Understanding Account Reconciliation

What Is Account Reconciliation?

Account reconciliation is the matching and validating balances in the general ledger (GL) to external and internal sources or other independent calculations to ensure that month-ends and year-ends are closed accurately.

Data sources used to remediate and reconcile account balances include sub-ledgers for HR and fixed assets, bank statements and accounts receivable and payable schedules. For both internal and external sources, every balance must match its corresponding account in the GL. Inter-company transactions, currency exchange rates and various non-cash activities only generate more complexities in an already complicated, time-consuming process.

A well-planned process can be made easy with account reconciliation software, this would include an audit trail, workflow automation and supporting information to ensure that all accounts balance out. But at the same time, the process is transparent and clearly justified for everyone involved.

What Are the Objectives of Account Reconciliation?

Proper account reconciliation:

• Gives management a timely and accurate picture of last period's performance.
• Demonstrates the organization's financial integrity to internal and external stakeholders--including accurate and transparent regulatory reporting.
• Provides real-time data or "actuals" to the accounting and financial planning and analysis (FP&A) teams to perform variance analysis and re-forecasting.

Internally, proper account reconciliation also provides process benefits, including reducing the time it takes to close, consolidate and prepare financial statements for every reporting period while improving and automating internal control measures. What's more, it's a process that's ripe for automation--but frequently done in a manual, time-intensive and error-prone manner.

What Happens Without a Proper Account Reconciliation Process?

Without a proper, automated account reconciliation process, organizations may encounter a range of problems arising from:

• Large numbers of accounts and corporate entities and the complexity of sub-ledgers and other systems involved—from payroll systems to bank statements.
• Bottlenecks in the period-end close from unexplained exceptions—accounts requiring adjusting entries to balance out—that prevent timely and accurate identification, review and reconciliation.
• Fraudulent or negligent accounting practices that go undetected due to unreconciled accounts, poor internal controls or a lack of supporting documentation, commentary or calculations.

Account reconciliation is the bedrock of accurate, efficient, compliant and timely financial statement delivery. Account reconciliation must be treated as a priority and critical path in the period-end close process to provide a complete and accurate picture of a company's financial performance.

Recap: Accounting 101

The origins of account reconciliation and accounting itself date back to the 15th century. Accounting has a long history, despite the fact that the need to earn CPE credits for CPAs were only established in 1996. The basic premise is an accounting fundamental: for every journal entry posted to the GL, debits and credits must be equal, matching up with any sub-ledgers or supporting transaction records.

A standard transaction entered into the general journal, by definition, balances out; it's reconciling those against any number of sub-ledgers and external records that makes the process complicated.

Today's modern accounting, enterprise resource planning (ERP) and GL systems have built-in controls to prevent unbalanced journal entries from being posted to the general ledger. The tricky part comes with exceptions--accounts that don't match their corresponding sub-ledgers or other transaction systems.

Exceptions require adjusting entries to balance out. This is where accounting teams can spend a huge amount of time--reviewing, investigating and finding the supporting explanations and calculations to make the appropriate adjusting entries for each exception to ensure an accurate, supported reconciliation.

Reconciliation Processes

The reconciliation process happens at the end of every reporting period--monthly, quarterly and annually--to ensure every GL account matches the balance of its corresponding sub-ledger or external transaction system. The process typically involves three distinct stages once the initial books are closed, and trial balances are created for the period.

Four-step account reconciliation process

1. Reconciling the trial balances for accounts in the general ledger with corresponding accounts in sub-ledgers or other secondary transaction systems, primarily including:

• Sub-ledgers - two of the most common include payroll or human resources information systems (HRIS) and fixed asset tracking (FAST) systems.
  
• Bank statements - for the cash or bank reconciliation process, it's critical that the balance in the bank matches what the cash balance shows on a balance sheet.
• Roll-forward schedules - the closing balance for every account (e.g. depreciation, prepaid assets, accounts payable and receivable) at the end of one period should equal the opening balance at the start of the next one.

2. Adjusting entries and ensuring they're all reviewed, investigated and approved before posting to the GL. Reconciling and making adjusting entries are complicated processes and where most bottlenecks in the close process take place. This is where accountants spend the bulk of the close cycle, acting as detectives and internal auditors to find the source of every exception and the supporting information to explain them.

3. Providing supporting calculations and documentation where required (e.g., if an account doesn't balance by a wide margin, explain why). External auditors, regulators and even senior management all need trusted numbers and transparency and documentation to find the sources and explanation for every exception quickly.

The Importance of Proper Documentation

Documentation of the entire reconciliation and financial close process is necessary for internal visibility. Not to mention, also for auditors and 21st-century reporting regulations to satisfy:

• Reporting regulations such as Sarbanes Oxley (SOX) prescribe what needs to be reported and the process documentation needed to accompany them.
• Transparency and visibility requirements of external auditors for faster auditing with greater confidence.
• Consistency and continuity of processes, ensuring that they are maintained across departments and over time.

Why Is Account Reconciliation So Important?

The month-end close, adjusting entries, posting to the GL and generating financial statements and reports are only part of the story in what's referred to as the full-spectrum of FP&A activities. Gone are the days when finance and accounting functions existed in silos; now, they feed each other to learn from past performance, optimize present performance and maximize performance in the future.

Still, it's only after undergoing rigorous reconciliations and analysis that it's possible to prepare reliable financial statements with confidence. Account reconciliation is a critical item in the financial close process because:

• It's the foundation for most internal controls that are crucial for protecting the company's assets.
• It's required before month/year-end reports, and financial statements are issued.
• Properly documented account reconciliation provides full internal visibility and is essential for meeting regulatory reporting requirements with confidence.

Account Reconciliation and Full-Spectrum FP&A

Every business needs to close its books. It's not an option. But the larger the business, the more shareholders it has, the more complex its accounts and operations, the more complicated the process becomes. And more importantly, having a reliable, streamlined and automated account reconciliation process becomes, too.

Best practices dictate that companies close their books monthly to report on the previous month's financial performance (or actuals), allowing management to stay on top of the company's financial health and meet its reporting obligations. A critical part of the month-end close includes account reconciliation--ensuring the actuals are accurate, reliable and timely.

The modern, full-spectrum approach to FP&A depends on the delivery of these actuals so that the more forward-looking and planning-based phases of the FP&A cycle can take place. Actuals are needed for:

• Creating rolling forecasts, analyzing variances between their actuals and forecasted numbers and determining any course corrections required of a company to stay on track to meet its performance targets. (Click here to learn more about rolling forecasts to learn more about rolling forecasts)
• Providing FP&A teams with the actuals, insights and credibility to play a more strategic role in the organization and using these data to inform smarter business decisions and plans.
• Continuous monitoring of financial and operational metrics to improve efficiency and accuracy with each iteration and provide fully transparent performance reports to stakeholders, auditors and regulators.

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Manual Reconciliation vs. Automation

Account reconciliation is often the bottleneck in closing the books on time. Numerous accounts have to be analyzed and reconciled each month. When performing these reconciliations manually, the sheer volume can make the task seem insurmountable.

Automation is the key here. In fact, with the right tools and technology, it's not uncommon to reduce the time to complete the financial close by 50% or more.

(Visit this link to learn how we did just that for Capstone Infrastructure)

With the proliferation of financial process automation systems today, it's possible to automate unnecessarily manual and time-consuming tasks across functions and applications. This is particularly important in:

• Connect your GL, sub-ledgers, and other source systems directly to the software you use for account reconciliation and feed into budgeting, forecasting, and other FP&A software functions.
• Identifying exceptions to review, adjust, reconcile and post to the GL in final form.
• Facilitating workflow automation throughout the process of identification, remediation and reconciliation.

The following areas—each involving a high degree of manual effort to balance against the general ledger (GL)--make a compelling case for automating the account reconciliation process wherever possible:

Sub-Ledger Balances

Balancing the general ledger and sub-ledgers is a key control automated account reconciliation software that will post matching entries without manual review. When automated, it will take the manual effort out of identifying exceptions when accounts are unreconciled. This ultimately frees up hours or days of your accountant's time that they would otherwise spend posting accounts that need no reconciliation and searching for those that do.

Instead, automated account reconciliation allows your accounting teams to focus where their expertise is most needed: investigating, remediating and reconciling only the GL accounts that are automatically flagged as exceptions for being out of balance with their corresponding sub-ledgers.

From a technology standpoint, this identification step requires account reconciliation software that integrates with disparate, companywide sub-ledger systems—the most common being payroll and human resources information systems (HRIS) and fixed asset tracking systems (FAST).

The value of automation is even more apparent if your organization has subsidiary companies or separate but related corporate entities. As the number of these entities grows, so does the complexity of the account reconciliation process and the overall volume of data, accounts and sub-ledger systems involved.

Bank Reconciliations

The bank reconciliation--or cash reconciliation—is the similarly time-consuming process of reconciling transactions when they exist in your general ledger but not your bank's reporting systems or vice versa. For example, a check is cashed at the bank before the corresponding journal entry is made in your accounting software.

Automating the bank reconciliation process delivers much the same value as reconciling sub-ledger exceptions. Automation frees up your accountant's time from searching for those exceptions manually by flagging just the transactions requiring investigation and reconciliation. When you have multiple banks, accounts in the thousands and transactions in the millions each month, automation addresses an even greater degree of complexity and magnitude of transactions to review—a process that would otherwise take up days or even weeks of your accountant's time.

Roll-Forward Schedules

Roll-forward schedules are much the same as sub-ledgers when it comes to reconciliation. But instead of checking GL balances against data residing in other company systems, most schedules are kept in disparate, standalone spreadsheet files. Whether accounts receivable aging schedules or depreciation and amortization tables, roll-forward schedules can involve additional complications, including:

Version control challenges when faced with a single schedule exist in multiple spreadsheet files across your organization.

As with sub-ledgers, each schedule typically includes pre-determined rules for what supporting commentary, documentation, and calculations need to accompany certain adjusting entries (e.g. if balance differences exceed an acceptable threshold) before posting them to the GL.

The basic check and balance of ensuring the closing balance of one period equal the opening balance of another.

From maintaining version control and eliminating unnecessary manual review to configuring rules and GL integrations, the value of automation to roll-forward reconciliation should be clear to anyone who's performed the process before.

Workflow Automation

If manually reviewing accounts and tracking down supporting documentation for exceptions weren't time-consuming enough, most companies have month-end close and reconciliation workflows they follow to close out each period.

Depending on the number and complexity of accounts, entities and the overall business, simply carrying out this workflow—completing the review step before forwarding it to another party for approval, for example--can be just as tedious as the reconciliation itself.

Workflow automation allows checklists, roles, rules and processes for review, reconciliation and approval (or rejection) to be defined once and repeated regularly. It automatically marks adjusting entries as complete and routes them to the appropriate colleague for approval before posting, for example. And once built, workflow automation takes virtually all the manual effort out of the process.

Automatic notifications, real-time status reports, routing tasks to the right roles, and posting transactions to the GL. These things, when complete, all go even further to make the account reconciliation process more accurate, efficient and rewarding for those involved. They also bolster the confidence of executives and external stakeholders in the numbers resulting from the process.

Account Reconciliation Software Solutions

There are numerous software options available to finance and accounting teams. And they are all designed to better manage and streamline the account reconciliation process!

It's not uncommon for smaller companies to use a combination of their accounting/GL software and a library of Excel spreadsheets.

More sophisticated options for larger companies include:

• Point solutions such as Blackline (NASDAQ: BL) and Trintech focus solely on consolidations and account reconciliation. These are often trying to separate traditional FP&A solutions for budgeting and planning.
• GL reporting and account reconciliation modules from ERP "mega-vendors" such as Oracle, IBM or SAP.
• Modern, full-spectrum FP&A platforms such as Vena offer everything from account reconciliation to scenario analysis through a single system.

Ask Yourself...

Even if you have a modern ERP system in place that offers account reconciliation functionality, questions you should ask yourself include:

Does the GL/ERP system post matching entries automatically?

Is it flagging only the accounts that need review, remediation and reconciliation on the part of the accounting team?

Is there a quick and intuitive way to explain each exception to management, auditors, regulators and other stakeholders?

This could be through external documentation, supporting calculations or references to changing exchange or interest rates, as just a few examples.

Do audit trails and supporting calculations/explanations provide accounting teams with the ability to post newly reconciled/adjusted entries into the GL with confidence?

This is another key aspect of account reconciliation. 

The Excel Problem

Aside from ERP systems, standalone Excel spreadsheets have played a dominant role with accounting and FP&A professionals for more than three decades. Based on survey data, about two thirds of finance professionals still rely heavily on standalone spreadsheets for accounting processes. Even financial close management and FP&A software with "Excel-like" interfaces have been unable to dethrone these standalone spreadsheets.

Today, companies need to respond quickly to any situation with accurate, real-time information that Excel, on its own, cannot deliver. The main problems with Excel on its own include:

• There's no single source of data, supporting calculations or comments. There are only disparate spreadsheets, which can lead to errors from discrepancies and version control issues.
• Excel lacks any robust workflow automation, version control, audit trails or underlying database. And simultaneously, the ability to scale to the demands of today's mid-and large-sized companies.
• Processes that rely on error-prone data can easily lead to costly consequences for any business--particularly publicly traded or otherwise regulated companies.

The Solution

Whether choosing a point solution or full-spectrum FP&A platform for account reconciliation, there are three essential ingredients of a software solution—and they're all related to automation:

• Connecting directly to source systems—from your GL, ERP systems or HRIS. Then, GL and sub-ledger accounts that match can be posted automatically. This also allows FP&A teams to pull live actuals into reports, forecasts and more.
• Automatically identifying accounts that don't match. This frees up time by enabling teams to focus on the issues that require investigation and review.
• Facilitating automated workflows to eliminate manual work through all stages of the process, from review, remediation and reconciliation, to the creation and distribution of financial statements, management reports and self-serve analysis tools.

For numerous reasons, the ideal solution is to pick a full-spectrum FP&A software solution. One that spans the FP&A cycle—from closing the books and regular forecasting to variance and scenario analyses and internal/external reporting.

Today's leading FP&A or corporate performance management (CPM) systems include workflow automation, version control, audit trails and other measures required for transparency and control.

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Last but not least, and not common enough among FP&A software, it's vital to pick a solution that integrates directly with—and doesn't try to replace—Excel and all its powerful functionality, even extending to add-ons like Power Pivot and Power BI.

The familiarity finance and business users have with Excel goes a long way to speed up adoption. And ultimately, it contributes to better business-wide decision making and planning.

Combined, these features provide companies and their account reconciliation teams benefits including:

• Financial statements, audits, regulatory and management reports based on a single source of trusted, accurate numbers with guaranteed data integrity.
• Better visibility for management, auditors and regulators into the processes and supporting calculations--the story behind every adjusting entry.
• Allowing finance teams to spend less time inputting data and more time analyzing, modeling and focusing on strategic, decision-driving roles.

The net result? More productive teams, more accurate numbers and, ultimately, a better bottom line--all from picking the right account reconciliation software. Full-spectrum FP&A options streamline account reconciliation, empower finance teams and give leadership the tools and confidence to make the right decisions--not just in finance but across the organization.

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