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Ten Steps to Achieving Reconciliation Zen

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Balance sheet reconciliations are still one of the accounting department’s most powerful tools to catch mistakes, errors, omissions, and fraudulent transactions during the financial reporting process. Not only are they one of the most effective, but they are also one of the last opportunities to identify issues before the numbers go out the door in the form of financials.

reconciliation

Biennial reports from the Association of Certified Fraud Examiners (ACFE) consistently rank the fraud-fighting effectiveness of reconciliations higher than even external audits and IT controls. It’s a front-of-the-line detection tool that can catch fraudsters early, which in turn results in fewer damages.

Even though reconciliations are a core control for the accounting department, the process often suffers a bad rap. Many people tend to think of reconciliations as an administrative exercise; a way of looking at the account and piecing together what happened – and that’s a problem.

Why proactive reconciliations matter

When we see reconciliations as an after-the-fact documentation effort and approach the work that way, we end up compromising their effectiveness. With this attitude, it doesn’t matter whether we catch an error or how long an outstanding check is on the books for – we just document it! The presumption is that reconciliations have no consequences; since it’s a rote exercise, there is no impact.

This is why we must start to see reconciliations as a proactive exercise. They can and should impact the financials, and we need to treat them as the core activity they are. With that in mind, we’re here with ten key steps to building and maintaining a healthy balance sheet reconciliation process:

  1. Know where critical accounts lie. Start by understanding what the balance sheet accounts look like and how they behave, then use that as a basis to assess criticality. There are several different ways to slice this, from the inherent nature of the account to its balance size, or from the degree of activity to past events. Knowing which accounts are critical helps to prioritize the work that follows.
  2. Take real-life constraints into account. You’re not going to be able to tackle everything all the time, so identify your limits. The main ones are time and skill, which is why it’s crucial to understand your accounts in Step One. Without that insight, it’s more difficult to be realistic about what you can handle as a team, determine when to tackle each account, and to match the work to the right people.
  3. Train your team. This is not the kind of subject where, if you push hard enough, the work will get done. Work needs to be completed thoughtfully and intelligently. To accomplish that, reconcilers need to understand the purpose behind the work and be familiar enough with the account and reconciliation procedures to do the work properly and document appropriately.
  4. Monitor deadlines. The biggest mistake we see in the field is reconciliations that don’t get started until after the close is done, putting a lot of pressure on teams. If you’re working to just one deadline, consider the tiered approach. This is a spread-out method where you designate some accounts to be done before the close, some accounts during the close, and the rest after the close.
  5. Standardize every reconciliation and apply the same level of rigor consistently across the account population. If an organization is reconciling a few hundred to a few thousand accounts, every one of them needs to undergo the same degree of scrutiny and inspection when it comes to reconciling. Likewise, the preparer of the reconciliation must go through the same steps to validate the balance. This means using standard forms.
  6. Insist on high quality work product. Accounts should be reconciled to either zero or within an immaterial threshold; this approach is almost always non-negotiable. Always aim to get the most independent or objective source documents possible to substantiate balances. Aged open items and write-offs should be kept to a minimum.
  7. Document, document, document. Basic sign-off is a must. This can be something as rudimentary as printing out the rec and signing it or as advanced as having a digital sign-off system. However you do it, make sure it’s signed and dated – do not backdate!
  8. Stay alert. Prepare for unanticipated events or potential bottlenecks by identifying trends. Learn from past cycles so you can tweak the process next time. Once you start to detect trends, you can get ahead of them. Soon enough, you’ll inevitably develop strong inclinations based on experience and intuition.
  9. Know your KPIs. What gets measured gets done. If you care about it, you should probably measure it. Keeping track of important metrics such as open items, exceptions, and write-offs is essential, and needs to be done at a high level. You need to know if it’s being done right, what exceptions you are finding, and which accounts are having problems.
  10.  Lastly, nothing happens without your people. Reward each other and make the work meaningful. Your team is literally the last gate; you’re doing one of the last set of checks and balances before numbers go out the door. Make the work count.

All of this can be implemented without any special tools or automation. However, if you are curious about what’s available in the market to help automate this process, the SkyStem team is happy to help. Reach out to schedule a product demonstration and see how your accounting team can get out of manual spreadsheets and administrative work in less than one month’s time.

Looking for Accounting software? Check out Capterra's list of the best Accounting software solutions.

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About the Author

Nancy Wu

Nancy Wu currently leads sales and customer success for SkyStem, a technology company that offers month-end close and reconciliation automation for mid-market companies in banking, healthcare, retail and various other industries. Ms. Wu has spent most of her career working in, consulting for, and auditing various accounting departments’ financial close process for public and private organizations ($200 Million to $4 Billion). Her published work around leveraging user behavior to design internal controls is archived in the Cornell University Library. Ms. Wu is also the author of a whitepaper that discusses management standards around balance sheet reconciliation process. She is the subject matter expert on a webinar program that draws hundreds of registrations each month on topics ranging from internal controls over financial reporting, to month-end close infrastructure, to Finance tone at the top.

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