Account reconciliations seem so simple – yet why is it that they are so often challenging to keep on top of and to do well? We propose below some simple concepts – starting with the account reconciliation design through to their execution – that will improve your reconciliation process and also simplify their performance through clearly stated objectives and framework.
This is Part 1 of a 3-part series.
Let’s remind ourselves of exactly why we perform account reconciliations – to obtain assurance through an independent review and matching to alternate measures that account balances are properly stated; and by extension, that our financial reporting is properly stated.
When we say properly stated, it is that the activity recorded (and therefore the associated balances) conform to the five core financial statement assertions (and control objectives):
- Existence or Occurrence – The activity recorded actually took place or existed for the time period reported.
- Completeness – The activity reported is comprehensive and complete for the reporting period and account.
- Valuation or Allocation – The values assigned to the activities/transactions are properly allocated, assigned, and distributed across the different account types and/or time periods.
- Rights & Obligations – The organization has rights to or obligations for the activities/transactions in the period reported.
- Presentation and Disclosure – The activities and account balances are appropriately classified, reported and disclosed.
Remember that account reconciliations are a process like any other financial reporting process and should be treated as such with formal consideration to their design, operation and control. After all – account reconciliations play an important role in overall internal controls over financial reporting (ICFR) and should receive the attention necessary.
- Design – The design of the account reconciliation should consider the objectives of the reconciliation including risks associated with the particular sub-process and operating elements. The design should address data sources used to validate the operation of the process and its recording – including limitations on the timing and availability of information.
- Roles/responsibilities – There are two primary roles, that of the account reconciliation preparer and the reviewer. These responsibilities should be clearly assigned and understood to ensure the timely and proper operation of the reconciliation. The reconciler is essentially the “owner” of the account who understands the daily activities, operation and reporting of the account including all sources posting to the account.
- Segregation of Duties – Like any control function, proper segregation of duties should be maintained to ensure the effectiveness of the review performed. Ideally for account reconciliations – the reconciler would be a person separate and independent from the person posting to the account. This often is not practical and the person posting to the account is usually the reconciler – with a separate and independent person/manager responsible for reviewing and approving the reconciliation. Under this design – it is especially important that the source information for the reconciliation be properly controlled to ensure its integrity as well as the propriety of the overall reconciliation to mitigate segregation of duties risks between user and preparer.
- Scope – The scope of account reconciliations is at a minimum generally focused on all balance sheet accounts; however there may also be a need to include revenue and expense accounts. The scope should be set based on the needs, and past experience of reporting challenges at the organization. The scope should include those accounts with period to period changes or activity, but also consider the rationale for and reasonableness of unchanged or static account balances. Each set of accounts may have its own operating expectations based on the nature and frequency of activity reported through the account which should be considered in designing and performing the particular reconciliation.
- Frequency – The frequency of account reconciliations should at a minimum coincide with the reporting or closing frequency (i.e. monthly or quarterly) so that the reconciliations support the closing balances. Practically – the reconciliations may be performed more frequently; even daily or weekly to keep in step with a high volume of (transactional) posting activity and to identify any potential issues early on to have sufficient time to research and correct them before the reporting close.
- Deadlines – Ideally the account reconciliations would be completed in the same reporting period before the books are closed and reporting completed to correct known errors prior to reporting. However, ever shrinking reporting deadlines with limited time and resources makes this impossible. The next best alternative is to complete the reconciliations and their review shortly after closing to allow adequate time for further follow-up and remediation prior to the next reporting closing. Reconciliation deadlines may also need to be staggered based on scheduling priorities and availability of information to ensure all accounts are addressed in a systematic fashion. As noted above, by increasing the frequency of interim reviews, potential issues can be identified early and start to be corrected before their formal (monthly) sign-offs.
- Review – As important as the reconciliation itself is the separate review and sign-off/approval of the reconciliation. As noted above, this is especially critical where there might be potential segregation of duties weaknesses in the preparation of the reconciliation, and/or process and accounting complexities and/or significant judgments that would particularly benefit from another level of, or a deeper review.
- Retention – The reconciliations are an important part of ICFR and should be retained for the current reporting year until audit and sign-off on year-end reporting. Reconciliations should be retained in a network directory accessible to only those needing access and restricted from those that don’t. The reconciliations should be password protected from improper changes after their preparation and review, and backed-up to ensure they are available when needed. Where possible, it would be helpful to retain the prior years’ reconciliations in addition to the current year as balance sheet accounts are the culmination of prior period activity, building over time. Some problems can also go undetected for some time and longer retention will help with the availability of information to research issues back to the time of their origination.
- Monitoring – As with any process, it is important to monitor performance to ensure its proper operation. A checklist, or use of preparer confirmations and sign-off and/or other tracking means are necessary to ensure that all reconciliations are completed and reviewed on time. Central retention, such as saving reconciliations and support to a central network directory can also help with monitoring, by increasing visibility to the completed/saved reconciliations.
- Technology Solutions – In recent years a number of applications have been developed to help with the reconciliation process. Their features vary across solutions from simple stand-alone databases to retain account reconciliation documentation to integrated end-to-end solutions managing the entire process where journal entries can be initiated and posted to the accounting ledger and linked to supporting data and reconciliations performed with monitoring and status reports to measure progress to completion, and summarize adjustments across accounts.
This concludes Part 1. Part 2 will begin the discussion on how to conduct the reconciliation.