Account Reconciliation as a Control—Review

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

The account reconciliation is an effective procedure that can help an organization identify fraud and errors, but the review is the step that makes the procedure an internal control. If it isn’t reviewed, then it isn’t a control. With this blog, I hope you see the importance of performing a review, and that you find a few tips that will help you perform an effective review.

To help illustrate why a review is important, I’m reminded of a conversation with my mother when I was a kid. She asked me, “When are your mid-term exams?” “They were last week,” I responded. “When did you study?” was my mother’s next obvious question. I thought for a moment, and then told her, “On the bus.” To which she queried, “How did you do?”

As you can imagine, I didn’t do too well on the tests. There were two types of reviews performed during my mid-terms—1) when I studied the materials on the bus, and 2) when my teachers graded my tests. Needless to say, the review performed by my teachers was more effective.

I hope the following will help enhance your review process:

• Who – The ideal person to review an account recon is someone who is not influenced by the preparer. They should also have management responsibilities. The more accounting knowledge the reviewer has the better. In smaller organizations, the best reviewer would probably be the owner, but they usually do not have the time nor the interest. An outside CPA could be a good resource to help review.
• What – All account recons should be reviewed.
• When – The review should be performed within days of the preparer’s completing the recon. This will help the preparer answer any questions faster. A good business practice is for the preparer to finish by the 15^th of the month and the review to be completed by the last day of the month.
• How – The review of the reconciliation will vary based on the type of reconciliation, but the following process should be used as a guide:
  • Confirm preparer has finished with reconciliation and has properly signed off.
  • Tie beginning, ending, and any third-party balances to support. And, periodically, the balances should be looked up independently in the system or confirmed through third-party verification.
  • Tie any beginning balances for the current month to the ending balances from the prior month.
  • Review any outstanding or questioned items from the prior month’s recon to determine what happened with them. Did they clear out, are they still outstanding, and do they make sense?
  • Review a sample of the current month’s activity to determine if the preparer properly reconciled or accounted for the activity. This is where most of your time should be spent, and the amount of time will vary based on the level of activity and complexity of transactions. I will provide additional details in the next blog related to pitfalls, which will help identify areas that should be focused on during the review.
  • Review the supporting documents and determine if everything is properly supported.
  • Sign off by reviewer.

So, why is it necessary for us to perform a review? Let’s take my mid-term grades. If my teachers had asked me to assign my own grades, my grades would have been higher than what I actually earned or deserved. They would not have reflected the reality of what I had learned. This is the equivalent of an employee performing an account reconciliation and no one reviewing it. Without a review, you have less confidence in the recon’s accuracy. Do you think my grades assigned by me or by my teachers were more reflective of reality? If you answered, “Teachers,” then you are right.

Finally, I mentioned fraud and errors several times throughout this blog series, but I haven’t explained how account reconciliations can identify either. I promise next week we will have plenty of examples that relate to pitfalls when performing or reviewing account reconciliations.

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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