How Finance Teams Can Perfect the Art of the Reconciliation Audit

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Thursday, September 15, 2022

Looking to make improvements in your reconciliation audit process? Follow these steps to ensure your accounts are accurate and reliable.

Article 4 Minutes
How Finance Teams Can Perfect the Art of the Reconciliation Audit

The approach you take to account reconciliation could have a wide range of consequences for your business and how it functions.

From a compliance perspective, for example, ensuring your internal ledgers correspond with your bank account statements is a key part of the financial closing process and will help you stay on the right side of laws such as the Sarbanes-Oxley Act of 2002. The US Congress passed this legislation to tackle fraudulent financial reporting by corporations, following scandals involving companies like Enron and WorldCom.

Building a solid understanding of your financial records and statements is also good practice if you want to gain the clearest possible picture of how the company is performing at any given point in time.

Regular auditing is crucial if you want to achieve accuracy and transparency in account reconciliations, so what can you do to maintain high standards in this area and get positive results?

Plan and prepare

Careful planning and preparation can help you increase the likelihood of your reconciliation audits yielding the outcomes you're looking for.

Before starting the process in earnest, make sure you have a clear idea of exactly what you're auditing and the key priorities of your investigation. Are you examining reconciliation and month-end close activities for a specific period, for example, or are you taking a more general look at how these accounting functions work in your business and how they could be improved?

Establishing these parameters and priorities early on will help to ensure the time and resources you dedicate to the audit are being used efficiently. Limitations are crucial to mitigate risks like 'scope creep' and to prevent focus being taken away from the key goals of the task at hand.

It's also important during the planning and preparation stage to make sure you have the basic information you need to conduct the audit properly, such as the relevant ledger data, bank account information and reconciliation statements.

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Investigate discrepancies

When auditing reconciliations covering specific periods of time - most often your monthly accounts - you should be on the lookout for any discrepancies, particularly those that don't have an obvious explanation.

Standard processes such as payments pending or still being processed will explain the majority of differences between your bank accounts and internal ledgers, for example, and your reconciliation statements should identify and justify them.

However, closer attention is required when you discover signs of more serious issues in your audits, especially if they don't appear to have been adequately explained in previous reconciliations. Missed or failed payments, for instance, could lead to serious problems in your cash flow or lines of credit if they're not spotted and addressed promptly.

It's vital to focus on detail at this stage of an audit. Small discrepancies might not appear to be a major concern on first glance, but they could be symptomatic of wider problems such as flaws in your invoicing or data entry procedures.

Draw conclusions based on data, not assumptions

A common pitfall to avoid when planning and executing a reconciliation audit is going into the task with preconceived ideas or assumptions about what you'll find. You may have been through this process many times before and usually had similar outcomes, but that doesn't necessarily mean the same thing will happen again on this occasion.

Be sure to adopt a data-driven approach and take your lead from what the numbers stored in your software solutions - whether it's an Excel spreadsheet or an integrated ERP system - are telling you.

If you're particularly keen to avoid drawing conclusions that aren't backed up by the data, consider asking another member of the finance team to look at the same information and see if their thoughts align with your own.

Make the most of technology

As noted in the previous step, it's essential to make the most of the tools at your disposal and to turn the power of technology to your advantage. It's also important to acknowledge that particular tech applications - much like human workers - have distinct strengths and weaknesses, and will only deliver real value if they're used in the right way.

Spreadsheets can be useful for the most basic record-keeping, for example, but they're also reliant on human users and can only work with the data they're given. This presents some clear risks, such as the possibility of human errors in data entry having unintended consequences in other areas of your accounts and financial affairs. Even the smallest oversight - such as a decimal point or a zero being put in the wrong place - can have serious repercussions.

It's for this reason that you might want to consider incorporating automation into your account reconciliation and auditing practices. Software specifically designed for this task can collect and manage your ledger, bank account and reconciliation statement data, examine the figures in detail and pick out any inconsistencies.

This can be done at greater speed and with higher levels of accuracy than individual employees are capable of, leaving the people on your team free to focus on tasks that make better use of their uniquely human expertise.

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