Ensuring the accuracy of a company’s financial reports has become increasingly important since the enactment of Sarbanes-Oxley and the scores of other rules and regulations that have followed. The need for financial accuracy and compliance reporting has risen to a position almost on a level with profit and loss. If an auditor finds a material error in the quarterly or annual Securities and Exchange Commission (SEC) report the company may be required to disclose a failure of controls, which can be a very timely and costly procedure for a business.
You would be wrong to assume that accurate reporting is not important for small businesses. While you may not be submitting SEC reports every quarter, the financial health of your business requires accurate and timely information. Inaccurate information or delayed reporting can cause wrong and costly management decisions.
One way to avoid making wrong or costly decisions is having an efficient, accurate and timely financial close cycle. This cycle begins with the account reconciliation process. The implementation of a solid reconciliation process creates a foundation for evaluating business performance, supporting organizational decisions, and satisfying external reporting requirements , which may save your business time and money in the long run.
Technology plays a major role in the reconciliation process but software alone cannot ensure that account reconciliations are accurate. Here are 5 best practices that will set you on your way to error-free account reconciliations and a more efficient financial close.
- Reconciliations should be completed and reviewed in a timely manner.
- Create due dates for the reconciliations
- Have a mechanism to track the status of each reconciliation
- Account reconciliations should be complete – no account left behind!
- Ensure that all appropriate accounts are being reconciled, including new accounts.
- Ensure that each reconciliation, includes a title, a description of the account, and procedures and/or instructions on how to complete the reconciliation (applicable contacts, reports to run or obtain, etc)
- Reconciliations should be accurate
- The individual preparing and reviewing the account should understand what it is used for and what should be used to support the balance.
- Ensure that the correct, most updated balances are being reconciled
- Reconciliations should support the appropriate accounting principles
- Ensure that the reconciliations follow the principles such as historical cost, matching and full disclosure
- Ensure that the reconciliations are objective, that they identify material unidentified differences, that they are consistent, and that the transactions behind the general ledger balance followed the convention of conservatism.
- The account reconciliation process should be constantly reviewed and improved
- Review the account reconciliation policy to ensure that it accurately reflects the company’s position
- Review the overall process routinely to identify improvements that help drive quality and timeliness
Good tools and processes are the key to ensuring quality, accuracy and completeness within your business. A sound account reconciliation process will focus the right people on the right activities and give management real-time information around the close process.