Businesses these days have to take all the measures they can to ensure adherence to accounting standards and regulatory compliance. A public company’s financial information is not only beneficial for internal stakeholders but for external stakeholders such as investors and shareholders as well. Therefore, failure to comply with accounting regulations can leave businesses vulnerable and open to legal action.
A key process to facilitate regulatory compliance is account reconciliation. Without reconciling accounts on a regular basis, creating accurate financial statements will not be possible. The reconciliation process helps companies check the accuracy of all the business transactions they have recorded during the accounting period.
In order to be compliant with accounting laws and regulations, it’s also important for businesses to document the entire account reconciliation process.
Let’s understand in detail why documenting reconciliation is important for compliance:
Documenting Reconciliation for Compliance
It’s only when companies are internally aligned with best accounting practices that they can be compliant with accounting standards and regulations. Here’s how documenting reconciliation helps them do the same:
- Regulatory compliance: Businesses need to have an audit trail for internal and external audits. Well-documented reconciliation processes allow them to achieve the same. Regulatory bodies check all accounting processes and documentation to decipher whether a company is adhering to accounting standards. Without proper documentation of transactions, auditors and external stakeholders will not be able to evaluate if the company is complying with regulatory requirements. Leveraging advanced account reconciliation software enables businesses to seamlessly maintain an audit trail and ensure compliance.
- Risk and fraud management: It’s easier for businesses to identify errors and fraudulent activities if they have a verifiable record of all business transactions. Recording transactions in an accounting system is not enough, businesses also need to have documentation of all transactions in order to cross-check and identify error-prone instances or any fraudulent activities.
- Improving internal controls: Documenting the reconciliation process also allows companies to check if the implemented internal controls are functioning properly. With effective internal controls, businesses can identify inefficiencies and errors before they occur and take proactive steps to address them. Documented reconciliations help them identify areas where controls can be improved to minimize errors.
- Training employees: It’s also important for employees to align on and follow accounting best practices for the company to ensure compliance. Documenting the reconciliation process can help with the same. New staff can be easily trained with the help of such documentation of accounting procedures. Furthermore, every team member will be able to align with all the steps and procedures that the company needs to follow.
- Enhanced financial reporting: A major benefit of documenting the reconciliation process is improved accuracy of financial statements. Companies can significantly reduce the risk of misstatements if they have proper documentation regarding all their business transactions. Well-documented reconciliations can further help companies make better financial and operational decisions to improve their financial position.
- Legal defense: In case the company ever faces legal action, documented reconciliation can come to its aid and help defend the financial integrity of the company. A verifiable audit trail is a strong proof against legal disputes and challenges.
How to document reconciliation
Now that we’ve learned why documenting reconciliation is important, let’s take a quick look at how businesses can go about the process.
- Define the scope of reconciliation. It’s important to keep track of which accounts are being reconciled at what point during the accounting period. Define how many reconciliations the company needs to carry out in an accounting period.
- Identify and document the people responsible for different steps during the reconciliation process. Furthermore, documents which people are responsible for reviews and approvals for different stages of the reconciliation process.
- Keep a detailed record of various steps involved in the reconciliation process. For example, the process being followed to match internal and external documents.
- Document how the company tracks and deals with errors and discrepancies during the reconciliation process.
Conclusion
As we have discussed, documenting reconciliation is yet another crucial part of the accounting process. It helps businesses maintain their financial integrity and allows them to report accurate financial information to their stakeholders.
