General Ledger Account Reconciliations…

Basic Building Blocks for Good Accounting Controls

Presentation for the Greater Milwaukee Chapter of the IMA

Account Wrecks of the early 21st Century

Presenters: Jeff Adler & Dan Craft

Jeff Adler is the President of RecWizard.His career includes 6 yearson the audit staff of PwC andover 30 years of controllership, financial management and consulting experience. He founded RecWizard in 2001.

Dan Craft is a Senior Manager in the Technology

and Risk Services group for Ernst & Young in Troy, MI.

His recent experience includes Sarbanes-Oxley process control

evaluation and re-design.

Today’s Agenda

What is an account reconciliation1

Why are reconciliations important2

Self-assessment of your process3

Define key elements of a good process4

What is an account reconciliation?

A – something required by Sarbanes-Oxley that was not important before 2001.

B – part of my job duties that wastes time but makes the auditors happy.

C – a means of creating stress between my supervisor and me.

D – an analysis of an account balance that explains what the balance is, why it is there, and that it is adequate.

CompanyPolicy

SupportingDocuments

Clear, CompleteExplanations

At a Pointin Time

Validity An assessment of the validity, correctness and appropriateness of the account balance…

Definition of a reconciliation

… documented by relevant calculations, clear and complete explanations…

… in compliance with company policies.

… with copies of supporting documents…

… at a specific point in time…

Why are Reconciliations Important?

FinancialStatement

Audit

Sarbanes-Oxley

GoodAccounting

Financial Statement Audit

ReviewBusinessProcesses

AssessManagement

Process

IdentifyKey

Controls

Documentand TestControls

Results of the auditor tests and observations will determine the amount of year-end validation that is required.

Transparency

Timeliness Accuracy

Reliability

Corporate Governance Since 2002

Management Certification

AuditorAttestation

Clearly documented processes are a critical part of Sarbanes-Oxley compliance.

Sarbanes-Oxley Requirements

Good Accounting!

• For non Sarbanes-Oxley companies…

Timely Correction of Accounting Errors – moreaccurate Financial Statements and improved

reliability and accuracy.

Sarbanes-Oxley type requirements are growing Many large companies are requiring compliance withSarbanes-Oxley even though they are privately held.

Assessing Your Process

Are policiesreadily available

to all staff

Are reviews andapprovals completedand documented

How much trainingdo you provide

What do You do?

What seniormanagers take anactive role in theprocess

How often do you require reconciliations to be prepared- Are all accounts reconciled on that schedule

How soon are reconciliations required to be completed- Do you complete them during the close process

Do you rely on your account reconciliation process as a key control- Do your auditors rely on your process as a key control

Are reconciliation processes included as part of your annual review process- Do you address and track timeliness and quality issues

Best Practices for Reconciliations

Train

Standardize

Document

Make sure your staff knows how to prepare reconciliations that are qualitative – not quantitative

Add efficiency and consistency by providing standard formats or templates

Proper supporting documents, comments and calculations create auditable and verifiable reconciliations

Monitor & Review

Review and monitor to maintain a continuous control environment

Good Reconciliations

1.What?

2.When?

3.Why?

4.Who?

5.How Much?

InvestigativeProcess

GeneralLedger

Qualitative vs. Quantitative

Answer these investigative

questions

Help - Tutorial

Feedback

Prepare Review

Staff Manager

Provides the ability to maintain communication and feedback with clearly defined formats –easier to focus on the content instead of the form of the reconciliation.

Standardization

RecWizard Templates

Subledger MatchBank Account

Calculated Balance

Accruable ItemNon-current Debt

Current DebtGeneral List

Amortizable Prepaid

Internal

External

Subledger

BankStatement

ExcelWorkbook

Memo orLetter

JournalEntry

Invoice

Lease

Contract

Documents provide support and validation for the account balance.

Supporting Documents

Policies and Procedures

Readily accessible policies and reconciliation procedures help make sure processes are documented and not lost as part of staff turnover.

Review and Monitor

Real-time visibility to see the status of all reconciliations

Solutions for Control Sheets

Excel Workbooks

Access Database Programs

Specialized Process Control Software

Manual Checklists

If you don’t use an application like RecWizard, you have many other options to control the progress of your account reconciliation process

Dan Craft – Ernst & Young

ProcessImprovement

HistoricalPerspective

Keys to Success

Current State Observations

Current State Observations

Decentralized Execution

and Testing

Unidentified Differences

Segregation of Duties

Issues

Delinquent Aged Items

No Visibility with Senior

Management

ManuallyIntensive

NotPerformed

Timely

Lack of Training

Susceptibleto Human

Error

Current State Observations

These issues, if left unaddressed, can very quickly lead to SOX compliance and financial statement risks

Adverse Opinion from Auditors Regarding Internal Controls

Restatement of Financial Statements

No Company can afford to ignore these issues

Historical Perspective

• Pressure to reduce month-end closing cycle

• Diminished priority on account reconciliations

• Shift in policies regarding timing of reconciliation preparation

• Deadline moved to “immediately following” the hard close

• Lack of senior management visibility lead to “deadline creep”

• Deterioration to not completing reconciliations at all – or at best, very poorly

The degradation of the account reconciliation process did not happen overnight. There has been a series of events that has led to the current state in most companies.

Historical Perspective

StaffingDemands on accounting functions increasing at higher rate than number of personnel

Training Lack of training because “everyone knows how to reconcile an account”

SOXSarbanes-Oxley requires significant accounts to be reconciled prior to issuing financial statements

AuditorFocus

Auditor focus is increasing while many companies’ focus is decreasing or remaining stagnant

Leading Practices

Templates

Consistent Process enabled by standard

reconciliation templates

Visibility

End-to-end process visibility and

commitment by Senior Management

Centralized Monitoring and Testing to assure

continuing quality

Workflow

Automated Messaging to assure timely

notification of staff regarding due dates and

delinquent tasks

Risk

Materiality Based Risk Assessment to prioritize

staff efforts

Quantify Potential Adjustments prior to issuance of financial

statements – particularly SEC reports such as the

10-Q and 10-K

Monitoring

Adjustments

Drive remediation consistently across all locations

Keys to Success

Executive Support and Tone at the Top

Sufficient Resource Commitment

Training – at all levels

Focus on root cause rather than symptoms

Time invested up front will translate directly to the success and benefits of a good process

Improve processes prior to technology introduction

Account reconciliations… the easy way!

RecWizard2700 Neilson Way – 1233Santa Monica, CA 90405

310.869.1170

info@recwizard.com