Issues affecting the finance staff of small companies using Oracle E-Business Suite

Importance of Account Reconciliations in Oracle E-Business Suite modules

The finance department in most organizations is coming under increasing pressure to transform and streamline the financial close and reporting function while continuing to maintain the integrity of the financial statements and close process. A key part of this close process includes the completion of detailed account reconciliations, which can be a major bottleneck in the close process.

The necessity for understanding and certifying an account balance and its transactions is prompted by regulatory and audit control requirements.  In addition to the statutory pressure for account reconciliations, the current economic situation makes it imperative for Finance executives to understand the details and transactions behind every account. They need to be able to easily identify fraudulent, improper and excessively aged transactions.

In most organizations, the account reconciliation process is a very time consuming and manual process. A robust and integrated account reconciliation software application will allow Finance to more effectively manage their business. 

Account Reconciliations: An Essential Part of the Financial Close

Account Reconciliations fulfill an important role in ensuring financial statements contain accurate information. Balances that were accurate one month may require adjustment the next, due to changes in circumstances affecting the company. For example, a company in litigation must evaluate contingent liability accruals to make sure they reflect a reasonable estimate of the expected loss. In a sales transaction, cash may be received before the revenue can be recognized, and the entry to recognize revenue must be timed to match satisfaction of revenue recognition requirements. For reasons like these, companies must perform an analysis of account balances on a periodic basis and consider whether adjustments are required. This process, if not performed properly, can result in the accumulation of significant errors as time goes on. 

Some of the key challenges in account reconciliations include ensuring all accounts are being reconciled, that the reconciliation itself is complete and proper, and that the company is maintaining the proper evidence that this control activity was performed. Oracle’s experience with customers reveals that this tedious process is typically performed in Microsoft Excel, where Finance staff manually enter the balances to be reconciled and the analysis justifying the account balances. Managers usually send emails or make phone calls to track progress and follow up on delinquencies. Due to the challenges in tracking account reconciliations, companies typically prepare and review most reconciliations on the same schedule and are often not factoring in risk when determining frequency and due dates.

Common failure points include:

• Missing or lost reconciliations

• Un-reconciled accounts

• Improper use of roll-forwards

• Reconciliation of the wrong balance (balance changed after certification)

• Insufficient justification or documentation

When these failures occur, audit findings can result in a significant deficiency or a material weakness in internal control, and costs can reach the hundreds of thousands, or even millions of dollars.

General Ledger Balance Sheet Reconciliations

These reconciliations typically cover all active balance sheet accounts (any account open for posting), including accounts with a zero balance. The justification for including zero balance accounts is that the existence of a zero balance doesn’t mean the balance is proper. It could be that the balance should have been something other than zero.

The objective of General Ledger Reconciliations is to ensure that the balances used for financial reporting are accurate. They are typically performed monthly, though some low risk / low volume accounts may be reconciled less frequently, such as quarterly, or in the case of equity, annually. The method used for reconciliation depends on the nature of the account. If the account is supported by a subledger, then the reconciliation typically requires a comparison of the general ledger balance to the subledger balance, followed by an analysis of the subledger balance to support reasonableness. For example, accounts receivable reconciliations will often contain an aging of the receivables balance, to ensure the balance contains no excessively aged receivables that should be written off. Accounts not supported by a subledger require an analysis of the account balance. Specifically, the reconciler must be able to document what the balance should be, based on their understanding of the business and the economic conditions supporting postings to the account. For all types of accounts, if errors are detected in the account balance, then reconciling items must be documented explaining the difference and the action to be taken to resolve the discrepancy. 

Extracted from Oracle Hiperion white paper-Reducing the pain of Account Reconciliations