Reconciliation is a traditional control tool to identify mismatches between different sets of books in a finance and accounting setup. Unfortunately, reconciliation fails to correct errors committed at the source, and often there is a time lag between the identification and correction of the error. Manual correction of reconciliation findings in a digital environment also requires additional controls such as approvals and audit trails for future reference.
The Reality of Reconciliation
There is growing recognition that reconciliation is not a sustainable approach for improving the efficiency of the finance function. A transformative strategy available today can completely eliminate the need for reconciliation; it involves:
- Improving the alignment between the IT and finance functions to improve visibility into every transaction
- Customizing ERP platforms to address errors at the source, instead of continuing with manual and inefficient methods of reconciliation
The latest ERP platforms are now designed to make errors visible even as the transactions take place, so that errors can therefore be fixed immediately. Better in-built control mechanisms reduce the chances of error and the need to perform reconciliation during downstream processes.
Leading finance functions are following a gradual four-step process that enables them to understand whether they meet control objectives, identify the root cause behind their reconciliation issues, and determine whether reconciliation is necessary:
- Assess the number of accounts, and whether all of them are actually being used
- Understand why each account is being reconciled and the reason for the mismatch between two sets of books; a Pareto chart of key drivers will help identify the areas that need to be prioritized
- IT and finance teams should work together to track the path of every transaction, both within the organization as well as in the extended ecosystem
- Use built-in controls within ERP systems to catch errors across transactions as they happen. Analytical and statistical tools can help identify patterns to pinpoint transactions that do not conform to the established norms
Moving from Reactive Reconciliation to Proactive Error Identification
Organizations today emphasize electronic risk and control mechanisms to strengthen confidence in financial reporting. In addition to the significant amounts of effort required, the lack of accountability and visibility across traditional reconciliation processes is compelling finance functions to rethink their approach to reconciliation. CFOs will need to employ analytics and move to a risk-based approach to carry out control checks on transactions. As finance teams become more strategic, they will need to focus on finding ways to drive business growth. Fixing issues as they happen can reduce reliance on reconciliation, and free up time and resources for more value-adding activities.
For more information, download Is Reconciliation Becoming Passé in the Digital Age?