Dynamic Risk Rating: Features and Benefits

By Kars Stal, Chandan Malhotra, Caroline Bennett, and Michael Hurley

Overview

Organizations seeking to drive efficiency in their Account Reconciliation process can automate many steps in the process with Oracle Account Reconciliation Cloud Service (ARCS). One such automation opportunity is dynamic risk rating. The Hackett Group advises our clients to use a risk-based approach for account reconciliation, with enhanced focus and analysis on accounts with the greatest likelihood of material errors. Within the account reconciliation tool, clients can assign a risk rating to each account. The traditional approach to risk rating is a one-time (or maximum once a year) review of your account reconciliations for risk based on activity, materiality, volatility, complexity and risk / exposure of material misstatements. ARCS takes this one step further, by assigning risk rating dynamically.

Dynamic risk rating automatically assigns risk levels to each account based on a pre-determined set of criteria, typically based on dollar thresholds, account type, or reconciliation frequency. Based on the risk rating of High, Medium, or Low, clients can assign different due dates and frequencies to complete the reconciliation, and the tool will reevaluate these after each data load. In this paper, we will discuss in more detail the features and benefits of creating rules to drive dynamic risk rating in ARCS and walk through a case study of a client who Hackett assisted in implementing this functionality.

Risk rating indicates the risk level of each account based on other attributes of the account, for example activity, materiality, volatility, complexity and risk / exposure of material misstatements. As an example of setting a materiality threshold, accounts with balances up to $2M would be rated Low risk, $2-$5M accounts rated Medium, and over $5M rated High. Companies may also assign risk by account type or statement line. Typically, finance leaders want to pay particularly close attention to cash accounts, and choose to assign them higher risk ratings than non-cash accounts with similar balances. In addition, the finance team may designate accounts for reconciliation at different frequencies. Typically, accounts are reconciled on a monthly, quarterly, or annual basis. Higher risk accounts will be designated a higher frequency (e.g., monthly).

Historically, risk ratings needed to be assigned manually for each account. Now, using Oracle ARCS, the criteria of account balance, account type, frequency, and other attributes can be combined to develop sophisticated rules to automatically assign risk ratings. Dollar threshold of the account balance is usually the most important factor and tends to have the greatest weight in determining risk level.

Finance leadership can use the assigned risk level to set different deadlines or frequencies for completing reconciliations. For example, all High risk accounts may be due by Day 5, Medium by Day 7, and Low by Day 10. Focusing on High risk accounts to be performed as part of the close process, where others will be performed less frequently or outside of the close process, can ensure issues are found earlier and reduce the number of journal entries after close, and at same time increase overall compliance.

Case Study – Dynamic Risk Rating Implementation

The Hackett Group is an experienced leader in implementing Oracle ARCS and has helped our clients set business rules within the tool for dynamic risk rating. One of our most recent ARCS implementations including dynamic risk rating was for a $6B Data Communication and Telecommunication Equipment Provider. This client has a global account reconciliation application with a team of 500 users to reconcile and approve over 11,000 accounts within 10 business days each period.

At this client, we established dynamic risk ratings based primarily on account dollar thresholds, with balances less than $2M rated Low, balances from $2M to $10M rated Medium, and those larger than $10M rated High risk. We also used account frequency as a factor in setting risk levels, with all High risk accounts reconciled monthly. Medium and Low risk accounts could be reconciled on either a monthly or quarterly basis.

This client based their account reconciliation timeline on risk levels, with the higher-risk accounts due earlier. The schedule was set as follows for each risk level:

  • High Risk – 6 days
  • Medium Risk – 8 days
  • Low Risk – 10 days

If account balances or other risk factors change, the risk rating for that account and related due dates would automatically update based on the defined rules. Based on assigned due dates, preparers and reviewers receive automatic email notifications when they have tasks due. Overall, this implementation reduced the risk in the organization, provided proper focus during the close cycle on drivers of risk, and developed a more efficient close and reconciliation process through automation.

Conclusion

Dynamic risk rating in an Oracle ARCS application can be a quick win opportunity for improved standardization and automation in the account reconciliation process. Hackett has worked with numerous clients to determine the right attributes, thresholds, and logic to determine risk ratings and automate them using ARCS. Implementing dynamic risk ratings automates a task that otherwise must be performed manually each period by the account reconciliation tool’s administrator (or will not be performed at all or only once a year). The ability to automate facilitates increased focus on more value-add activities and reduces the risk of having to make journal entries late in the close process. Creating the right thresholds and rules to determine risk ratings can improve compliance by standardizing requirements and driving increased focus on the highest risk accounts. Oracle ARCS is the perfect tool to provide this capability.