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Internal Control Completeness

Internal Control in Account Reconciliations – Completeness

Did you hear the story of the Financial Controller who wanted to do all of the account reconciliations for his bank? Not only did this overly enthusiastic employee take on work normally delegated to accountants reporting to him, he also personally provided outside auditors with whatever they wanted to see at year end.

Why?

Was he hoping to gain the CFO title? Did he discover some ultra-caffeinated drink that allowed him to go weeks without sleeping?

No. And no.

He was engaged in financial fraud that spanned more than two decades and caused his company losses in excess of $200 million. His company did not know. It had no idea until he sent in a confession letter after he stopped showing up for work.

How can this be? So long and such an enormous amount?

The SEC, in its Cease-and-Desist order against Molex Incorporated, where this Financial Controller worked, sites in one of the eight internal-control failures that “internal auditors were manipulated to ignore incomplete accounting records such as missing account reconciliations or to rely on the documents the controller created.”

In a separate case, Eliot Lewis, the Assistant Inspector General for Audit Office of Inspector General U.S. Department of Labor, warned of issues with a new system that were affecting the completion of an audit. One of the reasons for the disclaimer of opinion, incomplete account reconciliations; “For example, the Department could not reconcile its underlying supporting data for certain Unemployment Trust Fund balances to the general ledger in a timely manner.”

The Public Company Accounting Oversight Board (PCAOB) held an inspection of KPMG LLP in 2013. A few of the deficiencies found were of enough significance that the PCAOB felt that KPMG may have issued an opinion “without satisfying its fundamental obligation to obtain reasonable assurance about whether the financial statements were free of material misstatement and/or the issuer maintained effective internal control over financial reporting (ICFR).”

In one case, the PCAOB mentions how KPMG used controls that compared internally created data to other internally created data. “These controls did not address the completeness of such data or the significant assumptions underlying the reserves, nor did they address the completeness and accuracy of, and the disclosures related to, those reserves.”

No pun intended, but completeness is a hard thing to get your arms around. Incompleteness is much simpler. In a Google search, you will find many mentioned material weaknesses based on “incomplete account reconciliations”.

“Every business crisis I have ever been involved with began with the unraveling of the acct recs and helped to begin correcting itself as those accts became reconciled.”

In the 2003 Harvard Business Review publication titled How We’re Fixing Up TYCO, Ericunraveling rope Pillmore , then Senior Vice President for Corporate Governance for Tyco, talks of phases the new executive staff took the company through. He mentions that people focus on what gets “emphasized, measured and rewarded”. In Tyco’s case, the finance department focused more and more on deals while loosely managing the reconciliations, inventory and accuracy in the month-end close. In order to ensure there was no “systemic fraud” within their accounting transactions, they used explicit questions. Questions from auditors covered management’s judgements and methodologies surrounding their reserves, valuations and other items. The auditors’ tests included the completeness of reconciliations.

When I asked Mr. Pillmore about the importance of account reconciliations when keeping the engine of finance running clean, he had the following to say, “Acct recs are at the heart of a well-managed and controlled company.  From cash to receivables to inventory to billing to accts payable to miscellaneous liabilities to the equity accts….they give you the confidence as a CFO AND CEO that your business is what the financial results say.  Every business crisis I have ever been involved with began with the unraveling of the acct recs and helped to begin correcting itself as those accts became reconciled.”

If only a fraction of accounts are reconciled then only a portion of the financial statement in the company’s close is what it says it is.

One way to avoid incomplete account reconciliations is to hook an account reconciliation automation solution to your ERP or accounting system. Most SaaS based solutions are agnostic, working with almost all available systems. You just have to ensure that all accounts are included during your implementation. Additionally, many allow you to schedule your reconciliations as needed, whether monthly or quarterly for example. An additional benefit is that variances are red flagged. Automation establishes a workflow where accountants are assigned accounts, tasks, deadlines and roles such as preparer or reviewer – closing any gaps so no accounts fall through the cracks.

SkyStem’s ART is an account reconciliation automation solution that many companies rely on for its ability to help them attain completeness, timeliness and accuracy with their account reconciliation and financial close. See how an account reconciliation automation solution works here.

By |2023-03-11T18:15:25+00:00May 28th, 2015|Blog|0 Comments
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