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General Ledger Account Reconciliations… Basic Building Blocks for Good Accounting Controls December 8, 2005 and December 12, 2005.

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Presentation on theme: "General Ledger Account Reconciliations… Basic Building Blocks for Good Accounting Controls December 8, 2005 and December 12, 2005."— Presentation transcript:

1 General Ledger Account Reconciliations… Basic Building Blocks for Good Accounting Controls December 8, 2005 and December 12, 2005

2 created by… Slide 2 Account Wrecks

3 created by… Slide 3 Presenters: Jeff Adler & Dan Craft Jeff Adler is the President of His career includes 6 years on the audit staff at PwC and over 30 years of controllership, financial management and consulting experience. He founded in 2001. Dan Craft is a Senior Manager in the Technology & Risk Services group for Ernst & Young in Troy, MI. His recent experience includes Sarbanes-Oxley process control evaluation and re-design.

4 created by… Slide 4 How old are you? Where are you from? What is the size of your organization? How do you feel about your current process? What is your role in your organization? Who are you… the attendees?

5 created by… Slide 5 Today’s Agenda What is a an account reconciliation 1 Why are reconciliations important 2 Self assessment of your process 3 Identify key elements of a good process 4

6 created by… Slide 6 What is an account reconciliation? D – on analysis of an account balance that explains what the balance is, why it is there, and that it is adequate. B – part of my job duties that wastes time but makes the auditors happy. A – something required by Sarbanes-Oxley that was not important before 2001. C – a means of creating stress between my supervisor and me.

7 created by… Slide 7 Company Policy Supporting Documents Clear, Complete Explanations At a Point in Time Validity An assessment of the validity, correctness or appropriateness of the account balance… … at a specific point in time… … documented by relevant calculations, clear and complete explanations… … with copies of supporting documents… … in compliance with company policies. Definition of a reconciliation

8 created by… Slide 8 Why are Reconciliations Important? oFinancial Statement Audit oSarbanes-Oxley Requirements oGood Accounting

9 created by… Slide 9 Financial Statement Audit 2 – Identify the Key Controls in the Processes 1 – Understand the Business and its Processes Review Business Processes Assess Management Adherence Identify Key Controls Document and Test Controls 3 - Document and Test the Controls 4 – Review the Results of the Tests and Assess the Quality of Controls

10 created by… Slide 10 Transparency TimelinessAccuracy Reliability Corporate Governance Since 2002 Auditor Attestation Management Certification Sarbanes-Oxley Requirements

11 created by… Slide 11 Good Accounting Plus… For non Sarbanes-Oxley companies Timely Correction of Accounting Errors – more accurate Financial Statements and improved reliability and accuracy. Sarbanes-Oxley type requirements are growing – many large companies are requiring vendors to comply with SOX standards – many lending institutions are also expanding loan covenants to include SOX.

12 created by… Slide 12 Assessing Your Process Are policies readily available to all staff Are reviews and approvals completed and documented How much training do you provide What do You do? What senior managers take an active role in the process How often do you require reconciliations to be prepared - Are all accounts reconciled on that schedule Are reconciliation processes included as part of your annual review - Do you address and track timeliness and quality issues How soon are recon- ciliations required to be completed - Do you complete them during the close process Do you rely on your account recon process as a key control - Do your auditors rely on your process as a key control

13 created by… Slide 13 Best Practices Reconciliations Training Standardize Document Make sure your staff knows how to prepare reconciliations that are qualitative – not quantitative Monitor & Review Review and monitor to maintain a continuous control environment Proper supporting documents create auditable and verifiable reconciliations Add efficiency and consistency by providing standard formats or templates

14 created by… Slide 14 Good Reconciliations Answer these investigative questions 1. What? 2. When? 3. Why? 4. Who? 5. How much? Investigative Process General Ledger Qualitative vs. Quantitative

15 created by… Slide 15 Help-Tutorial

16 created by… Slide 16 Feedback PrepareReview Staff Manager Provides the best ability to maintain communication and feedback with clearly defined formats it’s easier to focus on the content instead of the form Standardization

17 created by… Slide 17 RecWizard Templates Amortizable Prepaid Accruable Item General List Bank Account Calculated Balance Non-current debt Current Debt Subledger Match

18 created by… Slide 18 Supporting Documents Internal External Subledger Bank Statement Excel Workbook Memo or Letter Journal Entry Invoice Lease Contract Documents provide support and validation for the account balance.

19 created by… Slide 19 Policies and Procedures  An important part of documentation – what are your polices – and where can you find them?

20 created by… Slide 20 Review and Monitor Use control sheets to make sure you consistently review and follow up

21 created by… Slide 21 Options for Control Sheets  Excel Workbooks  Access Database Programs  Specialized Process Control Software  Manual Checklists

22 created by… Slide 22 Dan Craft – Ernst & Young Process Improvement Historical Perspective Current State Observations Keys to Success Leading Practices

23 created by… Slide 23 Current State Observations Not Performed Timely Decentralized Execution and Testing No Visibility with Senior Management Segregation of Duties Issues Delinquent Aged Items Unidentified Differences Susceptible to Human Error Lack of Training Manually Intensive

24 created by… Slide 24 Current State Observations (continued)  These issues, if left unaddressed, can very quickly lead to SOX compliance and financial statement risks  Adverse Opinion from Auditors Regarding Internal Controls  Restatement of Financial Statements  No company can afford to ignore these issues.

25 created by… Slide 25 Historical Perspective Pressure to reduce month-end closing cycle Diminished priority on account reconciliations Shift in policies regarding timing of reconciliation preparation Deadlines moved to “immediately following” the hard close Lack of senior management visibility lead to “deadline creep” Deterioration to not completing reconciliations at all – or at best, very poorly The degradation of the account reconciliation process did not happen overnight. There has been a series of events that has led to the current state in most companies.

26 created by… Slide 26 Historical Perspective (continued) Staffing Demands on accounting functions increasing at higher rate than number of personnel Training Lack of training because “everyone knows how to reconcile an account” SOX Sarbanes-Oxley requires significant accounts be reconciled prior to issuing financial statements AuditorFocus Auditor focus increasing while many companies’ focus is decreasing or remaining stagnant

27 created by… Slide 27 Leading Practices Templates Consistent Process enabled by standard reconciliation templates Visibility End-to-end process visibility and commitment by Senior Management Monitoring Centralized Monitoring and Testing to assure continuing quality Workflow Automated Messaging to assure timely notification of staff regarding due dates and delinquent tasks Risk Materiality based risk assessment to prioritize staff efforts Adjustments Quantify Potential Adjustments prior to issuance of financial statements – particularly SEC reports such as the 10-Q and 10-K Drive remediation consistently across all locations

28 created by… Slide 28 Keys to Success Executive Support and Tone at the Top Sufficient Resource Commitment Training – At All Levels Focus on Root Cause Rather Than Symptoms Time Invested Upfront Will Translate Directly to the Success and Benefits of a Good Process Improve Processes Prior to Technology Introduction

29 Jeff Adler – President 732.938.7000 Dan Craft – Senior Manager Ernst & Young 248.457.3915

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