Account Reconciliation as a Control—Pitfalls

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

This blog series was developed to address the issues I have seen in the account reconciliation process. As you can imagine, I have seen plenty of pitfalls. Some were smaller than others, but there were several that were complete failures. What if you discovered someone stole almost $100,000 over several years?

I once was asked to investigate an unexplained difference between the bank balance and the account balance. As I explored deeper, I found that the clerk who was preparing deposits and posting them in the accounting system was stealing cash (and checks written to cash) from the deposits. To conceal the missing cash, the clerk would use checks received on later dates.

For example, any cash taken in on day one would be pocketed, and checks received on day two would be used to make up for the short fall. Cash from day two would be pocketed, and checks from days three and four would be used to make up for the short fall.

The controller who was performing the recons had an accounting degree and several years of experience. It appeared that the controller performed recons on a monthly basis. During the reconciliation process, the controller would reconcile deposits on the bank statement to deposits posted in the accounting records. There were times when multiple items in the bank statement would be reconciled to one item in the accounting records and vice versa. This should have been a warning sign because, while this may occur occasionally, the frequency with which it occurred in this case was well outside the norm. The biggest clue something was wrong was the growth in the length of time between an entry in the accounting records and the date the deposit was made.

For example, any funds received for Friday, September 23^rd, would be posted in the system with a matching accounting date. These same funds would be deposited on Monday, September 26^th. This timing will vary depending on how long it takes for someone to make the deposit. This timing difference grew to over a month. Just imagine the funds received on September 23^rd not being deposited until October 31^st!

Needless to say, these recons were completely ineffective. This is a real-world example and could have been avoided or losses significantly mitigated if proper account reconciliations had been performed. Assuming account recons are actually performed, the following are common pitfalls:

• Properly reconciling activity is important, as you can see from the above example. When reconciling the detailed activity, you have to make sure it makes sense. The transactions on the book side should exactly match the bank side. If they don’t, you have to understand why. The key word there is “understand.” Don’t just match transactions for the sake of matching them.
• Performing the wrong type of reconciliation. I knew there were people doing recons incorrectly, but didn’t realize all the different types of recons there were until I sat down to write this series. The pitfall usually happens when people perform balance roll-forwards when one of the other types is necessary. Balance roll-forwards are the easiest and have a time and a place, but they are completely ineffective when trying to reconcile the activity of the cash account, accounts payable, or pre-paids.
• Recon not performed timely. Sometimes people put off performing the recons because performing recons consistently takes a lot of time and resources. When they finally get around to doing them, the recons take more time, and oftentimes, things get missed that lead to writing off things that might have been collected—like NSF checks, errors, or theft. Performing consistent, effective recons is a preventative control because recons can deter wrong doers when they know someone is looking. If someone chooses to steal, a recon can also identify it sooner, which can reduce the losses.
• Not reviewing the recon. As hard as it is to get people to prepare recons, finding someone to review them seems to be even harder. I have seen too often when people ask others to prepare a recon, but it is never reviewed. There are times when an outside CPA may come in to review them from time to time, but the CPA is usually focused on the ending date for the period they are engaged to evaluate (e.g., compilation, review or audit). There is so much that can happen within the period—which is why monthly, timely reviews are so important.

We all make mistakes and I probably make more than most—just ask my wife. But we can learn from the above pitfalls to perform more effective account reconciliations. These pitfalls also could have been avoided if certain best practices were implemented. I will provide some of these best practices next week. I will also provide another example of an organization failing to implement proper account recons, which resulted in writing off over 70% of its assets.

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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