Concerned about Account Reconciliations
Account reconciliations are not a moving target. They can, however, be your Mount Everest. They are a good financial reporting bellwether. They absolutely must be attended to.
If you read through the SEC litigation site, you will find cases of fraud within nearly all departments of a company, from the C-Suite to the front counter.
In this article we’ll look at three roles that are prone to suffer at the hand of poor accounting practices, such as loose controls and untimely or incomplete account reconciliations: the CFO, the CEO and the CTO.
CFO concerns with account reconciliations: compliance, visibility, accurate numbers, risk exposure, overtime during the close, unfavorable audit.
Protiviti’s 2014 Finance Priorities Survey found period-end close, cash forecasting and account reconciliations to be the top three priorities for financial leaders who said they want their organizations to improve.
“A growing focus on period-end close activities, consolidation, and account reconciliations suggests a similar desire to improve these areas within a thriving yet volatile business climate, when such activities may slip in quality.”
Account reconciliations can touch bottom-line profitability, balance-sheet strength and top-line growth. How? Once account reconciliations are improved both in terms of quality and timeliness, CFOs can focus on strategy and other matters outside of worrying about an auditor comment or post-close adjustments.
Glass Lewis & Company completed a thorough analysis of companies having to issue restatements. In the list of companies and their material weaknesses mentioned, poor methods of dealing with account reconciliations were often mentioned.
CEO concerns with account reconciliations: accurate numbers, overall health of company, SEC filings, risk exposure, communications matters, audit committee, strategic opportunities.
Texas CEO Magazine, in its March 2014, issue mentions reconciliation and analysis as one method in its list of The Checks & Balances of Preventing Fraud. The article stresses that the “impact of fraud cannot be underestimated” making its early detection a top priority.
Account reconciliations as part of internal control of financial reporting can be the gotcha for CEO’s. Take Koss Corporation for example. Their CEO’s Principal Accounting Officer, Secretary, and Vice-President of Finance managed to steal $30 million from the company. “Many account reconciliations were either not prepared or were not maintained as part of Koss’s accounting records. To the extent that reconciliations were conducted, they were improperly performed by the same persons who initiated or recorded the transactions, enabling those persons to make modifications to the reconciliations to cover up fraudulent entries.”
Yet one more poor internal control that hurt the CEO was the fact that he did not thoroughly review the reporting certificates the dishonest employee was providing him.
CIO concerns with account reconciliations: identifying opportunities and risks for the business, monitoring technology trends that could impact the company.
It may seem somewhat indirect, however CTO’s can directly affect account reconciliations with the systems that the finance team has to use when reconciling accounts and creating financial reports.
For example, in the previously mentioned fraud case, “Koss’s computerized accounting systems were almost 30 years old and access to the accounting systems could not be locked at the end of the month and there was no audit trail.” The dishonest employees were thus able to make undetected post-closing changes to the books and bypass an internal control.
Many companies grow through acquisition. Typically these acquisitions involve new systems, leaving some finance teams working with over a dozen ERP or accounting systems when closing the books. With the pressure to close the books in an ever decreasing time-frame, those with numerous systems which may or may not talk to each other, end up scrambling during the close to get the best controls in place that time and circumstances allow. Quality of internal controls is likely to suffer.
Another way that CTOs or CIOs may directly affect account reconciliations and the financial close is through fraud. For example, in this case a CIO paid an IT services firm for services not rendered while receiving kickbacks. Another example mentions a CIO who confessed for a lighter sentence in this case of corporate fraud.
One tool that can help the C-Suite in their relentless pursuit of strong controls is an account reconciliation automation system. While the accounting team works directly within the automated workflow that has a built in audit trail with email alerts and a scoring system, those needing only a 50,000 foot view of account reconciliations and the financial close, can access dashboards containing live status and exceptions reports.
SkyStem’s ART is one such a tool that is popular both with accounting teams and the C-Suite because of the visibility it provides as well as its ability to improve internal controls.
See how ART can improve internal controls here.
You can see where a few things intentionally went awry in the Accounting Horror Stories section.