Account reconciliations
Using two different sources of information to verify if figures are accurate and aligned can validate even the most complex transaction. This process, known as account reconciliation, is usually done by comparing the general ledger balance for a specific financial statement account with supporting documentation of what the balance should be.
Depending on the nature of the financial statement account being verified, the supporting documentation can include the following items:
- Reliable third-party information
- An analytically developed expectation
- A separately maintained subledger
- Another internal database
Using this data, organizations can verify and analyze the completeness, validity, valuation, calculation, and proper application of accounting principles, and other assertions around a particular transaction, helping to avoid financial misstatements and improve financial statement integrity.
Common pitfalls
Most organizations do some form of account reconciliation, but not all of them work to make their reconciliations as effective as possible. Below are some of the most common challenges faced by accounting teams.
Incomplete reconciliations
Many organizations only reconcile accounts they view as important. This approach usually misses a common error that arises when a journal entry is posted to the wrong account. Balance sheet integrity can only be achieved by reconciling every balance sheet account.
Absence of a risk-based approach
Not all reconciliations are equal. Some accounts are more complex, high volume, and prone to error while other accounts may present lower risk. Understanding the difference between high- and low-risk accounts and developing appropriate reconciliation procedures for each of them is essential for avoiding errors and maintaining efficiency in the reconciliation process.
No clear accountability
For the process to be successful, reconciliations need to be done completely, correctly, and quickly enough to catch errors before financial misstatements occur. Many organizations neglect to clarify who’s responsible for ensuring this happens. Developing a formal reconciliation calendar or checklist can help drive the process by designating who’s doing what and when they’re supposed to do it and by establishing clear quality internal control procedures.
Lack of standardization
Just as there needs to be clarity around which accounts are being reconciled, when, and by whom, it also needs to be made clear how that’s going to happen. Without putting quality standards in place, many organizations perform reconciliations without consistency.
Everyone involved with the reconciliation process should know the following:
- What are the expected review procedures to be performed?
- What’s the acceptable supporting data?
- What’s considered an exception for follow-up?
- How should those follow ups and their resolutions be evidenced?
Knowledge gaps
Implicit in the standardization issue above is the assumption that those reconciling the accounts understand the purpose, risks, and relevant U.S. generally accepted accounting principles (GAAP). This understanding is critical in designing the reconciliation procedures and for appropriately identifying, researching, and resolving potential exceptions.
