There are varying views on what account reconciliation is and why we even need to do it, depending upon your role within an organisation. So, let’s get back to basics, Ann Furlong writes.
Account reconciliation, in its simplest form, is the comparison of balances in the General Ledger to other source documents, such as bank statements, invoices, contracts and so on.
So the question we need to ask is what are we trying to achieve by preparing an account reconciliation?
a): To make accountants work late during month-/quarter-/year-end and improve the pizza economy?
b): To increase the operating expenses of a company by employing accountants to prepare the reconciliations?
c): To identify mistakes in the General Ledger, help ensure accuracy in the financial statements, and, in some cases, even prevent fraud?
The correct answer, of course, is c), but I’m sure the pizza industry loves accountants around period-end close time.
Account reconciliations are a fundamental control within a company. There are two main classes: systematic and manual reconciliations. Systematic reconciliations within SAP ensure that the control accounts reconcile back to the General Ledger, for example, Materials Management, Accounts Payable and Accounts Receivable.
Manual or non-system reconciliations are those where a person has access to post journals and is required to:
- Identify mistakes in the General Ledger such as mis-postings within the accounts or duplicate entries,
- Understand the nature of a transaction within the account,
- Substantiate an account balance – this means ensuring that even though a journal has been posted to a balance sheet account, it is in fact correct, and
- Ensure accuracy of the numbers, decreasing the likelihood of a mis-statement and ultimately preventing the potential for fraud.
No matter how hard we try as human beings not to make mistakes, there will always be instances where a number is transposed, or an extra zero makes its way into a spreadsheet entry, or we overstate a value. This is why a critical part of the period-end close process is to reconcile all accounts in an effort to identify these ‘hidden’ mistakes and correct them in a timely manner.
We’ve identified what a reconciliation is and why it’s important to prepare them, but it’s also important to think about what makes a ‘good reconciliation’.
- Do we know what we are reconciling?
- Is the account description and purpose clear?
- Would a reviewer of the reconciliation understand the item?
- Have we correctly identified the reconciling items?
- Supporting documents – is the correct support attached and easily accessible for future review?
Traditionally, reconciliations are done manually in Excel – nothing wrong with this, you may say, but what we should be looking toward is efficiency, speed and visibility. For some applications, Excel may be a good tool for an accountant, but it doesn’t aid in the visibility or creation of a controlled environment. Yes, we can lock down cells but we are all experts in unlocking the cells and updating the template to what we want it to look like.
We should be looking towards software to drive a world-class process which includes: standardisation, auto-certification, policy and procedures, training, and a secure, controlled environment with the data and reports being available anywhere, any time.
The BlackLine Financial Close Suite is one example of a software tool designed to automate and optimise traditionally tedious and often error-prone account reconciliation and financial close processes, with modules that cover the entire financial close (Account Reconciliations, Task Management, High Volume Transaction Matching, Variance Analysis, Journals and Consolidation Integrity Manager).
An automated software solution like BlackLine won’t do all the work for the accountant, but it will ensure the focus is headed in the right direction: on standardised reconciliations that are complete and timely. And if reconciliations are not complete, then dashboards and reports will be available to provide the visibility for management to follow up.
So why are account reconciliations important? Account reconciliations are really the fundamental starting point to ensure fiscal integrity over the financial statements, and can even help prevent fraud as the economy and fiscal responsibilities change. Accountants or preparers of reconciliations need to move away from preparing transaction listings, as we can all run a report and review what’s in the General Ledger. The focus needs to be on proving the entries are correct and substantiating the balances – after all, this is the value-added activity of the accountant.
Ann Furlong, FCCA, is director of operations, APAC, for enterprise-class financial close software provider and SAP partner BlackLine Systems. She can be reached at ann.furlong@blackline.com.
This article was published in the Inside SAP Yearbook 2014 (September 2013).
