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General Ledger Account Reconciliations…
Basic Building Blocks for Good Accounting Controls
Presentation for the Greater Milwaukee Chapter of the IMA
Account Wrecks of the early 21st Century
Presenters: Jeff Adler & Dan Craft
Jeff Adler is the President of RecWizard.His career includes 6 yearson the audit staff of PwC andover 30 years of controllership, financial management and consulting experience. He founded RecWizard in 2001.
Dan Craft is a Senior Manager in the Technology
and Risk Services group for Ernst & Young in Troy, MI.
His recent experience includes Sarbanes-Oxley process control
evaluation and re-design.
Today’s Agenda
What is an account reconciliation1
Why are reconciliations important2
Self-assessment of your process3
Define key elements of a good process4
What is an account reconciliation?
A – something required by Sarbanes-Oxley that was not important before 2001.
B – part of my job duties that wastes time but makes the auditors happy.
C – a means of creating stress between my supervisor and me.
D – an analysis of an account balance that explains what the balance is, why it is there, and that it is adequate.
CompanyPolicy
SupportingDocuments
Clear, CompleteExplanations
At a Pointin Time
Validity An assessment of the validity, correctness and appropriateness of the account balance…
Definition of a reconciliation
… documented by relevant calculations, clear and complete explanations…
… in compliance with company policies.
… with copies of supporting documents…
… at a specific point in time…
Why are Reconciliations Important?
FinancialStatement
Audit
Sarbanes-Oxley
GoodAccounting
Financial Statement Audit
ReviewBusinessProcesses
AssessManagement
Process
IdentifyKey
Controls
Documentand TestControls
Results of the auditor tests and observations will determine the amount of year-end validation that is required.
Transparency
Timeliness Accuracy
Reliability
Corporate Governance Since 2002
Management Certification
AuditorAttestation
Clearly documented processes are a critical part of Sarbanes-Oxley compliance.
Sarbanes-Oxley Requirements
Good Accounting!
• For non Sarbanes-Oxley companies…
Timely Correction of Accounting Errors – moreaccurate Financial Statements and improved
reliability and accuracy.
Sarbanes-Oxley type requirements are growing Many large companies are requiring compliance withSarbanes-Oxley even though they are privately held.
Assessing Your Process
Are policiesreadily available
to all staff
Are reviews andapprovals completedand documented
How much trainingdo you provide
What do You do?
What seniormanagers take anactive role in theprocess
How often do you require reconciliations to be prepared- Are all accounts reconciled on that schedule
How soon are reconciliations required to be completed- Do you complete them during the close process
Do you rely on your account reconciliation process as a key control- Do your auditors rely on your process as a key control
Are reconciliation processes included as part of your annual review process- Do you address and track timeliness and quality issues
Best Practices for Reconciliations
Train
Standardize
Document
Make sure your staff knows how to prepare reconciliations that are qualitative – not quantitative
Add efficiency and consistency by providing standard formats or templates
Proper supporting documents, comments and calculations create auditable and verifiable reconciliations
Monitor & Review
Review and monitor to maintain a continuous control environment
Good Reconciliations
1.What?
2.When?
3.Why?
4.Who?
5.How Much?
InvestigativeProcess
GeneralLedger
Qualitative vs. Quantitative
Answer these investigative
questions
Help - Tutorial
Feedback
Prepare Review
Staff Manager
Provides the ability to maintain communication and feedback with clearly defined formats –easier to focus on the content instead of the form of the reconciliation.
Standardization
RecWizard Templates
Subledger MatchBank Account
Calculated Balance
Accruable ItemNon-current Debt
Current DebtGeneral List
Amortizable Prepaid
Internal
External
Subledger
BankStatement
ExcelWorkbook
Memo orLetter
JournalEntry
Invoice
Lease
Contract
Documents provide support and validation for the account balance.
Supporting Documents
Policies and Procedures
Readily accessible policies and reconciliation procedures help make sure processes are documented and not lost as part of staff turnover.
Review and Monitor
Real-time visibility to see the status of all reconciliations
Solutions for Control Sheets
Excel Workbooks
Access Database Programs
Specialized Process Control Software
Manual Checklists
If you don’t use an application like RecWizard, you have many other options to control the progress of your account reconciliation process
Dan Craft – Ernst & Young
ProcessImprovement
HistoricalPerspective
Keys to Success
Current State Observations
Current State Observations
Decentralized Execution
and Testing
Unidentified Differences
Segregation of Duties
Issues
Delinquent Aged Items
No Visibility with Senior
Management
ManuallyIntensive
NotPerformed
Timely
Lack of Training
Susceptibleto Human
Error
Current State Observations
These issues, if left unaddressed, can very quickly lead to SOX compliance and financial statement risks
Adverse Opinion from Auditors Regarding Internal Controls
Restatement of Financial Statements
No Company can afford to ignore these issues
Historical Perspective
• Pressure to reduce month-end closing cycle
• Diminished priority on account reconciliations
• Shift in policies regarding timing of reconciliation preparation
• Deadline moved to “immediately following” the hard close
• Lack of senior management visibility lead to “deadline creep”
• Deterioration to not completing reconciliations at all – or at best, very poorly
The degradation of the account reconciliation process did not happen overnight. There has been a series of events that has led to the current state in most companies.
Historical Perspective
StaffingDemands on accounting functions increasing at higher rate than number of personnel
Training Lack of training because “everyone knows how to reconcile an account”
SOXSarbanes-Oxley requires significant accounts to be reconciled prior to issuing financial statements
AuditorFocus
Auditor focus is increasing while many companies’ focus is decreasing or remaining stagnant
Leading Practices
Templates
Consistent Process enabled by standard
reconciliation templates
Visibility
End-to-end process visibility and
commitment by Senior Management
Centralized Monitoring and Testing to assure
continuing quality
Workflow
Automated Messaging to assure timely
notification of staff regarding due dates and
delinquent tasks
Risk
Materiality Based Risk Assessment to prioritize
staff efforts
Quantify Potential Adjustments prior to issuance of financial
statements – particularly SEC reports such as the
10-Q and 10-K
Monitoring
Adjustments
Drive remediation consistently across all locations
Keys to Success
Executive Support and Tone at the Top
Sufficient Resource Commitment
Training – at all levels
Focus on root cause rather than symptoms
Time invested up front will translate directly to the success and benefits of a good process
Improve processes prior to technology introduction
Account reconciliations… the easy way!
RecWizard2700 Neilson Way – 1233Santa Monica, CA 90405
310.869.1170
info@recwizard.com
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