In our series on the Record to Report (R2R) process, we examine three main components: close checklist, reconciliations, and journal entries. This second article in the series is focused on reconciliations.
Embedding internal controls throughout your entire R2R process is key regardless of public or non-public organizational status. Organizations should be able to create internal control tasks and monitor the performance and completion of them to help ensure their financial statement quality and accuracy while reducing risks. Organizations should design their internal controls to reimagine their control environment, centralize redundant controls, and eliminate irrelevant controls.
Organizations today face many challenges with their R2R process that lead to increased financial risk.
Red Flag Conditions Driving Risks – Reconciliations
Balance sheet reconciliations are one of the most time-consuming tasks within a finance organization. Historically, these reconciliations were completed using spreadsheets and collected/stored in binders or on SharePoint sites. Further difficulties of reconciliations include:
- Inefficiency – Lots of time spent emailing, printing, and updating for changes in balance sheet balances.
- Error Prone – Manual reconciliations are prone to human error.
- Lack of Scalability – The processes are unable to handle growth in an organization (more transactions, various enterprise resource planning (ERP) systems, multiple reconciliation formats, etc.).
Despite the challenges faced by retailers today, there are many opportunities to help enhance the R2R process and mitigate risks detailed above.
Best Practices & Controls – Reconciliations
Retailers can improve the reconciliation process through standardization of policies and templates and utilization of a risk-based methodology around the preparation of reconciliations. This can look like the following:
- Account Reconciliation Policy – Draft and finalize an account reconciliation policy that outlines the procedures and requirements for completing an account reconciliation in an organization.
- Risk-Based Methodology – As part of your organization’s account reconciliation policy, determine how the risk rating of an account will affect its treatment. The objective here is to successfully manage the fine balance between reducing overall workload and maintaining control of the process. Automated rules should provide a consistent, auditable process.
Risk-Based Methodology Considerations
In coming up with the rules, consider these aspects:
- Quantitative Factors
- In general, based on the dollar amount of balance or change from the prior month; an organization needs to set thresholds for balance and change that are specific to your company’s materiality, e.g, what is considered high versus low risk.
- Qualitative Factors
- Identify certain accounts based on the type of accounts that are susceptible to:
- Fraud
- Errors in prior years
- Judgment required or extent of estimates involved
- Complexity of accounting principles
- Reliance on third parties (for data/information)
- These could have specific rules related to these accounts, e.g, for cash or reserves, you may want to always reconcile monthly.
- Identify certain accounts based on the type of accounts that are susceptible to:
Utilizing Dynamic Account Maintenance (DAM)
Using the DAM functionality offered through Cadency by Trintech, administrators can create advanced jobs that run automatically and help reduce the workload of users. DAM jobs can:
- Evaluate accounts based on a specified threshold and make changes to selected fields across multiple accounts.
- Automate a risk-based methodology to account reconciliations, helping to ensure users spend more time focused on high-risk accounts reconciliations. That methodology can perform automatic bulk processing for reconciliations, reviews, and approvals for accounts meeting specific requirements.
Optimized Environment
Cadency by Trintech offers retailers several critical ways to help improve their month-end reconciliation, such as:
- Reducing monthly reconciliations by 55% and automating 25% of reconciliations by implementing risk-based methodology & Cadency.
- Standardizing format for global reconciliations, with reconciliation templates assigned based on account type such as cash, subledger, rollforwards, etc.
Organizations utilize tools such as Cadency by Trintech to help automate their close management through operational efficiencies, enhanced visibility, mitigation of risk, and reduced time spent on collecting support for auditors.
About Us
Forvis Mazars is recognized by Trintech as a strategic alliance partner. We work with Trintech to deliver services to help standardize and centralize financial reporting processes while driving greater transparency and automation initiatives. Our CFO & Business Consulting team stands ready to help your company solve its complex business problems. If you have questions or need assistance, please reach out to a professional at Forvis Mazars.
Additional Articles
For more insights on the R2R process, see the other articles in our series on the close checklist and journal entries.