Reconciling accounts at the end of a period is one of those mundane finance department tasks that are ripe for automation. Reconciliation is the process of comparing account data (at the balance or item level) that exists either in two accounting systems or in an accounting system and somewhere else (such as in a spreadsheet or on paper). The purpose of the reconciling process is to identify things that do not match (as they must in double-entry bookkeeping systems) and then assess the nature and causes of the variances. This is followed by making adjustments or corrections to ensure that the information in an organization’s books is accurate. Most of the time, reconciliation is a matter of good housekeeping that identifies errors and omissions in the accounting process, including invalid journal postings and duplicate accounting entries, so they can be corrected. Reconciliation also is an important line of defense against fraud since inconsistencies may be a sign of such activity.
Back in the days of quill pens and blotters, it might have been manageable to meticulously comb through accounting entries. Today, however, volumes of data are too great to make this realistically feasible, and technology provides accountants with faster and more effective means of spotting patterns and familiarizing them with the peculiarities of the organization’s books. For CFOs and controllers who are trying to determine how to begin the process of transforming their department to make it a more strategic player in their organization, this is a way to free finance staff to do more productive tasks.
There are three important virtues associated with automating reconciliation. The first is consistency: Business rules, policies and procedures are applied consistently in ways that are in line with accounting policies that external and internal auditors accept. Machines are more reliably consistent than humans in such tasks. The second virtue is elegance: Automated systems simplify the process while making it faster and more accurate. They enable auditors to focus their time and attention on the most important issues that arise. The ability of automated systems to highlight exceptions eliminates the need for random sampling, which both consumes time and poses the risk that something important will go unnoticed. The third virtue is efficiency: Automated systems enable an organization to substantially reduce the amount of time needed to complete the reconciliation of accounts because the system performs the purely mechanical tasks and skips the accounts in which there has been no activity or in which the amounts to be reconciled are too small to be material. These systems also reduce the time internal and external auditors need to check reconciliations because all of the work is centralized in a single system and because the system and its configuration functions as a higher level of control in the reconciliation process that is easy to test and monitor.
Despite these obvious virtues, many organizations underutilize automation. The majority manage reconciliations in spreadsheets shared through email. Electronic spreadsheets were a major advance decades ago. Today, however, they are not the best choice because the information they contain is fragmented, difficult to consolidate, hard to share and prone to error. Running this process with standalone spreadsheets and email is more difficult and time consuming to manage and control than using a dedicated reconciliation application. A well-designed dedicated application assigns ownership of every task to individuals and provides real-time visibility into which parts are on schedule, which are behind, and which may be in danger of falling behind schedule. These systems employ templates that are centrally controlled to ensure consistency and quality. The templates can be updated as needed. A spreadsheet may start as a template, but it is difficult to control it, even with protections built in.
Documentation is another weak spot in standalone spreadsheets shared through email. Although there are objective aspects to the reconciliation process, those performing it ultimately must use their judgment. These judgments must be supported by narratives and calculations that clearly and completely explain the decisions each person made and by citing supporting documents wherever necessary. A related aspect is approvals, since good governance and control of accounting systems require that someone inspect and approve the work of others when their actions (or lack of action) can have a material impact on the quality and accuracy of financial statements. So, another important element that a dedicated reconciliation system is providing to support the approval workflows to ensure that the work has been completed before the books can be closed.
Automating reconciliation can be a first step in creating a virtuous cycle. Many executives in finance organizations would like to improve the performance of their department but face the challenge of finding the time to devote to such efforts. The staff time that can be saved through automation can be reinvested in finding, and fixing, the root causes of other issues that bog down the department. Automating reconciliation can accelerate the financial close, improve productivity, reduce errors and the related possibility (albeit limited) of financial misstatements, enhance control and diminish the risk of financial fraud. These are reasons enough why all midsize and larger corporations should investigate the benefits of dedicated reconciliation software.
Regards,
Robert Kugel