Reconciliation: Take a Look Around

Aug 28, 2014

I had lunch last week with a consulting colleague of mine and she was talking about her experiences which rang true to my own. One of the biggest challenges she sees is that CFOs and controllers do not feel the need to reconcile. There seems to be ample concern about detail and making sure each specific account is correct, but very minor effort going towards an overall reconciliation. Unfortunately, from management on down, no one seems concerned with the overall reconciliation.

One major issue we have both observed is that income statement items are tied-out, but inventory has not been valued in months, if not years. Cash is reconciled to the penny, but no analysis of cash flow and cash needs has been done.

Business_ReportsI am sure some of you reading this saying, “if the above things are being done, then yes, reconciliation has been done.” I beg to differ. Reconciliation is ensuring that two sets of records agree, but in addition, you must reconcile the balance sheet and confirm that the information being recorded is complete and accurate. This type of reconciliation should be done monthly along with documentation supporting the reconciliation. An example would be reconciling the freight payable account and including freight invoices, etc. The person preparing the reconciliation should have an understanding of  the account and how it is used. They also should know what documentation is needed to support the balance. Reconciliation needs to answer, What? When? Who? Why? and How Much? If you are not able to answer all of these questions then you are not doing a thorough reconciliation. As I mentioned before, often times inventory is overlooked and not adjusted. A physical count must be done and compared to the balances on the general ledger. If they do not match, an adjustment needs to be made. However, just making an adjustment without answering the vital questions is not reconciling, it is just plugging.

This issue starts at the top with management not requesting to see reports that show reconciliation and not understanding its importance. If you are not tying your actual results back to what you expected to occur, how do you ever know if you are accurate. Are you actually recovering all of your costs? The entire integrity of your system is questioned when you are not reconciling.

I truly cannot stress it enough. It is so crucial. I would compare it to every time you come up to an intersection you just go, you never actually look to your left or your right, you just assume everything is ok. Eventually, you will be completely blindsided and that blindside may be fatal. Start looking around!

Categories: Cost Accounting