Financial Institutions And Their Account Reconciliation Processes
Do you work in an industry where there is only an eight-percent chance that employees who steal will be caught? Do you work in an industry with a reputation built on trust? Do you work in an industry that has an annual FBI Fraud and Failure Report?
If you work in the banking industry, you do.
At the 2014 AICPA Banking Conference, Steve Merriett, Chief Accountant of the Federal Reserve, called 2014 a “very challenging year from a regulatory output level due to the volume of new regulations”. In the Public Company Accounting Oversight Board (PCAOB) portion of the conference, it was concluded that “whatever you are doing in regards to auditing internal control, it is not enough”.
Under constant pressure to make it easier for their customers to bank anywhere, anytime, banks are also getting pressure to improve internal controls and comply with stricter regulations, all the while maintaining or decreasing costs. As a result, financial institutions and their account reconciliation processes are under constant scrutiny.
In its Managing Reconciliations by Exception: A Key to Improving Operational Performance by Reducing Costs report, PWC analyzed SEC 10K filings to determine that, for the average financial institution, the reconciliation of transaction, position and balance accounts make up 1.5 to 2 percent of operating expenses. “The majority of these costs are labor related, stemming from the degree of manual processes still in reconciliation operations.”
The report stresses the importance of improving efficiencies such as reducing account reconciliation errors and streamlining SOX compliance requirements. It adds that exception management, when done correctly, draws attention to issues early in the process, “particularly where small initial problems may have larger downstream effects.”
They go on to say that one way of improving efficiencies is through technology and that not only does taking this step provide financial institutions with visibility into their processes, namely reconciliations, but that process costs may also be reduced by 20%.
How to Rob a Bank and Get Away With It
ABC News’ How to Rob a Bank and Get Away With It story highlights why the “best way to rob a bank is from the inside”.
Given that customer trust is the cornerstone for successful banks, they are often not willing to publicly prosecute smaller internal theft cases, preferring to handle the clean-up themselves to avoid any harm they may inflict upon their reputation when bringing charges against a dishonest employee.
Another condition causing concern for banks is the fact that many law enforcement agencies just do not have the manpower, or interest, to investigate cases involving less than $100,000.
“In 2011, there were more than 5,500 reports of suspected embezzlement at banks. Of those cases, approximately 580 were investigated, and of those investigations, 429 cases, or 8 percent, ended with convictions, according to FBI data.”
As the article states, this equates to bank employees having a 92 percent chance of robbing a bank and getting away with it, at least in 2011.
Implementing better controls within banks is the solution recommended by fraud analysts and the FBI.
For some interesting stats on banks and the crimes they suffer, the FBI has compiled data for a number of years on their website.
Account reconciliations, as mundane and repetitive as they may be, are often the preventative measure banks can take to catch fraud as they uncover out-of-balance situations and improper transactions. At issue, of course, are the controls in place with regard to the account reconciliation process. Does a separation of duties exist? Do all preparers and reviewers have access to policies and procedures? Are the policies and procedures current? Are processes standardized, consolidated and visible? The great thing about a stringent account reconciliation process is that you do not have to search for anomalies, exceptions or out-of-balance situations – they unearth themselves as items are reconciled.
Aite Group reports that reconciliation technology is becoming increasingly important for financial institutions as market pressures are increasing the demand for data integrity and visibility. They go so far to say that it is now a top-ten priority.
In his Financial Services Anti-Fraud Risk and Control Workbook, Peter Goldman summarizes the Federal Reserve Bank of New York’s Industry Sound Practices for Financial Institutions.
Whether a lot of change is needed or just a few tweaks, a quick way to begin building sound account reconciliation processes is through an account reconciliation automation tool.
SkyStem’s ART is one such tool. You can read how it helped Gateway Bank of Southwest Florida modernize its account reconciliation processes while improving internal controls in their customer success story.