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Reconciliation

The role of reconciliation in accounting

Ross McGee
Ross McGee

Reconciliation is an accounting process which checks whether internal figures match external ones. In other words, reconciliation is fundamental to accounting – confirming whether financial information is valid and highlighting if any discrepancies are present. Read on to discover how making reconciliation part of your accounting activities puts confidence in your financial data and your business.

Ensuring accuracy and consistency

Tracking numbers has to be two things – accurate and consistent. If not accurate, it is entirely pointless. If not consistent, it becomes drastically less effective. As a result, accountants require reconciliation, and reconciliation which they can conduct regularly at speed to help them with:

Balancing accounts

Here are just a few ways in which reconciliation can ensure that accounts are balanced:

  • Reconciling bank statements with financial records

    Fundamentally, accountancy is about tracking the movement of funds. When this takes place between internal accounts, accountants can ascertain for certain where they go from and where they end up with their own records. However, when funds are either sent to or received from external parties, accountants have less intel to work with for a period of time. In this scenario, they are left partially in the dark by not necessarily having immediate access to records from an external party.

    Ultimately, they must wait for additional information from external parties to be supplied to them. A typical example of this is a bank statement. Once this is attained, cross-referencing can take place between their financial records and those from the bank. This is a simple bank reconciliation but will immediately notify an accountant of whether there are any anomalies in their financial records.

  • Confirming accuracy in balance sheets

    Given that balance sheets must consolidate accruals, deferrals, equity, debt, bank balances and more, it is all too easy for at least one error to arise. That is why it is important for reconciliation to take place across the board, ensuring that no inaccurate figure from any account can dislodge any others.
  • Tracking revenues and expenses for precision

    In industries such as retail, revenue can be harder to track due to transactions not resulting in invoices being raised to customers. As a result, even though POS systems recognise sales instantly, in the eyes of an auditor, revenue cannot be confirmed with this intel alone. There can be delay until funds are shown on a bank statement and the way these are pooled can vary depending on the payment method. A control account is commonly used until reconciliation has taken place across POS system records, bank statements, and payment firm records such as those provided by Mastercard or American Express to prove complete accuracy.  

Identifying discrepancies

Here are a couple of outcomes from reconciliation related to deviations:

  • Detection of errors and irregularities in transaction records

    Despite having the aim to produce accuracy, even when it comes to creating transaction records, errors are not completely avoidable. Fortunately, instead of having to create an extra task specially to spot these, simply conducting reconciliation achieves this feat. No matter why an error occurs, reconciliation will always highlight when there are irregularities between balances.

  • Addressing missing or duplicate entries

    Sometimes the intent to track everything can go too far and instead lead to the same transactions being accounted for twice or even multiple times – a common mistake to make when seeing so many similar figures during manual recording. It is therefore not surprising that this mistake can as easily go unnoticed when reconciliation – a failsafe to this issue – is done manually too. That is why automated reconciliation is preferred to overcome this issue plus many other accounting difficulties.  

    By introducing an automated solution such as Aurum, human errors can’t rely on additional human oversights allowing them to continue to go unnoticed. Instead, automation shows no discrimination – flagging every single error, regardless of whether its source was accidental or deliberate.  

Fraud detection and prevention

Some might believe that accountants’ sole purpose is to deal with internal affairs and figures but what they fail to consider is that these can easily be influenced by external forces. Unfortunately, more often than not, this includes fraudulent players. As a result, accountants in fact have the responsibility of dealing with one of the most serious outside forces. Fortunately, reconciliation can make them well-equipped for fraud prevention too by:

Spotting financial irregularities

Here’s how reconciliation can spot fraud and initiate a resolution:

  • Recognising unauthorised or suspicious transactions

    It’s not only innocent errors which can lead to accounts not adding up. Sometimes individuals can try to sneak through transactions which they hope their finance team won’t notice such unathorised expenses. The same goes for fraudsters who definitely don’t want their actions to be noted.

    However, the best bookkeepers will keep on file all authorised outgoings. Consequently, when bank statements are cross-referenced with their own financial data, any unauthorised payments should be obvious to spot, investigate and resolve.

  • Verifying the legitimacy of vendor payments

    Conducting business requires trust. As much as sellers expect to receive the agreed payment amount, purchasers expect to pay a fair price. Between long-term business partners, this is usually taken for granted, making it all too easy for invoices to be paid quickly without first checking that the amount billed is correct.

    Anyone in the accounts payable department though will tell you that it is always wise to first check supplier statements against your company’s account balance. In other words, conduct vendor reconciliation. By doing so, accountants can spot whether they are being asked to pay too much regardless of whether that is due to timing differences when it comes to payments and invoice production, an innocent mistake, or anything else.  

Ensuring compliance and accountability

Fraud prevention is not just about being reactive, it is also a matter of stopping it before it begins. Reconciliation can help here too by:  

  • Aligning financial practices with regulatory standards

    Industries such as gambling, asset management and insurance amongst others all have strict regulations which they must comply with by law. More often than not, reconciliation plays a key part in ensuring that regulations are fulfilled by those in these sectors. For example, under CASS rules, asset management firms must conduct custodian reconciliation to make sure that client funds are secure.

    These regulatory standards are designed to curtail fraud. As a result, by fulfilling these requirements, accountants automatically place their firms in the best position possible to operate safely. Another prime example of this is creating a byproduct of reconciliation – audit trails for transparent record-keeping. Doing so is easily achievable with the likes of Aurum which as it automatically reconciles also produces a complete audit trail. The result of this is that every movement of money is easily seen, leaving no place for fraudulent activity to hide.  

    In addition, it should also be noted that meeting regulatory standards not only creates tangible results but also creates a reputation. This reputation is one of being professional and secure, signaling to any criminals on the lookout for opportunities that their business will not be an easy one to infiltrate.

Data integrity and decision-making

Working tirelessly over numbers which come flooding in every second of the day isn’t usually done as a hobby. Instead, it is done to ensure that organisations can make informed decisions. Without accountants, ever-changing numbers would continue to be present, but how they impact certain accounts, how they interact with one another, and whether they are accurate would be completely unknown. Accountants therefore have an undeniably high level of responsibility. As such, they require reconciliation to ensure that everything is correct, assisting them with:  

Informing decision-making

At its core, reconciliation is all about ensuring data integrity, by achieving that, it enables:

  • Using reconciliation data to make strategic financial decisions

    The entire financial department is undergoing a significant evolution currently; transforming from being solely number counters and checkers to strategic partners. As a result, the numbers which finance teams provide are more important than ever. Now, they are used to ensure that everything is above board and that the company will continue to move in the right direction. The figures which firms work with therefore must be reconciled before decisions are made. If not, strategic decisions could be doomed before they are even made.
  • Access to precise financial information for budgeting

    Near the top of any list of priorities for financial leaders is to provide definitive budgeting across all departments. Whilst this might be an activity which is focused on future spending, it is nearly entirely based on historic figures. To look forward, businesses must therefore first look backwards, and that means conducting reconciliation.
  • Optimising resource allocation and investment choices

    Money is perpetually precarious due to shifting valuations. As a result, accountants need to not only know how much their business possesses but also where it is allocated to ensure that they are optimising their assets.  

    For starters, reconciliation will ensure an accurate review of funds totals and where they are held. In addition, if conducted via automated reconciliation which completes the most complex of reconciliations in minutes, it will give finance professionals an accurate real-time cash position. A massive benefit of this is that it reveals whether organsiations are in a position to utilise trapped working capital and therefore optimise its potential.

Producing trustworthy financial statements

  • Supporting accurate and reliable financial reporting

    A financial report must be holistic and accurate, leaving no stone unturned. By design, reconciliation produces both of these results. It checks that figures are correct, and when it discovers anomalies, it prompts further investigation, ensuring that all numbers are examined.  
  • Providing assurance to stakeholders and investors

    Proper bookkeeping is a fundamental aspect of any business. Without accounting, nobody within, nor outside of a company could have any assurance over its financial health. However, this desired level of certainty can only be fully achieved if reconciliation is incorporated into accounting activities. Not only does this ensure data integrity of financial figures so they be scrutinised by stakeholders with confidence, as mentioned, it will also mean that regulations are being met, satisfying stakeholders that no unwelcome fines are likely.

Double-checking your accounting

Despite accounting often being perceived as the financial activity which dots the "i"s and crosses the "t"s, reconciliation in fact proves to be the foundation for this. Ultimately, whilst accounting actions can feedback on account numbers, only with the addition of reconciliation can these numbers be verified, audit-ready, and used to inform wider business strategy.

No matter what accounts you work with and how many transactions you process every minute, book your demo today to automatically reconcile your financial data in seconds, together with aurum.solutions.

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