General Ledger Account Reconciliation: The Mandate for Automation

A Redwood Software White Paper

The nance department is a key strategic player in your businessminimizing compliance risks, analyzing opportunities, promoting efciency, and providing data for informed decision-making. Supporting all of the nance department objectives is an accurate set of nancial statements that clearly depict the health and stability of the company. An important, yet often overlooked aspect of maintaining accuracy in nancial statement reporting is general ledger account reconciliation, which is considered a critical tool for detecting and correcting errors in nancial data before submission to relevant authorities such as the SEC. The importance of performing timely and complete reconciliations cannot be underestimated. Financial executives regularly cite improper general ledger account reconciliations as a major contributor to nancial restatements, material weaknesses, and lengthy period-end closing processes. Automating key nancial business processes such as account reconciliations, reduces risk, improves compliance, speeds closing activities, and improves resource utilization.

The Backbone of the Business

A companys general ledger records all of its nancial transactions. Its the backbone for all corporate nancial statements. However, a general ledger can only be accurate if it is regularly and systematically reconciled with the actual transaction records detailed within it. Properly performed account reconciliations involve the comparison of a general ledger balance for a specic balance sheet account with the supporting documentation for what the balance should be. The two sources should be equal, which indicates that the main system of record is equal to the transactional system supporting it. Supporting documentation could be a sub-ledger of transactions or any other more detailed listing of account activity. General ledger (GL) account reconciliation also lies at the heart of strategic accounting. Its a companys best way to audit and improve its own practices and processes. Regular, internal reconciliations can point to intrinsic business inefciencies, redundancies and, simply put, wasted money. Properly executed, the account reconciliation process is a catalyst for change. This process is an opportunity for a company to analyze and rationalize the number of accounts it keeps on its books, leading to more efcient functioning. It also enables companies to establish risk-based criteria for the timing of account reconciliations as well as the speedy identication and rectication of errorssaving money and improving the risk prole of the company as a whole.

Optimal general ledger account reconciliation can also provide better information to drive corporate decision-making. This process can clearly showor effectively concealhow a company makes and spends its money. As such it is at the very core of business intelligence, providing key data for strategic decisions ranging from M&A activities to the resolution of human resource issues. The general ledger account reconciliation process should also serve as a standardization tool for the company, establishing uniform denitions, procedures, and policies to improve the quality and accuracy of reporting for compliance. This includes critical internal accountability reports, as required by IFRS and the Sarbanes-Oxley Act of 2002 (SOX). Under Subsection 404 of SOX, companies must provide an internal control report with each annual report outlining the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for nancial reporting; and contain an assessment, as of the end of the issuers scal year, of the effectiveness of the internal control structure and procedures of the issuer for nancial reporting.1 Companies face reporting using both GAAP standards and International Financial Reporting Standards (IFRS) requirements as well as any number of regional, national or international tax liability regulations that depend on accurate general ledger account reconciliation.

General Ledger Account Reconciliation: The Mandate for Automation

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Timing and Completeness are Key

The primary reason why account reconciliationn is cited as a major contributor to nancial restatements, material weaknesses, and lengthy period-end closing processes is that current account reconciliation efforts are manual, error-prone, and time-consuming processes. With hundreds, or often thousands, of accounts to reconncile each month, nance personnel lack the time to perform proper reconciliations since the manual nature of the task is overwhelming. This causes reconciliations to not be done on a timely basis, not done completely, or not done at all. Given the downsizing of todays corporations toward leaner accounting departments, nishing the account reconciliations on time with the appropriate level of quality creates a signicant challenge for most companies. The lack of time does not warrant a policy of rolling forward balances from the prior period - this is not a reconciliation at all, but a risky practice of assuming balances between general ledger and sub-legers are equal without checking. The result is that general ledger accounts are not reconciled or balanced against the appropriate supporting ledgers, which could mask a variety of nancial reporting risks including misposted transactions, improper accounting treatment, or lack of effective accounting controls.

Human involvement increases the risk of errors. Since accounts are not reviewed consistently or in enough detail, numbers that are out-of-balance may not be properly detected during the manual review. This can cause data reliability and restatement issues down the road. In addition, the abundance of stand-alone spreadsheets created by various individuals allows too much inconsistency. This increases the risk of errors since unless reconciliations follow a uniform process, the thoroughness of the reconciliation effort by individual can vary considerably. Time to close is at risk when waiting for completion. Often times during the close, nance users are required to perform so many tasks, including major account reconciliations, within such as short timeframe that even more delays can occur in the rush to complete everything on time. Reconciliations are not done at all. With time constraints and many accounts to reconcile, some critical reconciliations are not performed at all. Management may not be aware of the depth of the problem and may continue to push for faster turnaround times for nancial information which can cause even more accounts to be overlooked. This leads to data reliability and restatement risks down the road. The task becomes increasingly complex as the organization grows. Reconciliation efforts increase given the size and complexity of the company. The addition of new prot centers, the expansion of GL accounts, and the use of many non-integrated nancial systems all contribute to a more complex and lengthy reconciliation process. Efforts are further complicated with the acquisition of new entities, which generally have their own systems, chart of accounts, and processes for handling the function. All the manual effort translates into substantial amounts of time and effort for nance staff to complete reconciliation activities. Pressures take their toll on people forcing them to work long hours, which creates errors, burnout, low morale, and ultimately high turnover. In some cases, organizations address these challenges by outsourcing the effort to an offshore shared service center. Unfortunately that solution alone is seldom the right answer. With the decentralized approach, the control, management, and visibility of the process are often compromised. Financial staff at the home ofce often becomes less efcient if the reconciliation process isnt modied to adjust properly for responsibility sharing. Peter Minck, a Vice President at Redwood Software, who helps companies streamline their reconciliation processes explains, An inefcient process doesnt become more efcient by increasing the number of people involved. Unless the fundamentals of the process are improved, the result will not drastically change. One of the fundamental changes Minck sees is the introduction of automation into the reconciliation process.

Manual Reconciliation Efforts Increase Risk and Inefciency

Manual GL Account reconciliations create a series of challenges for nance users during and after the period close that increase risk and promote inefciency. Effort is time-consuming and labor intensive. Even though the task is repetitive in nature, nance professionals at all levels of the organization continue to perform this function manually. The manual nature of the effort promotes inefciency since reconciliations are typically performed utilizing a series of stand-alone, unsupported spreadsheets emailed back and forth between individuals to prepare, review, and approve account reconciliation activity. Unfortunately its difcult to effectively track and prioritize reconciliations with this type of process since updates often create a critical break in the internal control structure of the process since supporting explanations and issues are maintained separate from the actual reconciliation activity. Important resource time is occupied during and after the close. Current economic conditions require companies to spend a greater portion of time looking forward to better prepare the organization for making changes resulting from decreased sales and rising expenses. Since nance users often spend a large percentage of time on the data collection aspect required of reconciliations, this effort takes them away from other more important value added activities such as analysis and variance reporting that support the organizations ability to understand the drivers of the business.

General Ledger Account Reconciliation: The Mandate for Automation

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Automating the Reconciliation Process

The key to best practices in GL account reconciliations lies in establishing a clear set of uniform policies and implementing efcient practices based on established priorities. Automated processes enable the streamlined precision required for success. According to a PricewaterhouseCoopers Advisory Viewpoint on improving account reconciliation activities, there should be a constant effort to improve the process, effectively manage information, and use technology to automate where manual. 2 Gartner concurs with this position. In a recent research note, John E. Van Decker notes: Software that targets nancial-close process improvements is changing how nance teams work during the close, increasing efciency and dramatically reducing the risk of errors and missed steps.3 Analysts agree that many rms have controlled-environment nancial transactions (such as ERP) and nancial consolidation and reporting (such as corporate performance management [CPM]) tools in place. However, the process management for the nancial close often remains manual process. Continued reliance on manual processes for account reconciliations is costly, inefcient, and, ultimately, full of risk. Generally, there are several factors that can highlight whether current manual reconciliation processes warrant the deployment of an automated solution: More than 200 balance sheet reconciliations being performed during any monthly cycle Limited visibility into the status of the process since spreadsheets, emails, and voice mails are utilized as the primary vehicles for performing and monitoring activity Numerous manual handoffs between participants in the preparation, review, and approval process Information is kept on a variety of sub-systems and uploaded into a core nancial system and/or consolidation system Reconciliations have not been completed according to a pre-established schedule due to time and resource constraints

Automated Solutions Streamline Processes

Automated reconciliation software solutions perform activities in a systematic manner with interfaces provided between the general ledger and sub-ledgers as required. Software generally provides a tracking of current period activity and a history of prior period results for compliance documentation. Since reconciled items are scheduled and controlled in a centralized repository, there are major efciency benets. Preparers can be in different locations and time zones than reviewers and approvers. Status of work during any phase can be tracked without need for email or voice mail updates. Automation software for reconciliations has the greatest impact of process efciency when it can provide the following functionality: Visibility of the entire process to all stakeholders Listing of reconciliation assignments by account Automated notications to responsible parties for delinquencies Documentation of reported exceptions Status reports to nancial management and internal audit External auditors can also make use of the automated tools to streamline the audit process. By granting auditors read only access to the reconciliation process by period, including the explanation of the handling of reconciled items, the efciency and time of the external audit can be improved. In addition, due to the compliance requirement to provide tracking of internal controls over nancial reporting, the evidence of control activities can be placed on a single platform for more efcient compliance testing.

General Ledger Account Reconciliation: The Mandate for Automation

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Automating Account Reconciliations with Redwoods Reconciler

Redwoods Reconciler can automate all aspects of the GL reconciliation process, from capturing data from any nancial system across the enterprise, to tracking reconciliation status and approvals, to archiving results for compliance documentation.

Improving Auditing and Compliance

Account activities and reconciliation reports from SAP, Oracle, and other industry-specic nancial applications are stored in a centralized repository. Businesses can also use the repository to store and track other nancial reports produced during and after the period-end close, maintaining version control and protecting condentiality through strict security rules. This eliminates the time consuming process of accessing reports from several different locations. Reports are organized into logical folders for easy access, and data retention periods can be set for each report type according to internal control and compliance requirements. The Redwood Reconciler archives the approval history for all reconciliations, making the audit trail and documentation available to auditors and users with appropriate security privileges. Users can enter notes about issues that occurred and corrective actions that took place during reconciliation.

Balance and Transaction Matching

Users can establish pre-dened rules to compare total values and transaction-level detail between reports (e.g., bank statement to GL detail); highlight values exceeding a dened threshold within a single report (e.g., Actual vs. Budget expense comparisons), and reconcile values automatically through integration with Microsoft Ofce Excel spreadsheets (e.g., Trial Balance data from subsidiary system into consolidation system).

Data Capture and Validation

Financial applications already generate data and reports with the information required for reconciliation. Enterprise applications typically generate output in PDF or standard text-based format. Redwood constantly monitors any number of network directories for new information. When new data or reports become available, the Redwood Reconciler processes them against appropriate comparison rules specic to that reconciliation. As part of the reconciliation process, the Reconciler can highlight the values targeted for comparison or extract them into an exception report.

Integration with SAP Financial Closing cockpit (SAP FCc)

The Redwood Reconciler is fully integrated with the SAP Financial Closing cockpit, enabling users to monitor automated GL reconciliations in real time. This integration is made possible by harnessing the power SAP Central Process Scheduling (SAP CPS), the process automation standard co-developed by SAP and Redwood, and licensed and supported by SAP. The tight integration of SAP CPS with SAP FCc provides an unparalleled level of automation and management between SAP and non-SAP applications. With SAP CPS functioning as the central process management platform for the SAP Financial Closing cockpit, users can view the status of reconciliation processes from across the enterprise within FCc just like the tasks they perform during the period-end close.

Status Monitoring and Alerting

Users can monitor reconciliation status in real time throughout the process, including the prepare, review, and approve stages. Color indicators (green, yellow and red) provide a clear view of reconciliation status for easy identication, enabling quick response to any issues as they arise. To expedite error resolution, the system can send notications or alerts to specied users when a validation process returns a failed status.

General Ledger Account Reconciliation: The Mandate for Automation

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Redwood Reconciler Improves Reconciliation Performance

The Redwood Reconciler improves the speed, reliability, efciency, and compliance of the reconciliation process by driving improved end-to-end nancial organization performance in many ways: It saves time and money. Companies spend a signicant amount of time manually reconciling accounts to ensure accuracy of reporting information. Typical GL reconciliations can take hours to complete. Since companies have hundreds or even thousands of accounts, the solution can easily save a signicant amount of time and money. This can translate into a 40 to 70 percent reduction in the number of hours to perform this aspect of the close with less cost to the organization. It frees up resources to focus more time on value-added activities. Finance professionals all agree that if more time could be freed up to analyze data to understand the drivers behind the numbers and not waste time validating data, nancial statement reliability would be greatly improved. It eliminates human errors. Reconciliation work is done electronically using the same pre-dened transaction matching methodology each and every time removing the inconsistencies and errors typically associated with manual human involvement. It ensures that all reconciliations are done properly and on-time. Reconciliations will occur automatically each period, regardless of personnel workload. It enhances the visibility of the close process. Usersincluding the preparer, the reviewer, and the approvercan track the various stages of the reconciliation process within a centralized, secure repository.

About Redwood Software

Redwood Software helps customers compete and win in todays business environment through best-in-class business and IT automation solutions, products and services. We help businesses automate what matters mostto improve reliability, speed, efciency and compliance. We are the trusted automation expert to thousands of customers worldwide. We work to drive agility and unparalleled competitive advantage through specific process automation solutions while helping to maximize the value of existing information management and technology investments. To learn more please contact your local Redwood Software representative or visit us online at www.redwood.com.

Sources
1. American Institute of Certied Public Accountants (AICPA). Summary of Sarbanes-Oxley Act of 2002. http://www. aicpa.org/info/sarbanes_oxley_summary.htm. 2005. 2. PwC Advisory Viewpoint How to Improve Account Reconciliation Activities (PricewaterhouseCoopers, 2007) 3. Leading Futures and Options Exchange Adopts a Financial-Close Solution by John E. Van Decker (Gartner, Inc., April 6, 2010)
Redwood is a registered trademark and Cronacle is a trademark of Redwood Software. SAP, SAP NetWeaver and all other SAP products and service names mentioned herein are the trademarks or registered trademarks of SAP AG in Germany and several other countries. All other products or company names mentioned are used for identication purposes only and may be trademarks of their respective owners. Redwood Software 2011. All rights reserved.

The Bottom Line

Accuracy and timeliness in nancial reporting continues to be a strategic imperative for all companies. With increased scrutiny being placed on nance organizations to deliver results faster with no errors, the development of streamlined processes to handle important tasks such as account reconciliation in a more complete and timely basis is critical. However for many companies, accounting organizations continue to use error-prone, time consuming, manual processes and tools for managing important nancial processes including account reconciliations. Such practices create signicant process inefciencies, data reliability issues, and internal control breaches all leaving room for nancial reporting inaccuracies, restatements, and material control weaknesses. Automating key nancial business processes, such as account reconciliations, reduces risk, enables process scalability, and improves resource utilization. www.redwood.com

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General Ledger Account Reconciliation: The Mandate for Automation

www.redwood.com