As organisations look to reduce the cost of their finance and accounting teams, it is essential for them to find the balance between reducing workloads while still maintaining control of the balance sheet reconciliation process. For this reason, firms are increasingly looking to implement global, risk-based reconciliation policies.
By taking a risk-based approach to reconciliations, resources can be focused on the higher-risk activities while those tasks with lower risk can be done less frequently. With a global approach, the process can be standardised, rationalised and the appropriate actions can be taken dependent on the risk.
Through working with several global organisations who have completed similar projects, I have been able to summarise some of the best-practices I have learnt when it comes to developing a standardised, global, risk-based reconciliation policy.
A reconciliation policy can act as a training document for employees as well as setting out requirements and procedures. Guidelines and criteria are more likely to be adopted when individuals understand the importance and relevance of a process while reducing resistance to change. For this reason, it is recommended to give an overview of why reconciliations are being performed, and exactly how a balance should be substantiated.
Outlining key terminology can also help users understand the policy. For example, what is your definition of a Reconciling Item? Must all accounts be fully reconciled or just to within a threshold? What level of segregation of duties is acceptable for the preparation and review of a reconciliation?
The next step is to determine how the risk-rating of an account will affect its treatment. The key here is to manage the fine balance between reducing overall workload and still maintaining control of the process. For example, by mandating that only high-risk accounts are reconciled monthly, individuals will have more time to investigate any differences rather than spending their time reconciling zero-balance accounts which adds less value.
A low-risk account may only need to be reconciled on an annual basis whereas a high-risk account may be prioritised each month. The risk rating could also determine the level of approval that is required in the workflow.
Next, the criteria for identifying the risk rating of an account must be clearly established. It is important to have the ability to determine risk-ratings on an ongoing basis. Otherwise, if static ratings are used, a high-value unexplained item in a low-risk account may not be reviewed for 12 months.
Risk ratings can be driven by several factors relating to an account. For example, a low-risk account may be based on the month over month variance of the balance, or the difference between the General Ledger and Sub-ledger ending balances. On the other hand, a high-risk account could be defined by a debit balance existing when a credit is expected, where there has been a higher-than-usual variance in the balance of the account, or when the same reconciliation failed a peer review in the prior period.
These dynamic risk-ratings should be evaluated on an ongoing basis to ensure nothing is missed.
Finally, technology can be utilised to aid the implementation of a global reconciliation policy by enforcing standardised best-practices which will, in turn, increase overall user adoption.
Users can be automatically notified when the risk rating of one of their accounts changes based on a variance, materiality threshold or level of activity, making risk-rating more transparent and objective.
Overall, risk-intelligent automation supports a more efficient and effective account reconciliation process, with several of our clients reducing both risk and costs simultaneously.
Written by: Thomas Edwards, Trintech Manager of Finance Transformation – EMEA