The concept of reconciliations is simple: balancing an account or bank statement. But a reconciliation can encompass a wide variety of functional areas within an organization. In essence, a reconciliation involves taking the information presented and then matching this data using agreed upon criteria to bring this information into balance.
The criteria may vary for each reconciliation, but the methods used to achieve a reconciliation will have many similarities. At Clark Schaefer Consulting, we have designed a framework for structuring an efficient reconciliation process.
Phase I – Orientation
Determine the nature of the accounts to be reconciled, including the purpose of these accounts. Become familiar with the staff members responsible for the specific areas of the organization as well as required deadlines and expected deliverables.
Phase II – Identification Phase
Assess the types and sources for the account transaction file data such as general ledger accounts, accounts receivable detail, accounts payable records, and bank transactions. Obtain a working knowledge of the various sources for this data and assess the controls that are in place to ensure its validity. Determine formats available for the data and sort transactions by type and/or source and run totals on the overall transaction balance to provide independent verifications.
Phase III – Investigative Phase
Based upon what is found during the Identification phase, investigate the sources of the differences identified. Compare source transactions to target transactions looking at a variety of factors such as source (e.g., order entry, purchasing, inventory), type (e.g., invoice, credit, adjustments), reference (e.g., invoice number, journal number), or date. Track the source of discrepancies, which could be from various issues, such as keying errors, interface problems, timing issues, etc.
Phase IV – Resolution Phase
Using data accumulated in the Investigative phase, determine the extent of each reconciliation’s effort. By calculating the time it takes to research a certain number of these transactions, extrapolating the time it would take to resolve the entire file’s reconciliations, and where appropriate using statistical sampling, project the extent of the entire population’s reconciliation requirement. Based upon this estimate, develop a revised timeline for the project, adjust the methodology accordingly, and continue reconciling. This helps to ensure that we work within whatever budget you’ve established for getting this work done.
Phase V – Control Improvement Phase
Based upon the findings of our previous phases, identify any control weaknesses that may have resulted in the identified discrepancies. Develop recommendations for control improvements that detail the observed reconciliation issue, identifiable risk, and proposed control enhancement.
Phase VI – Process Improvement Phase
During many reconciliation projects, it becomes apparent that specific business processes, while not a control risk, may still appear to be inefficient and/or ineffective. Identify these processes and develop process improvement recommendations for each.
Phase VII – Reporting Phase
Develop a closing report that details the procedures that were performed. Describe the process followed to reconcile each account, including any significant findings and observations.