How to Modernize your Account Reconciliations

By Bob Davenport, Director of Finance Transformation for finance controls and automation software leader, BlackLine

Originally posted on SAP Analytics. Reposted with permission.

As part of our ongoing accounting and financial close series, today our partner, Blackline, will address the importance of good account reconciliation.

When a person thinks about account reconciliations, they don’t necessarily hear trumpets playing and people cheering. Their minds usually lean towards the monthly process that is time-consuming, manual and a “necessary evil.” Account reconciliations would probably never get nominated for an Oscar, but they certainly deserve far more attention than many companies give them today.

Reconciliations are the first line of defense when it comes to detecting fraud and ensuring balance sheet integrity. There isn’t a day that goes by that an announcement isn’t made with regards to an accounting fraud scandal, financial statement re-statements, and/or SEC fines and penalties being assessed. Not only does this create additional headaches and costs for an organization, but it can destroy public opinion of that company.

This can be devastating to your future as a going concern, especially if you are a publicly traded company. Here are a few reasons why reconciliations are important, as well as some common pitfalls and how you can improve this process in your organization.

1. The Importance of Doing It Right

As I mentioned previously, account reconciliations are the first and foremost tool in detecting fraud, as well as providing assurance that your balance sheet is accurate. It is imperative that the balance sheet is presented as accurately as possible due to the importance of the statement. The balance sheet provides the readers of the financial statements a picture of the overall financial position of the company. How far in debt is the company? Can it meet its short- and long-term obligations? Is it a viable option to invest in?

These, as well as many other questions, are answered by this one statement. With so much riding on how the balance sheet represents your company, the importance of accuracy cannot be emphasized enough. The importance is not limited to just outside readers of the financial statements, it’s equally important to internal users of this information as well. As accountants, it is our responsibility to provide accurate and reliable information to management as to how the company is performing. Management relies on this financial information to make key business decisions, such as growth and expansion, hiring of personnel and investment in sales/marketing campaigns.

2. Training and Education

“Back when I was in school,” there wasn’t a Reconciliation 101 class that you could take to learn what a good reconciliation is. Many organizations train new employees by the old method of “this is how we have always done it.” Whether this is good or bad depends on how much attention was placed on training associates on what a good reconciliation should be.

If you were to look at a good account reconciliation, you would see five main characteristics:

• Assessment of the validity, correctness and appropriateness of the account balance
• At a specific point in time
• Documented by relevant calculations, clear and complete explanations
• With copies of supporting documents
• In compliance with company policy

If this is the way you have always done things, then you are in great shape. However, a majority of companies are lacking these characteristics in their reconciliations. Some reconciliations include all of the general ledger detail. Isn’t this just a replication of the general ledger? How does this assess the validity, correctness and appropriateness of the account balance? Others provide the beginning balance and ending balance for the period and explain what changes took place – a roll forward if you will.

Were all the changes valid? Should they have been made? These are the types of questions/issues that need to be addressed in order to provide a quality account reconciliation. Management needs to make a priority of educating both existing, as well as new, associates on how a proper reconciliation should be done and what should and should not be included in them.

3. How Things Are Currently Done

Earlier in this article I mentioned that reconciliations are time-consuming and manual. Even so, I am always amazed to hear just how manual and time-consuming the account reconciliation process truly is.

A typical reconciliation process is as follows:

• Find previous month’s reconciliation, usually some type of Excel spreadsheet file
• Manually enter in the current period balance into the spreadsheet
• Provide proof of the GL balance, i.e. – print screen of ledger
• Review previous supporting items in reconciliation to determine if they are still relevant
• Review GL activity for any new transactions that have posted to the account for the period to determine if they are appropriate
• Add new items to the Excel template
• Update any formulas in the spreadsheet, if applicable
• Accumulate all supporting documentation needed for the supporting items
• Print off Excel reconciliation, attach supporting documentation
• Provide to manager for approval
• Manager reviews all material, signs off and sends to next person for approval, if applicable
• Once reconciliation is fully approved, it is then placed in a folder or binder and stored either onsite or offsite
• Sign in on the reconciliation control log, if one is available
• Repeat for the next balance sheet account (and the next, and the next…..)

The steps above are not all-inclusive with regards to everything needed to complete a reconciliation. Some reconciliations are very straight forward while others can be far more complex. Regardless of the simplicity or complexity of the account, there are certain steps listed above that are required. This may not seem like a lot of work if you have, say, 25 accounts. But what if you had 250, or 2,500, or even 250,000 account reconciliations????

Think about the amount of time needed to pull this information together manually. What about all the documentation needed? Where are the procedures kept for all of the reconciliations? What about an audit? Would you be able to easily prove that all accounts have been reconciled, let alone provide copies of them to the auditors upon request? What if you are a global organization – how do you keep track of all these reconciliations? What if you are the CFO, getting ready to sign off on the quarterly financials? Are you going to feel comfortable knowing that every account has been reconciled based on a checklist created and updated manually?

What about formula errors in the spreadsheets? Studies have shown that more than 90% of spreadsheets contain serious errors, while more than 90% of spreadsheet users are convinced that their models are error-free. For as important as the account reconciliation process is, there are a lot of manual steps and “what if’s” involved.

4. How Things Could Be Done

Imagine if there was a cloud- based technology solution that could automate the account reconciliation process. What if there were options such as:

• Automated workflow
• Real- time dashboard reporting
• Reconciliation templates that provide consistency as well as automated schedules
• Audit trails, as well as prior period history, just mouse clicks away
• Auto certification of low-risk, routine account reconciliations

This technology does exist within BlackLine’s Financial Close Suite for SAP® Solutions. Alongside SAP Simple Finance powered by SAP HANA, BlackLine provides strategic value with instant insight across the Finance organization – all via a personalized and simple user experience.  BlackLine fills a white space, complementing the functionality inherent in SAP Financials.

In addition to the functionality listed above, there are many other great benefits in using technology for your account reconciliations. We provide a central repository for all of your reconciliation and supporting documentation, allowing global secure access anytime from anywhere. With your account and supporting item information in one place, you can have access to data that you never could readily get your hands on before. You can run reports to see the aging of your reconciling items. You can easily identify errors and the impact they could have on your financial statements.

Companies spend hundreds of man-hours in completing reconciliations; however, they are unable to access key information without adding hundreds of more hours without technology. Organizations spend millions of dollars on the latest and greatest ERP systems to record and track transactional data, but rely on manual processes to make sure that the information is valid, correct and appropriate. More and more companies need to look to technology for more than just recording orders and paying bills. Technology like BlackLine can help modernize the entire finance organization.