Despite years of increased focus on internal control over financial reporting, many companies continue to face significant risks associated with the completeness, accuracy, timeliness, quality and efficiency of their account reconciliations (“recons”). Striving to enhance their comfort with financial statement certifications, executives are grappling with how to obtain greater visibility into the status of their recons, including the aggregate nature, volume and direction of reconciling items.

While many companies have improved their discipline with recons, they are realizing that reliance on spreadsheets burdens the company with continued dependence on a manual process that is prone to error and requires significant, continued dedication of staff. Experience indicates that many companies cannot sustain this level of investment in a manual process. As the economy tightens, this increases the risk that improvements to the process will fall victim to staff reductions, further heightening the risk in this area.

Risk
The challenge of ineffective recon processes continues to impact large and small organizations alike. While restatements are trending downward, significant spreadsheet related errors continue to occur. Organizations that do not apply a sustainable approach to the recon problem will likely remain in a reactive, “clean-up” mode, and will continue to face increased risk of financial statement misstatement.

1. Quality – Essentially, the process involves “validating” (or analyzing through roll-forward procedures) account balances. Many organizations continue to struggle with a number of questions, including: Why are we performing recons? What is a recon vs. a roll-forward? What are the account owner’s responsibilities for investigating and resolving reconciling items? Who is responsible for performing and reviewing our account recons? How adequate is that review? Which accounts should we reconcile and how frequently? Should we reconcile to the penny?
2. Completeness and Accuracy – Are recons prepared and reviewed for all key accounts? Do you experience unresolved items that roll over from month to month without being investigated and resolved? Are there potential unrecorded accruals, reserves, unapplied receipts or other inaccuracies resulting from incomplete reconciliations or unresolved reconciling items?
3. Timeliness – Are all key recons and account analysis tasks completed prior to closing in order to identify and correct errors before they are included in financial statements? Is your close cycle unnecessarily lengthy due to extensive time required to prepare and review recons?

Point of View and Common Challenges
Experience shows that replacing spreadsheets with a web-based reconciliation solution can have significant impact:

1. Detection – Risk is significantly mitigated by enabling greater visibility into the nature and direction of reconciling items and their resolution.
2. Efficiency – Time spent on preparation and review is reduced via standardized templates and processes and, when appropriate, “auto-matching.”
3. Overall Governance and Control – Increased automation helps transition away from the inherent risk of spreadsheets and provides an enhanced, transparent audit trail (consequently reducing external/internal/compliance audit costs).

Recon issues continue to have a dramatic impact on the efficiency and effectiveness of the financial close cycle.  Research highlights that “Untimely or Inadequate Account Reconciliations” rank sixth on the list of leading issues driving the reporting of a material weakness .  The root cause underlying this problem is typically a combination of issues, including:

• Inputs
  1. Dedicated/properly trained staff that possess a clear understanding of how transactions flow into accounts and rollup into financial statements is lacking.
  2. Data required for sub-ledger validation originates from multiple systems, resulting in additional manual recon steps and thus increased likelihood of error.
  3. Formats, source documents, data definitions, application of policies and standards vary between business units/systems.
  4. High volumes of manual journal entries complicate recons. When significant entries occur during or after the close, recons require continuous updates.
• Processing
  1. A lack of clearly defined policies, procedures and standards compromises quality and limits efficiency of review.
  2. Materiality limits and standard reconciliation concepts are not in place or properly employed, further reducing efficiency.
  3. Numerous manual hand-offs, manual reviews, key person dependencies, and insufficient independence/segregation of duties can lead to items being missed.
  4. Masses of spreadsheets are used, further exacerbating unclear visibility, ownership and accountability.  Think of it this way:  100 spreadsheets per month = 1,200 files per year and 2,400 signatures.
• Outputs
  1. A high-level dashboard to determine close status and provide visibility into the aggregate volume/nature/direction of reconciling items is missing.
  2. Lack of transparent audit trail adds inefficiencies to external/internal/compliance audits.
  3. Copies of spreadsheets with supporting documentation must be continually maintained and generated for multiple external parties/auditors.

The Leading Approach to Sustainability
Leading organizations have experienced measurable ROI from re-engineering their recon process, such as:

1. Reduction of 15% of the annual close process workload by aligning the frequency of reconciliations with the risk of each account
2. Reducing reconciliation workload by more than 25% by replacing spreadsheets with a reconciliation application
3. Eliminating more than five days of delay in preparing the inter-company reconciliation by replacing the control spreadsheet with a reconciliation application

These organizations have realized such benefits by focusing on establishing a scalable process that does not require a commensurate increase in the resource allocation as the organization grows.  They have succeeded by questioning the status quo, particularly the need to rely on spreadsheets, and by championing the need to balance efficiency with the inherent risk of the existing manual recon process. This results in:

• Process Efficiency
  1. Focus resources on the highest-risk areas.
  2. Automate and improve routine steps in the recon process.
  3. Establish a common set of standard templates and policies.
  4. Provide staff with the accounting training they need to properly understand and prepare recons as well as discharge their responsibilities for investigating and resolving reconciling items.
• Visibility and Risk Mitigation
  1. Provide management with a clear view of recon status, aging of outstanding reconciling items, and dashboard tracking for reporting and performance management.
  2. Establish a common set of recon standards and policies for recons, roll-forwards and write-off approval thresholds.
  3. Clarify roles and responsibilities for account ownership, timing and management review.

Reconciliation Solutions – Enabling Tools
New technologies dramatically increase the opportunity to enhance value by “re-engineering” the recon process. There are a number of mature general ledger (GL) recon tools available that can enable the implementation of a repeatable, sustainable process that helps management ensure completeness and accuracy in account balances while minimizing costs.

These tools replace spreadsheets with a web-based system that standardizes the recon format, captures to/from balances from sub-ledgers and the GL, and provides a mechanism for an integrated process. They provide capabilities such as account assignments by roles, automated workflows, standard templates, database of prior recons, capture of explanations/resolutions, automatic account certification based on business rules, import of transaction-level data from the GL and sub-ledgers, electronic repository for supporting documents, and dashboards and reporting features.
The following factors indicate the need for an enabling recon tool:

1. More than 50 recons are prepared on a monthly basis using spreadsheets or other manual tools.
2. Recons are a key constraint in the close process.
3. The organization has a reported or potential significant deficiency or material weakness related to recons.
4. Documentation, communication, and enforcement of accounting policies and procedures are inadequate.
5. There are multiple reporting entities or accounting functions are decentralized.
6. A history of being highly acquisitive, combined with recon processes of acquired entities not being integrated effectively into the corporate close and consolidations process.
7. Multiple, un-integrated finance systems are applied in the close – consolidate – reporting cycle

Lessons Learned
Experience shows that while a software tool can be a powerful enabler, dramatic ROI (and lasting change) is realized through a focus on several other critical levers of change, including policy, process, methodology and training.  Companies that focus solely on a technical implementation of software run the risk of continued reliance on spreadsheets and inability to realize the broad benefits a toolset can provide.

1. It is not just the tool – do not underestimate the amount of effort that will be required for designing and implementing changes in policy, process, people and methodology.
2. Resources still need to be allocated – the tools do not eliminate the effort, but do enable a more efficient and effective process.
3. Establishing accountability is a critical success factor – leading organizations have devised techniques for “scoring” recons and embedding them in the periodic performance review process.
4. Effective roll-outs require dedicated project managers from both the process and IT functions.
5. The scale of the change may lend itself to a focused pilot, followed by a sequenced roll-out plan.
6. If the data feeds are not already clear and/or if there are significant un-reconciled accounts, the organization needs to plan for additional effort in these areas.

Getting Started
To successfully embed the new process, these tools require implementation in parallel with improvements involving policy, process, people and organization, reporting, methodology and data.  When getting started, begin with a focused effort to diagnose the state of recons that provides both the case for change and the roadmap for improvement. The overall effort is different for each company and can include:

1. “State of Recons” diagnostic – volume analysis, completeness/accuracy, preparer/reviewer “smoothing,” impact on close
2. Develop criteria and draft risk ranking/account prioritization
3. Draft recon policies and account ownership/accountability
4. Tactically support account clean-up efforts (if applicable)
5. Develop and implement standard/templates/formats and overall standard operating procedure (SOP)
6. Develop and conduct communication/training
7. Draft business requirements, select support systems, recommend roll-out approach and draft project plan
8. Manage program and support leadership

Remember that a disciplined recon process is instrumental to efficient and effective financial reporting. If recons are not completed accurately or timely, management’s ability to detect potential misstatements is limited. Today’s enabling tools have proven to be a viable, economic alternative to the obsolete spreadsheet-based approach. Companies with 50 or more monthly recons should take the time to consider these solutions to mitigate their risk and reduce the amount of time invested in manual processes.