Best Practices for the Account Reconciliation Process
by Terri Eyden on
By Susan Parcells, CPA
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.
Since the enactment of Sarbanes Oxley (SOX) 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 SOX, 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 SEC 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 account reconciliations are accurate.
Following this best practices list will send you on your way to error-free account reconciliations and a more efficient financial close:
Account reconciliations should be complete - no account left behind!
- Ensure 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, 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.
Account 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).
Account 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.
Account reconciliations should support the appropriate accounting principles.
- Account reconciliations should follow their local accounting principles.
- Ensure the reconciliations follow the principles, such as historical cost, matching, and full disclosure.
- Ensure 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.
The account reconciliation process should be constantly reviewed and improved.
- Review the account reconciliation policy to ensure 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/or instructions to ensure they answer: What? When? Who? Why? How Much?
- Use standard templates for the various types of reconciliations for consistency and ease of reviewing for accuracy and completeness.
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.
About the author:
Susan Parcells, CPA, is a Close Governance and Product Specialist for account reconciliation and financial close software provider BlackLine Systems.
You may like these other stories...
Read more from Larry Perry here and in the Today’s World of Audits archive.As one of the first steps in pre-engagement planning, the review of the prior year’s audit documentation is one of the most important....
The Financial Accounting Standards Board (FASB) said on Monday it will reach out to stakeholders about an accounting standard on fair value measurements, after a recent review of the standard noted that some investors found...
Accounting’s Big Data problemReality is swiftly outpacing the ability of accountants to gauge Big Data. In an article for CFO, David M. Katz asked, “What needs to happen for them to start to catch up?”...
Upcoming CPE Webinars
BAR is an acronym for: Boundaries, Authority and Role. This simple tool will provide participants with a solid understanding of leadership essentials to improve their performance.
This material is designed to provide a start-to-finish overview of how to plan and complete high-quality small audits efficiently.
In this session Excel expert David H. Ringstrom, CPA shares numerous techniques that you can use to work with charts more efficiently.
Key Accounting and Reporting Issues for Nonprofits No. 1: Overview and Statement of Financial Position
This material focuses on non-profit organizations organization, accounting and reporting.