What is the purpose for Balance Sheet Account Reconciliation?

It’s no doubt to ensure the accuracy of the ending balance.  But how?

Fro General Ledger Accounts (it means the accounts that are without subledger, e.g. Accrual accounts, Prepaid accounts, etcl,), the first step is to list the GL breakdown. Every open transaction must be listed.  This goes without saying.  But in the second step, there are two different ideas.

1)      The first idea is that the preparer should collect the supporting documents for all the open items and attach the supporting documents for review and approval.  These supporting documents are also the ones that support the entries when they were booked to the General Ledger.

For example, below is the account of payroll accrual.  The ending balance is composed by 10 entries.  The preparer does some preliminary analysis to split the open items to different categories.  And then supporting documents for each entries are embedded in the report.

The supporting documents for items No. 1 to No. 7 are the payroll reports from HR departmanet for each periods.  (ESPP means employee stock purchasing plan which is a certain % of distribution for the employees’ stock purchasing.)  The supporting documents for Item No. 8 to No. 10 are the email from Financial Shared Service(FSS).  The transaction is the accrual for accrual of FSS charges.

The advantage for this approach is that the reviewer and approver can easily find the original supporting documents for any item.

But there are certain risks for this approach.

- All the related parties, preparer/reviewer/approver, tend to focus on verifying the amount against the supporting documents and neglect another point to verify if the entries is correct and if there’s any entry missing.  In the case, there’s a mistake in each period from Feb to April .  But the preparer, reviewer, approver and later on internal auditors are all missing the real mistakes.  (The mistake will be discussed later.)  The reason is that all the readers are misled by so many supporting documents.  All are focus on verifying the amount against supporting documents while the overall accruacy are ignored.

- To find out all the supporting documents for seversal periods and enbed them in the report is time consuming (some hardcopies need to be scanned and attach to the report).  The result is that the account reconciliation couldn’t be completed before Corporation Report submission.  The company in the above sample has to define that Balance Sheet Account Reconciliation should be completed in 30 days of closing.  In this respect, one of the purposes for Balance Sheet Account Reconciliation to ensure the accuracy of the financial report is failed.

2)  Now let’s look at the second point of view.

This approach does not require the preparer to embed every original files in the report, but focus on the overall reasonable for the ending balance to ensure the accruacy and completeness.

The preparer should do some analysis to classify the open items by the same nature.

Then for each type of transactions, the preparer should explain why the entries are posted to convince the readers that the ending balance is correct. 

Because of the analysis, the pending cases of CNY500 from Feb to Apr have to be investigated. And the preparer could realize that the open items of CNY500 from Feb to April is the mistakes in bookkeeping.  The correct entry is Dr expense Cr Other Payables.  But in previous periods it was booked as Dr payroll accrual Cr Other Payables by mistake.

There’s another mistake in the first approach.  Because it is not required to analysis the ending balance, the ESPP of CNY 500 is also regarded as variances between accrual and payment.  Both the preparer and HR thought the total variance is 2550.  This is incorrect.

When apply the second approach, the prepare could realized that ESPP of 500 is due to posting error and ther real varience between accrual and payment is 2050.

To every open items, the supporitng documents are not embedded in the report.  This is because:

-          To ensure the accuracy for each entry is another control point in Manual Journal Entry. Each manual journal entry is reviewed by supervisor or manager (per Delegation of Authorization) once it is posted in SAP.  It’s no need to review the original documents in reconciliation again.

-          If the readers (reviewer/approver/auditors) are doubtful for any entries for any figures, he/she can easily get the original documents from the preparer by “Doc No.”.  In this company, the accounting documents are filed by SAP document number.

The advantage for the second approach is that

-          The preparer/reviewer/approver do not verify the amount against the original documents so they can perform the reconciliation from a higher level to ensure the overall reasonableness, accuracy, completeness and timeliness of the account. 

-          The preparer is free from the workload of uploading lots of the Journal Entry supporting documents to account reconciliation report. It is possible to complete the account reconciliation before corporate reporting deadline (if there are 3-5 days between the closing day and the reporting day).  Errors noticed in account reconciliation can be fixed before reporting.  So the quality of financial reports is improved.

The disadvantage is that the reviewer/approver/auditors may spend more time to get the supporting documents to verify the amount when necessary.  Considering the reviewer/approver/auditors do not need to verify the figures one by one, the increasing of time consuming to get supporting documents could be skipped.

According to above analysis, the second approach is better than the first one.