Account Reconciliation as a Control

Account reconciliation—I’ve been itching to blog about this topic for some time now. It has been at the top of my list because it is such an important business process. I’ll admit that account reconciliation is not the sexiest thing in the world, but I promise to write an entertaining, engaging, informative, and inspiring series that you’ll want to share with others.

We will begin our journey with the concept of dual entry accounting. Wow! I bet you didn’t think I would get that boring that quickly. Bear with me for a moment. This is essentially the basis for how we account for business transactions. For some of you reading this blog, accounting is the language we speak every day, and we understand the importance of a balance sheet. For others, accounting is a cost center, and it is difficult to understand why it is needed. These people usually want to know the “bottom line” (e.g., net income or loss) or the cash balance in the bank account, which means, they probably do not care about the balance sheet or understand its importance.

The first group, who understand the balance sheet, can make the “bottom line” whatever they want it to be by increasing an asset or decreasing an asset. They can do it any day of the week and twice on Sunday. If a person from the first group makes this choice, it can be detrimental to the organization. By the time the second group realizes what is happening, it may be too late. The organization may have to restate financials or, in some cases, file for bankruptcy. As the truth is uncovered, they begin to realize their organization’s past financial picture was nothing but a fairytale. They will also realize that the people involved may not live happily ever after. 

This brings me to the importance of account reconciliations, and unfortunately, there are an overwhelming number of people, including many with accounting backgrounds, who do not understand them. I must admit that I didn’t learn about them in college or even when I studied for the CPA exam. I spent years working in my profession before I was even exposed to them, and I did not truly understand them until I started doing them.

There you have it—the perfect storm—dual entry accounting and people who do not know how to perform account recons. We will cover the following three areas as part of this important blog series:

• The performance of the account reconciliation as a process. This blog will cover the who, what, when, and how related to performing an account reconciliation. There can be many transactions flowing through a balance sheet account, which can make reconciling the activity a challenge.
• The review of the account reconciliation as a control. In this one, we will cover the who, what, when, and how related to reviewing an account reconciliation. Most people believe that the performance of an account recon is a control, but they are mistaken. It only becomes an internal control when it is reviewed.
• There are numerous pitfalls that are commonplace. These can lead to costly errors, fraud, and in some cases, financial statement restatements. I have seen most of these several times throughout my career, and they are probably happening within your organization.

In this series, I will compare each of the above areas to games that we may have played as kids or adults. I hope you find this stimulating and that it inspires you to read the entire series. I also hope that there is enough inspiration left in you to share what you learned with others.

If you ever have an idea for a future blog or a question about a published blog, please contact me with your thoughts. I would love to hear from you.

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