Highly Effective Balance Sheet Reconciliation

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After the coming of Sarbanes – Oxley (SOX) for best practices, accounting reconciliation has become a control that is under appreciated. In the past, when discrepancies were found with entries in a balance sheet, the usual best practice was to craft an adjusting entry. This was done because it was necessary to make sure that the finances of the company were accurate for best practices.

However, the section 404 of SOX comes with the requirement for a higher intensity of conscientiousness. Now inconsistencies in entries of accounts will lead to a review of the financial reporting and close best practices. In addition to this, inconsistencies will require more controls to be placed in the system of the company to prevent repetition of inconsistencies in the future.

Automation of account reconciliation process is the more crucial best practice that seals the company’s success. To make automation effective, there are software applications. However they do not have solutions for everything. There is need to place controls around the software to ensure the software is effective for best practices. In order to ensure that account reconciliation if accurate, there are seven best practices that are recommended. These are:
1. Assigning the Account Accurately: This best practice requires the administration to be either centralized or decentralized. Therefore, business units will have to have central visibility and control. When new accounts are created they will be identified automatically.

2. Documentation of Procedures: There will be the need for policies, regulations and controls to support the description of existing accounts. The reconciliation and account history will be contained in the repository for best practices. Any change in the management or workflow will also have to be documented.

3. Scheduled Substantiation and Reconciliation: Tracking the activities and roles played by key personnel in real time will be required. There must be automatic search criteria or filters, interactive matching, account grouping and transaction matching in real time. Implementing the use of tools for bulk reconciliation supporting Dynamic Risk Rating, threshold, zero balance and no activity will also be required as a best practice.

4. Isolation of Issues: Unsettled dues of the past must be highlighted and notifications must be sent automatically to the managers and users. The comments and notes must be available for auditing and best practices. Accounts that are identified as high risk must be flagged and monitored continuously.

5. Intensification of Issues and Resolution: There must be an automated two-way system to intensify workflow. There must also be reporting best practices that capture facts and these must be configurable. When work is completed there must be a lock-down to confirm that it is over. For example, item aging and carry-forward rules help with locking-down completed work.

6. Make Adjustments with Honesty: This best practice requires a highly controlled system for adjusting the workflow. Reviews, creation and approval must be included and there must be controlled closure.

7. Empowerment of Personnel: There must be standard templates for reconciliation that are certified and that require confirmation of identity. Access to reference information for high quality reconciliations must be made easy for best practices. Additionally, there must a trail of continuous audits.

With these best practices, the balance sheet and reconciliations of companies will be accurate and up-to-date.

Further reading: Corporate Governance | Audit | Performance Improvement

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