Being able to effectively evaluate the reconciliation frequency for balance sheet accounts can involve the review of a variety of factors, both quantitative and qualitative. While the ultimate objective of balancing effective controls with process efficiency is the same for all companies, the level of effort and overall approach of designing the appropriate schedule can vary significantly between companies. There are many possible reasons for variation including different structures for the chart of accounts, the type of account reconciliation tools being utilized, and the overall tolerance for risk by senior finance leadership, and internal and external auditors. In many cases, the reasons for differences between companies is difficult to pinpoint, since account reconciliation processes are often developed in isolation and evolve over time. As is true for many processes, there can be great value in directly comparing designs between companies, so that all can benefit from the experience of knowledgeable peers.
During this Peercast, our feature company, a large global company with over $15 billion in revenue, shared their experiences in developing a structured approach to the risk ranking process for balance sheet accounts, including the steps they took in the creation of the appropriate evaluation criteria for their company.
The company utilizes SAP as their primary financial system and they also use the Blackline account reconciliation solution. They have both captive and outsourced employees carrying out the account reconciliations in a variety of locations across the globe.
Some of the challenges the company faced in creating the risk rankings for balance sheet reconciliations included the following:
- Obtaining a policy exception to incorporate a risk ranking process
- Securing alignment with internal controls and key stakeholders
- Developing a risk assessment methodology (internal and external benchmarking)
- Learning to mitigate the risk (introduction of quality check / variance analysis process)
- Ensuring system compatibility (Blackline)
- Carrying out change management (training, etc., people, process, technology)
Their risk ranking is based on the two criteria areas of financial impact (financial risk and average balance) and vulnerability (control effectiveness and internal benchmarking). Three risk levels were established, which are as follows:
- High Risk Accounts – Reconciled monthly (no change to frequency)
- Medium Risk Accounts – Reconciled four times a year on a rolling schedule
- Low Risk Accounts – Reconciled two times a year on a rolling schedule
The results of this risk-ranking initiative include more focused control, improved exposure to training opportunities, increased value analysis, a reduction in the number of accounts reconciled, a higher level of reconciliation quality. As an added benefit, this effort was part an overall project that will result in the creation of a global Center of Excellence for the account reconciliation process.
Additional specific details regarding the feature companies experiences in this area are available for Peeriosity members on the website in the PeercastTM Results section.
iPollingTM Results Review
A poll utilizing Peeriosity’s iPollingTM technology was developed in conjunction with this PeercastTM that provides some excellent exposure to company practices related to balance sheet account reconciliations. The first question looked at the standard reconciliation frequency for low-risk balance sheet accounts, with monthly being the most prevalent response at 36%. This was closely followed by quarterly at 27%, semi-annually at 14% and “Other” with 18% of the responses.
The second poll then focused on the standard frequency that the risk ranking for high-risk balance sheet accounts is re-assessed, with 32% of the companies doing so on an annual basis. Of the remaining companies in the research, 18% re-assess on a monthly basis and 14% on a quarterly basis, with an additional 18% having chosen to not establish a standard re-assessment frequency.
The following are some of the Peeriosity member comments related to this poll:
Real Estate & Construction Member: Looking into developing a more formal policy around risk ratings for the various balance sheet recons.
Other Industry Member: We risk rank based on entity size (Assets and Revenue) to determine reconciliation frequency (monthly, quarterly or semi-annual). Exceptions are Cash, AR and IC, which are all reconciled monthly.
Manufacturing Member: Non-key (i.e. low risk) accounts can be reconciled one month prior to quarter end.
Healthcare, Pharmaceuticals, Biotech Member: The exception is bank accounts, which are monthly reconciliations independent of the risk.
Retail Member: The frequency varies by country. Currently on a global project to standardise the frequency as well.
Non-Profit Member: Depends on the nature of the account and the volume of transactions. Every account is reviewed at least annually.
Real Estate & Construction Member: Most low-risk account reconciliations are performed quarterly.
As was well demonstrated by our feature company, setting up a risk-ranking process for balance sheet accounts is a significant effort that also can deliver a number of substantial benefits, including better controls, increased value analysis, and a higher level of reconciliation quality.
What is the status at your company regarding the reconciliation frequency of balance sheet accounts? Is your current approach meeting your needs or is it time to take another look at this important aspect of your control structure?
Who are your peers and how are you collaborating with them?
“PeercastsTM” are private, professionally facilitated webcasts that feature leading member company experiences on specific topics as a catalyst for broader discussion. Access is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from attending or accessing discussion content. Members can see who is registered to attend in advance, with discussion recordings, supporting polls, and presentation materials online and available whenever convenient for the member. Using Peeriosity’s integrated email system, Peer MailTM, attendees can easily communicate at any time with other attending peers by selecting them from the list of registered attendees.
“iPollingTM” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility to all respondents and their comments. Using Peeriosity’s integrated email system, Peer MailTM, members can easily communicate at any time with others who participated in iPollingTM.
Peeriosity members are invited to log into www.peeriosity.com to join the discussion and connect with Peers. Membership is for practitioners only, with no consultants or vendors permitted. To learn more about Peeriosity, click here.