of auditing, analyzing and designing account reconciliation processes, here are some common problems that exist right now in the account reconciliation process of many organizations:
The reconciliation is not in fact…a reconciliation
Many companies take the prior month’s ending balance and sum the debits and credits to arrive at the current month’s ending balance. This is not a reconciliation. It is more properly called a roll forward. The account reconciliation process is not simply a “math check”. The intent of this critical control is to ensure that account balances are fully supported. An example of full support would be an accrual calculation spreadsheet that supports the balance you are reconciling. Simply rolling forward the account balance without examining the appropriateness of the amounts themselves is often a mistake that results in misstatements and misfortune down the road. Care must be taken to ensure that in reconciliation documents the ending account balance is real and fully supported by factual evidence.
Reconciliations are inconsistent
If you were to take a sample of your account reconciliations from across your organization, how would you answer the following questions:
Are similar balance sheet accounts reconciled with the same frequency?
How is the frequency decided?
What is the materiality for determining if the balances are “reconciled”? Is a $5 difference material, a $5,000 difference,etc.
Do your account reconciliations have all the critical components of a reconciliation? Do they start with the GL ending balance?
How much support and documentation do your reconciliations require in order to determine the appropriateness of the ending balance?
Very often organizations have not determined which reconciliations require multiple levels of approval or higher-level approval. For example, a reconciliation of accrued vacation does not carry the same amount of risk as a complex accrued customer rebate account. Making sure that complex and highly critical reconciliations are analyzed and approved by higher authority levels often makes the difference between just wishing everything is ok, and everything truly being up to standard.
If you haven’t visited your account reconciliation process in some time it might be a great idea to check in with your staff and take a look at this critical control. If you find some things you didn’t expect or see that maybe this area needs some tightening up, you can contact us for our account reconciliation check-up analysis.