Let’s spend less time reconciling and more time identifying risk & improving business processes.
Account reconciliation is an under appreciated, yet critical, control that ensures the financial integrity of any business.
As well as being a strong foundation to financial control, most organisations perform reconciliation over the transactions and balances relating to all the varied different parts of their business. As such the reconciliation process contains a rich source of business data.
This information can be presented to provide insightful reports on where “downstream” processes can be enhanced or better controlled, increasing the efficiency of the reconciliation itself, and more importantly delivering improved “upstream” processes to the benefit of the customer and overall profitability.
But what makes for an effective reconciliation solution ?
Generally for whatever is being reconciled, it is best practice to reconcile at a transactional level as opposed to at a balance / position level. This is not to say balances aren’t important, as your reconciliation needs to also “work” at a summary level.
Balances should also be used at the point of loading of new transactions into a reconciliation, so as to validate the data, and ensure you are not reconciling using incomplete or erroneous transactional data. At the very least a waste of staff resource, but could lead to staff taking unnecessary action to correct a non-existent reconciliation difference !
Before processing any source data files, it is very helpful if file specifications can be provided (either internally -or- from 3rd party data supplier as appropriate) so that data within the files can be correctly interpreted for loading to the reconciliation system.
Loading of data
Firstly the ability to easily source, automatically format then load data received in any format is a key requirement. As required, the “joining” together of different data sources to enrich transactional data, or use of formulas to populate value-add information into additional fields, is also very important.
Ownership of the formatting rules should not lie with a custom development from the vendor, as every time a new product, business change, reporting requirement, etc occurs significant cost will be incurred. In-house ownership is much preferable, but will need development and retention of some specialist skills.
Consider also using a more generic tool such as Datawatch’s Monarch software to automatically format data ready for loading to your reconciliation tool, as it’s very flexible for extracting data from different file formats / layouts, and with some training can easily be used / supported by business users without the need for programming skills. This is especially beneficial if a 3rd party supplier alters their reporting format and you need to react quickly to the change.
Other alternatives are in-house customized routines, or the controlled development of Excel VBA macro programs, both of which allow organisations to be more self-sufficient on an ongoing basis.
Such approaches also have wider business applicability than just interfacing source data into your core reconciliation system, and so provide a greater return on investment over purchasing a vendor-specific data formatting module.
Audit trail on single transactions from source data, through the reconciliation process, into an archived matched group (and vice versa) is also very valuable.
This must be core functionality of any reconciliation tool, but also important is ease in which new match rules can be set-up, ability to prioritise order of multiple match rules on a single account, amend rules in-house without continual recourse to the vendor, and provide ease of reporting (preferably at transaction level) on the effectiveness of each rule compared to the level of manual matching on an account.
The overall goal should be straight-through processing (STP) via maximising auto-match rates where possible so that effort is focused on investigating exceptions, and the underlying business process causing the unmatched item.
The ability to easily unreconcile if records matched in error (hopefully manually than via an automated rule !) should also be a straightforward process.
Management of Exceptions
The ease of distribution to query owners is a definitive requirement, but the existence of a separate “workflow” tool to accomplish this is only really necessary if there are a large number of query owners across different teams and locations, in which case the benefit of purchasing any additional workflow module makes sense, otherwise costs may not be justified.
Moreover workflow works best if tightly integrated with reconciliation, with no replication of data for reconciliation and workflow purposes (otherwise you have issues of synchronisation, and introduce a requirement to reconcile your unresolved reconciliation items to your open workflow items)
Under any solution workflow must direct query owners towards the high risk items using potentially a RAG “traffic light” status derived from value, age, type of break, account on which break exists, etc (or a combination thereof, with all values should converted to a base currency for consistency of calculation). Most likely the needs of individual businesses will require creation of an organisation-specific RAG calculation so that material reconciliation breaks are promptly escalated for resolution.
Whether accomplished via the vendors own “dashboard” reporting tool or pointing Business Intelligence (BI) software at the reconciliation database tables, standard reporting should exist across all unmatched items / unresolved workflow queries to highlight the risk exposure to the business.
Other reporting around efficiency of the reconciliation process itself (including individual match rules), integrity of source data, service levels and staff productivity all help organisations to better understand what process changes will increase the STP percentage of future reconciliations.
Using “outputs” from the matching process as “inputs” to other business processes (for instance, automated journal preparation from unmatched items) is another beneficial use of reporting from your reconciliation system.
Ease of ad hoc reporting on any data item / field loaded to a reconciliation tool is also very important, as reconciliation is a great “window” across all business areas, as following best business practice every transaction that occurs across your operational and financial accounting systems should be reconciled. As such productivity indicators, measurement of service levels, operational efficiency, etc can all be achieved from reporting on reconciliation data.
Thus reporting from data loaded to a reconciliation tool (to maximise auto-matching and assist the investigation of breaks) actually provides a plentiful source of cross-company business intelligence MI.
Governance & Sign-Off
An effective audit trail over the life of individual transactions should be a given for any reconciliation tool.
Additional functionality to obtain period end approval / sign-off / attestation can be an important tool for highly regulated financial institutions, but is not necessarily a value-add purchase for some SME organisations, while others may deem a formal sign-off procedure as best practice in their internal controls.
Many organisations view the task of reconciling as a non-value add task.
However with the correct foundations in place, the reconciliation process can be central in driving continuous improvement across all other business areas, transforming itself into very much a value-add function.
Let’s spend less time reconciling and more time identifying risk and improving business processes.
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