OPTIMIZING THE CLOSE CYCLE – LEVERAGING AN EFFECTIVE ACCOUNT RECONCILIATION POLICY

By:  Kars Stal, Jay Henson, and Evan Bazinet

A company’s financial close cycle is responsible for providing an accurate performance snapshot of all financial and transactional activities for a given period. The ability to present this information in a consistent and accurate manner is imperative for businesses to drive both strategic and financial decisions. Generally, the more a company is able to understand the data behind finance and accounting activities, the better the company will be able to project future performance. Without accurate representation of underlying data, companies will be faced with misinformation leading to both internal and external consequences.

To mitigate this risk, proper checks and balances must be put in place around an enterprise’s data assets. Account reconciliation is one of these vital controls that enables companies to validate and accurately represent that data.  Acting as a preventative control to detect fraudulent activity at an early stage, account reconciliations ensures both the integrity of financial data and the reliability of financial statements.

An efficient and timely financial close cycle that uses an integrated reconciliation process serves as the foundation for evaluating a business’s performance. This foundation supports organizational decisions, satisfies external reporting requirements and reduces the risk of management surprises. At the same time, a reconciliation policy should enforce standardization for the organization across the reconciliation process to improve the quality and accuracy of financial data. As a result, errors and inaccuracies will reduce, thus allowing accountants to focus more on analysis, risk mitigation, and exception handling.

The remainder of this article aims to lay out The Hackett Group’s recommendations related to drivers of an efficient reconciliation process. The elements described in the table below should be discussed in any policy or procedural document related to this process.  Additionally, these elements should be made readily available to all resources involved in the reconciliation process, including auditors:

DriverDescription and Inclusion Driver
PurposeDriving forces (next to SOX requirements) to perform reconciliations and quick overview of past findings on the reconciliation process.  Provide sense of urgency on why to perform reconciliations in a complete and timely manner.
ScopeScope of accounts included in the account reconciliation cycle (at minimum assets, liabilities and equity accounts).  Create encompassing clarity of expectations around what reconciliations are to be confirmed.
DefinitionLevel reconciliations should be performed at (e.g., entity / account) by account type.  Clarify level of detail to be included in the account reconciliation.
Reconciliation criteriaOverview of criteria that warrant a reconciliation to be considered reconciled:  Description of Account, Independent source of reconciliation, Description of source and how to account for source data equals ending balance, Supporting documentation on reconciliations and any open items, Thresholds / Materiality limits by account type, Frequency by account type.  Provide minimum audit standard and guidelines to perform and review reconciliations.
Open Item Resolution ProcedureProcess to resolve any open items discovered during the reconciliation process and related time limits.
TimingTiming related to the preparer and reviewer timelines on a periodic basis.  Create opportunity to perform reconciliations outside of the close process, while still performing all critical reconciliations within the close process.
FrequencyLimit the frequency with which reconciliations are being performed based on criticality assessment.  Limit the amount of reconciliations performed on monthly basis, while still maintaining critical controls.
MaterialityThresholds and materiality limits established on which to perform the reconciliation by account type.  Limit time spend on investigating differences deemed to be immaterial, while still maintaining critical controls.
Roles and ResponsibilitiesClear description of the preparer and review roles and responsibilities during the reconciliation process.  Define the process to be followed to close the account reconciliation, including timing, acceptance and rejection definitions and levels of review.
Reconciliation AssignmentOverview of how to (re)assign reconciliations to prepares and reviewers, including how to achieve segregation of duties.  Provide timely and clear assignment of reconciliations (new and in case of resource changes) as well as insight into how to ensure segregation of duties between preparers and reviewers.
CompletenessChecks and balances in place to guarantee completeness of data being reconciled and eco-systems being in sync.  Align full set of data, inclusive of new accounts and ensure alignment of data across disparate systems.
Additional ControlsControls in effect on top of formal reconciliation process, like transaction matching and flux analysis on critical account.  Instigate additional controls beyond the monthly reconciliation process by end users.
TrainingDocument that lays out minimum training requirements for people involved in reconciliation process, periodic reviews of that training and cross training requirements across account types.  Formalize resource training as reconciliation is entry level job as well as ensure that new policies and procedures are communicated downwards.
Annual reviewYearly review of account reconciliation standards.  Ensure right controls are still in place and nature of accounts hasn’t changed to warrant a change in how reconciliations are performed.
RetentionWhere and how long reconciliations are being retained.  Align to audit requirements.
Source by account typeWhat is considered additional detail required for account reconciliations per account type as well as overview of data sources required for sign-off.  Standardize reconciliation methods and sources used by account type for potential usage of shared service centers.
Internal auditRole of internal audit and potential improvement areas.  Document how internal audit is involved in the process on a quarterly basis and how they will make recommendations to further automate and standardize the reconciliation process.
Tool usageOverview of SharePoint or automated reconciliation tool usage.  Make the process more efficient and clearly document how to use any tools available for the resources involved in the reconciliation process.