The Lost Art of ReconciliationsPosted: July 16, 2012
General ledger account reconciliations…They must be the most depended on, but at the same time abused control in the accounting toolkit. The theory of account reconciliations sounds so simple, so elegant; make sure the balance sheet accounts equal what they are supposed to be at the end of each month. That sounds easy enough, but there are so many ways to mess it up I am simply amazed at how this critical control has been destroyed over the years. Let talk about a few of the more common errors seen everyday in reconciliations across companies of all sizes.
Footing the general ledger – how many times do you see a reconciliation that takes the beginning balance of the G/L account, adds in the transactions for the month and then shows that the ending balance is “reconciled.” Give me a break. Whether you pay millions for SAP or Oracle or a few hundred bucks for QuickBooks, the one thing you can count on is that the general ledger will foot. That is a basic function of every general ledger package and not the purpose of a modern reconciliation. What should be done? Start with an independent source of what the general ledger account balance should be. Maybe it’s a subledger. Maybe it’s a report from a third party, maybe it’s even a bank statement. Whatever it is the key is it is independent – not a listing of the transactions that hit the account. Then you figure out (can we say reconcile) the difference between this report and the general ledger account balance. It’s an amazing concept that will work wonders for finding errors before they become big problems.
Unexplained differences – another common error is when differences between the independent source and the general ledger account are not really investigated and explained. The reconciliation starts with an actual independent source and ends with the general ledger balance, but in between are purported reconciling items that don’t actually explain anything. Some reconciliations even show “June difference”, “July difference”, “August difference” with no further explanation – and some differences being a credit and some a debit. A reconciliation is not simply a tracking mechanism for the differences between the general ledger balance and what it should be – it is supposed to actually determine why those differences exist and what needs to be done so they stop occurring.
Old items – reconciling items are not bourbon that improves with age. They need to be dealt with timely. The reconciliation may be to an independent source and the reconciling items may actual really explain the difference, but if no action is ever taken to clear the reconciling items, then what is the purpose of the reconciliation in the first place. You might as well be like that person who thinks they must have plenty of money in their checking account because they still have checks left in their checkbook (ok – for those under 30, the person who thinks they have plenty of money because the debit card still works; who cares if its only because you have overdraft protection and the bank is charging you through the nose for every additional transaction you make).
I don’t know why performing reconciliations is such a lost art. Maybe because it is considered grunt work and no one gets ahead just doing the basics. The action is around the sexy strategic stuff. It’s about helping the business make those big decisions and stretching your skills beyond accounting into all aspects of the business. The problem is that reconciliations aren’t easy and they can’t simply be delegated and forgotten. We need to remember that it’s doing things like reconciliations right in the first place and avoiding all of the fire drills that result from not doing them right that really gives us more time to do all of that other fun stuff in the end.