How Technology Can Support an Effective Reconciliation Policy

Published August 13 2020 by Mike Pilch
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Aligning a company’s implemented technology to support a reconciliation policy is a critical step to supporting an effective internal controls environment. This blog will provide you with insight into Alithya’s approach to creating an efficient reconciliation method and the key considerations you must take into account when developing your company’s account reconciliations policy.

What are Account Reconciliations?

Account Reconciliations are scheduled activities designed to ensure that source information is complete and accurately recorded within the financial systems. Organizations leverage transactional systems to support and record cross-functional data. Financial systems are not only used to capture and record transactions but to transform data into information. Financial systems encompass Enterprise Resource Planning (ERPs), often, referred to as general ledgers, and subledgers for key functions, such as accounts payables, accounts receivable, fixed assets, etc. To ensure the accuracy of financial information, the reconciliation process incorporates the following daily, weekly, and monthly routines:

  • validating that the financial activities or events recorded in the operational systems made their way into the subledgers
  • validating that the data in the subledger has been recorded in the general ledger
  • validating that journal entries were recorded and the amounts recorded are accurate
  • validating the effectiveness of accounting controls
  • qualifying the validity and integrity of the financial statements

Why are Account Reconciliations Important?

Throughout the year, various organizations face scrutiny over unreconciled activities, past due balances, and the timely preparation and review of reconciliations. As a result, auditors may highlight these material weaknesses and/or deficiencies in the internal control environment. While this may not result in fines or delisting of a publicly traded company, these deficiencies increase audit costs and contribute to poor financial decisions directly impacting shareholder value, leading to further oversight of the board of directors.

During a reporting period, various subsystems and transactional systems feed data to subledgers. Ultimately, it is fed to the general ledger and other decision-support systems. During the normal course of operations, the accounts receivables and payables subledgers record cash receipts and disbursements, thus impacting cash management. During a close process, these transactions are aggregated and consolidated within the financial statements to be monitor financial performance.

As the close process commences, Chief Financial Officers and Controllers are kept up at night by concerns about data quality and balances within the financial statements of their companies. Common questions include:

  • Is the information complete?
    • Was the consolidation run effectively?
    • Have subledgers been fed to the ERP and validated?
  • Is the information relevant?
    • Do I have any write-offs to consider?
    • Did we remember to run allocations?
  • Is the information accurate?
    • Have manual entries been recorded?
    • Have all accruals been recorded and prior period accruals reversed?
    • Do I have risk for fraud, both external and internal?

Account reconciliations are a foundational component of a company’s ability to evaluate the integrity of its financial statements. A key component of Sarbanes-Oxley 404 shows the effectiveness of internal controls over the company’s financial reporting.

The Reconciliation Approach

The maturity of the reconciliation approach and process is dependent on:

  • the organization and industry in which it operates
  • what steps and systems are part of the consolidation
  • how the financial statements are prepared
  • the reporting process of the company
  • the risk related to the misstatement of certain accounts

Organizations generally utilize two methodologies for reconciliations: transaction matching and a monthly balance review. Transaction matching is the process of matching transactional level detail to subsystems, cash accounts, balance sheet accounts, or P&L accounts. The method used depends on how financial transactions are recorded within operational systems and the comparable system, along with the volume of transactions. It is typically a highly time-consuming process as the matching process could be:

  • a one to one match
  • many to one match
  • one to many matches
  • many to many matches

Including a transaction matching process as part of the overall accounting control procedure results in:

  • to proactive reviews of activity to ensure transactions are recorded in a timely manner
  • assurance that activity has been processed between operational systems and subledgers or general ledgers
  • the capture of potentially fraudulent activity

For monthly compliance, companies deploy three separate methodologies to ensure balances are substantiated between subledgers and general ledgers. Those methods include:

  • balance comparison
  • roll-forwards or account analysis
  • variance analysis

Defining a Reconciliation Policy

The development of a reconciliation process starts with two exercises; understanding systems involved in the accounting process and evaluating opportunities for standardization. Creating an inventory of sources (i.e. general ledgers, subledgers, operations systems, and subsystems) and segregating them into those with a direct and indirect impact on the financial statements helps organizations to understand the systems that need to be evaluated as part of the reconciliation approach.

The second key exercise evaluates the reconciliation process for standardization of:

  • naming conventions
  • the close calendar
  • reconciliation run book calendar
  • process ownership
  • reconciled and unreconciled accounts
  • the audit review cycle

Since account reconciliations are a key control to ensuring the integrity of a company’s financial statements, companies must have a comprehensive and concise policy that establishes rules and procedures related to the:

  • basis of accounting
  • risk policy
  • materiality thresholds and how often materiality is re-evaluated
  • supporting documentation requirements
  • level of currency (i.e. transactional, functional, reporting)
  • escalation policy
  • aging, exceptions and stale dated policy
  • communication plan
  • certification process
  • retention policy
  • workflow policy

The risk policy is the lynchpin in defining many other components of the reconciliation policy. In evaluating the risk of accounts, it is best to understand:

  • the volume of transactions being recorded to accounts
  • the frequency of transactions being recorded to accounts
  • the financial impact of a misstatement on the financial statements
  • the potential impact of fraud

In order to capture the various elements and criticalities of the reconciliation process, the policy needs to be both comprehensive and adaptable for future organizational changes, such as:

  • changes and enhancements to source systems
  • new data sources
  • changes to the chart of accounts
  • re-organizations
  • mergers and acquisitions
  • departmental changes

Aligning Technology to Policy

Technology can lead to an efficient and seamless reconciliation process. In order to deliver an effective message to the responsible team members, as well as auditors, technology and policy should be aligned.

As the reconciliation policy and technology converge, critical components of the policy must be defined including:

  • risk
  • standardization
  • workflow
  • communication

These four core components of the policy can then answer the following elements of the policy:

  • frequency of reconciliation
  • certification rules
  • days aged methodology
  • support documentation requirements
  • formats
  • currency
  • basis of accounting
  • reconciliation calendar
  • segregation of duties
  • notifications
  • escalations

The key benefits of this methodology include:

  • A defined process to establishes controls and standardizing the approach.
  • Automation that reduces effort for zero balance accounts and balances that reconcile across systems.
  • Established attributes and rules for aging of unreconciled balances.
  • Automated notifications and escalations.
  • A defined workflow with segregation of duties.
  • An efficient process that utilizes technology to create synergies in the reconciliation of the financial statements.
  • Valuable insight into delivery a reconciliation policy.

Why?

Aligning technology with your existing and future policies can be a daunting task, but is a necessary component to reducing your risk, streamlining your process, and long-term success. Ask yourself these questions:

  • Is your reconciliation process manual?
  • Does your reconciliation process offer a way to track open and closed reconciliations?
  • Do you have the ability to auto-reconcile in your current process?
  • Does your reconciliation process provide email notifications and alerting for outstanding or overdue reconciliations?
  • Do you have a reconciliation policy the efficiently conveys your reconciliation process?

Alithya has a proven, comprehensive methodology to help our clients reap the benefits of their technology investments.

For comments, questions, or suggestions for future topics, please reach out to us at infosolutions@alithya.com.  Visit our blog regularly for new posts about Cloud updates and other Oracle Cloud Services such as Planning and Budgeting, Financial Consolidation, Account Reconciliation, and Enterprise Data Management.  Follow Alithya on social media for the latest information about EPM, ERP, and Analytics solutions to meet your business needs.

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