Assessing Risk within Account Reconciliations—The Project Before the Project

M2DynamicsAssessing Risk within Account Reconciliations—The Project Before the Project

 

The account reconciliation process continues to be an area many organizations are seeking to improve.

Stringent SOX requirements, external audits, pressure to improve the bottom line, and strict management of cash flow are a few of the factors affecting this trend.  However the process of reconciling accounts and in-depth balance sheet reviews in a timely fashion still present a challenge to many organizations.

As a result Account Reconciliation Management module (ARM) continues to be of great interest to organizations and an integral part of that improvement to streamline processes, enable reviews, and documenting results.  However, many improvements to the actual account reconciliation process can be made in advance of implementing a system and can yield great effectiveness and efficiencies which an account reconciliation management systems can later facilitate and enhance.

One of the most influential exercises to obtain efficiencies is to understand the risk associated with the reconciliation (or lack of reconciliation) of each account.  The objective is to shorten and streamline the account reconciliation process by focusing on high risk items that are important to the monthly close and have the greatest impact on the financials.  Those accounts which are low risk items and have lower impact can be reconciled later in the month or perhaps on a quarterly basis.  Ensuring integrity of the organizations financials should be strengthened, not compromised, through this process.

A risk scorecard can assist in this process, offering a quantitative way to assess both quantitative and qualitative risk attributes in a consistent manner across the organization.  The results yield a first pass at identifying priority of accounts that are being analyzed.  Management judgment should be applied to assess and modify results as needed.

With the assistance of internal audit, corporate accounting, management, etc., an organization can obtain input into the factors that should be included in the assessment.  The following are some examples that may be relevant but each organization should collaborate on what applies to their financial situation:

  • System generated vs manual entry
  • Impact to P&L
  • Liquidity
  • Account Balance
  • Percentage or dollar amount of change (volatility)
  • Special Circumstances (Regulatory, Legal, Environmental, etc)

Only a few of the most impactful factors should be used and you can segregate accounts and use different factors for those grouping if more applicable.  For the scorecard, each account is scored on a scale (for example 1 to 5) for each of the factors to assess risk.  Each factor can be weighted differently to further refine the outcome.  Each account has its own unique score related to risk as a result of the scoring.  Further judgment and refinements can be made after this initial pass.

Risk scores are helpful in determining the following:

  • Which accounts must be reconciled each month before the monthly books close?
  • Which accounts still should be reconciled each month but can be completed after close?
  • Which accounts can possibly be auto reconciled without needing further review?
  • Which accounts are of lower risk and can be reconciled quarterly?
  • Is it possible to reconcile certain accounts quarterly but on an “off quarter” month when there is less financial close activities needing to be performed?

These are a few examples of process improvements M2Dynamics can assist with, which result in a faster, smoother, more efficient close process and can be tracked and further refined with the assistance of an account reconciliation management system. The risk of an account should be reviewed when a significant change in the nature and activity of the account occurs and all accounts should go through a periodic review to re-assess the risk assigned and modify those needed. M2 has experienced resources to assist with streamlining your account management process as well as implementing Account Reconciliation Management system to maximize impact to the overall close process.