Account Reconciliation as a Control—10 Best Practices

This blog is the fourth in the series, Account Reconciliation as a Control.

As we close out this series, I will share with you a story that forced me to pull the trigger and write about this topic. I hope this story hammers home the point—account reconciliations are important.

For numerous years, leadership focused on the income statement while they ignored the balance sheet. There were some recons performed at various points. Most of them were inaccurate, incomplete, and not reviewed. As you can imagine, this account reconciliation process was not an effective internal control. In fact, it was a failure. While every
one was focused on the income statement, asset accounts began to rise and liability accounts began to decrease.

In the end, the organization had to write off over 70 percent of the organization’s assets. Think about the magnitude of this write-off. If you had $100 million in assets, the resulting write-off would have been $70 million.

The activities that led to this write-off occurred for over five years. Two examples of changes made to the income statement that impacted the balance sheet were 1) reducing cost of goods sold by moving expenses to inventory, and 2) reducing various expenses by moving certain expenses to miscellaneous A/R or prepaid expenses. Most of these adjustments were made during the month-end close process and were set to reverse the next month, but there were times when they didn’t reverse. I bet by now that you can guess what type of control would have identified this issue—account reconciliations!

The following list contains 10 best practices that will help enhance your account reconciliation process:

1. Perform account recons monthly;
2. Review recons within 10 business days;
3. Maintain proper supporting documents with each individual recon;
4. Store recons electronically to allow a review by others anytime;
5. Follow up on reconciling items over 30 days old;
6. Train employees and create engagement by helping employees understand the “why”;
7. Perform a second review (e.g., internal audit) periodically;
8. Research unreconciled amounts;
9. Seek out errors, and for errors that recur multiple times, work with others to mitigate them in the future; and
10. Seek out fraud, and if things aren’t making sense, get others involved.

Can you find the chart in the above picture that fits with this week’s example?

I hope this series has been helpful. If you would take a few minutes to reflect on this account recon series and share with me the most important lesson you learned, I would welcome and appreciate this feedback.

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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