The Importance of Bank Reconciliation in Internal Control

A bank reconciliation is a key control for many companies when, on an ongoing basis, accounting teams take necessary steps to substantiate cash on the balance sheet. Bank reconciliations verify the integrity of data between the bank records and a company’s internal financial records.

The very nature of a reconciliation control is detective, catching things like fraud, errors, and missing items—all after the fact, but before financials are reported.

Internal controls, like bank reconciliations, are there to detect errors, but what if there was a way to conduct the reconciliation process that would result in actually preventing those errors from happening in the first place?

The bank reconciliation process typically kicks off at the close of the period and after the bank statements have been received. Accountants will substantiate the transactions recorded in the general ledger by matching that data to the bank statements collected from the bank.

It is common for there to be exceptions each period, or transactions recorded in one place but not the other. These can include deposits in transit, where money has been received and recorded by the company but not yet posted to the bank account, or bank fees, where a processing fee has incurred per the bank statement but is not yet recorded in a company’s general ledger.

In addition to the bank statements, additional supporting documentation is obtained to validate the completeness and accuracy of these discrepancies between the two systems.

Bank reconciliations are an internal control for most companies. It’s a way to detect fraud and prevent errors from occurring, and most importantly, to validate that the cash on the balance sheet is, in fact, accurate.

There are two main problems that can arise with a manual, spreadsheet-driven bank reconciliation process. The first one is that errors become commonplace. When your accountants are working through multi-tab Excel workbooks that contain hundreds or thousands of line items that need to be reviewed, there is significant room for human error. And although the very purpose of the reconciliation is to validate bank account balance accuracy, fat-fingering or transposing a number, among other things, is not uncommon in spreadsheets.

The second main problem that can arise with a manual bank reconciliation process is that fraud may not be detected in a timely manner, or in some cases, goes undetected.

Bank reconciliations are typically performed at the end of the month, after the transactions have already been recorded. If an employee tries to commit fraud at the beginning of the month, accountants reconciling the bank statement transactions won’t catch the discrepancy until a month later, sometimes longer.

When fraudulent-like activities take place, they should be discovered and resolved as soon as possible, or the magnitude of the problem will likely get larger.

The two main problems with a manual bank reconciliation process are why bank reconciliations are so important in the first place—to detect fraud early and often—and to prevent errors from occurring in the first place. It’s near impossible to have confidence in your bank account balances when the person preparing the reconciliation and validating the amounts is bogged down by spreadsheets.

Modern accounting works to automate and centralize your reconciliation process, and ensures the following.

When you have an automated, integrated, and centralized bank reconciliation process, discrepancies between your books and the bank can be discovered on a more frequent basis than just at month end. This means that fraud can be detected as soon as it happens, the team can take corrective action, and this tight-knit process will make those thinking about committing fraud think again.

With modern accounting solutions in place comes reconciliation templates, timely sign-offs, and preparer accountability. No more back-and-forth emails trying to figure out why a number is off, missing supporting documents, or untimely preparation of reconciliations—all reasons that ultimately cause administrative errors. Prevent errors from happening in the first place, so your team can focus on resolving and substantiating the actual one-sided transactions.

With traditional, spreadsheet-driven processes in place, account reconciliations typically take place after the period-end close, whether that’s on a monthly, quarterly, or sometimes yearly-basis. This is long after a majority of the transactions have already taken place, business has moved on, and the front office is already looking to the period ahead.

Organizations that embrace modern accounting solutions like account reconciliation software are actually able to reconcile transactions as they are happening, in real time.

By implementing a automated reconciliation solution, companies can now look at reconciliation as a proactive process that can prevent errors, rather than an after-the-fact, detective activity that looks for errors.

Performing the reconciliation process earlier in the month, as business happens, allows accounting to be more closely aligned with the business by providing key stakeholders with pertinent account information in near real time.

Bank Reconciliations with BlackLine automate all the steps in the bank reconciliation process. The solution will securely import data from both the ERP or general ledger systems and bank files or statements. From there, it will automatically compare account balances and transaction-level detail, identifying those transactions that didn’t match.

This takes the guesswork out of the most labor-intensive part of the process—ticking and tying between data sources—and brings the confidence and time back to the part that matters the most—investigating the discrepancies, detecting fraud, and fixing errors.

Centralizing the reconciliation workflow and supporting documentation, and using templates that have enforced segregation of duties and embedded policies and procedures, helps prevent administrative errors from occurring and allows accounting teams to catch fraud early and often.

Using Bank Reconciliations with BlackLine to reconcile and substantiate bank transactions earlier in the process, when business is happening, will not only result in greater efficiencies but will also strengthen internal controls around cash.

Cash is king, as the old saying goes, so why leave a critical procedure and key control like bank reconciliations to manual, error-prone processes?

Read this blog next to learn more about how your F&A organization can achieve fully automated bank reconciliations.