An Act of Reconciliation:
Balancing your financial books is an effective internal control

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With the advent of the Sarbanes-Oxley Act (SOX), it’s easier than ever to run afoul of financial requirements. If your manufacturing business has gone public, or you’ve simply agreed to follow SOX principles, you must report any errors or omissions found by an auditor as a material misstatement or weakness unless you can prove you would have found the error or omission yourself with your current internal financial reporting controls. If you’re subject to Section 404 regulations, you may have to review your internal controls and find the one that mitigates the error.

Of course, no one makes mistakes on purpose, but a relatively simple practice can become a valuable internal control: balance account reconciliation. Every company balances its checkbook, so to speak, but speeding the process and extending it to all balance accounts can transform account reconciliation from a reactive process into a proactive mistake detector.

Super sleuthing

Most companies require balance account reconciliations, but there’s one way to be confident that an audit won’t identify a serious misstatement — reconcile every balance sheet account and understand the risk of misstatements in each.

Doing so every month may be difficult, given the number, size and types of accounts most manufacturers have, so conduct a risk assessment. Which accounts are most likely to result in financial reporting misstatements?

Generally speaking, higher-balance accounts that see many complex, high-dollar transactions are at greater risk of being misstated by a material amount. Reconcile these accounts and record any adjustments before you prepare financial reports.

You may want to reconcile these accounts more than once a month to reduce the work required to adjust them and to ensure that you make all adjustments before the reporting deadline.

Also, regularly reconcile accounts that could be misstated by a significant amount up to a material amount. For lower-risk accounts that carry no reasonable risk of material misstatements, continue to do timely reconciliations before your postclosing adjustment review.

Special requirements

Check with your bank, too, as different institutions have different reconciliation requirements. Most require you to reconcile zero-balance accounts, for example, but some also require that you reconcile profit and loss or off-balance-sheet accounts.

Additionally, some financial institutions require specific reconciliation procedures for certain types of accounts. For instance, suspense accounts, often defined as clearing accounts where unidentified items are temporarily posted, may have specialized reconciliation procedures.

Adjust your controls

Regardless of which accounts you reconcile or what procedures you use, you and your financial consultant should periodically review your reconciliation processes to be sure they’re in place and functioning as intended.

Account reconciliation can be an effective internal control, one that can compensate for the failure of other controls and identify deficiencies and material weaknesses before it’s too late. It’s well worth the work adjustments that will be required.

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