Account reconciliation has been described as an “underappreciated control,” yet it’s a key procedure in closing the books and creating an accurate set of financial statements that highlights your organization’s financial condition. Reconciliation identifies mistakes and misappropriations and subsequently validates adherence to the overall internal controls of your business. Also, since Sarbanes Oxley (SOX) was enacted in 2002, the accuracy of account reconciliations has become increasingly important from an audit standpoint.
A recent Process Automation in Accounting and Finance survey of 751 financial executives, managers, and analysts by IMA, the association of accountants and financial professionals in business, shined light on the challenges these professionals face when closing the books, especially as relates to software used in the process. In the survey, respondents identified “current software systems” as the third biggest constraint on their current closing process. Four in 10 respondents said they don’t use effective data management tools, and 43 percent said they spent more than half their time in the closing process on collecting, entering, and validating data. Here, we’ll take a look at how inefficient software tools and practices impact the reconciliation process.
Problematic Account Analysis Practices
A 2017 Benchmarking the Accounting and Finance Function Survey showed that 58 percent of US companies and 66 percent of Canadian companies rely on manual reconciliation of accounts. This is significant when considering the number of active general ledger (GL) accounts a company might have. The survey showed that while 33 percent of companies with $5 billion USD or more in revenue have 100 or less accounts, another 33 percent had 3,000 or more, and 17 percent had 10,000 or higher.
Many times, finance teams rely on repetitive exports of data from their ERP system into Microsoft Excel for manipulation, analysis, and reporting as part of the reconciliation process. The IMA survey hints at this process. Two-thirds of respondents reported they were highly dependent on their package accounting or ERP system for the closing process, while two-thirds also said they were highly dependent on spreadsheets.
Dependence on standalone spreadsheets with static data increases the chance for error and creates an inefficient reconciliation process. Once created, these spreadsheet reports can’t be repurposed because they don’t integrate with the “true” data in the ERP system. As a result, your spreadsheet-driven finance team can develop an unrealistic dependency on IT to execute immediate ad hoc reports with ERP data extract customizations to substantiate variances.
In addition to threatening the accuracy of your reconciliation and closing process, manual processes can impact your finance team’s ability to respond to management’s information demands. In the IMA survey, the top obstacle for such response delays, cited by 41 percent of participants, was “time required to compile the data, which undermines its usefulness.”
Compromised Adherence to Internal Controls
To assure management that internal controls are working, balance sheet accounts are stringently scrutinized as part of the period-end close cycle. Using various manual methods for account analysis inhibits your ability to consistently execute reconciliation controls, impacting management’s confidence that the implemented controls are effective. Only 28 percent of the financial professionals in the IMA survey said they completely trusted the accuracy and overall integrity of their financial close data.
What’s more, use of inefficient reporting and account analysis tools can lead to a situation where only your material account balances are reconciled. Over time, this results in lack of adherence to—as well as deterioration of—set internal controls.
Risky Reconciliation Business
In the IMA survey, more than two-thirds of respondents said they were under pressure to speed up the closing process. The inability of inefficient reconciliation and analysis tools and processes to identify potentially fraudulent, improper, or material transactions in a timely manner can exponentially inflate your audit risk during the period-end close cycle.
In addition, inefficient tools and processes make on-demand identification and analysis of account variances difficult or impossible, increasing audit risks and compromising detection of unprocessed transactions that could result in the understatement of your organization’s assets, liabilities, revenue, or expenses.
There are serious repercussions when failures in the reconciliation process lead to audit findings that highlight deficiencies or material weakness of internal controls, resulting in significant penalties for your organization. Prior to SOX, if an external auditor found a material error during review of your financial statements, you could still correct it with an adjusting entry without the controller having to issue a restatement or an auditor having to disclose a failure of controls, as described in accountingWeb. Post-SOX, your company may have to disclose a failure of controls if the auditor finds a material error in financial statements or a misstatement in quarterly or annual reports that you can’t prove you would have found on your own.
Toward More Automated, Less Manual Reconciliations
The four accounting processes that respondents to the IMA survey identified as requiring the most time and effort were balance sheet account reconciliations (44%), variance analysis (39%), bank and credit card reconciliations (36%), and journal entry creation (28%). These processes were also indicated as “especially good candidates to consider for automation.”
“Automation” may seem like a daunting word in terms of software systems, but some processes can become more automated at a reasonable cost with remarkable ROI. For example, the manual, error-prone, and time draining back-and-forth between the ERP system and spreadsheets can be eliminated by Excel-based reporting and analysis tools that directly integrate with live data in the ERP system. In fact, for one IMA survey respondent in particular, the path toward an automated closing process meant “better integration with ERP systems.”
A direct link between the ERP system and Excel delivers real-time access to account balances in the General Ledger, eliminating manual exports and letting finance create their own ad hoc reports to support management demands. They can retrieve multi-transaction level data directly from the subledger to support period-end close reconciliation and analysis activities. Because you constantly work with the live ERP data in your spreadsheet, there is more confidence in account balance accuracy, which strengthens confidence in internal controls. You also reduce materiality risk through proactive investigation and resolution of reconciliation differences via drill down functionality that’s integrated with ERP data.
An efficient, accurate, and timely period-end close cycle sets a foundation that elevates business performance, supports accurate corporate decisions and satisfies internal and external reporting requirements. Reliance on outdated or inefficient account analysis tools can stifle efficient execution of your reconciliation tasks, so it’s important to continuously examine alternatives to the software status quo.
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