miércoles, 28 de enero de 2015

Guide: From balance reconciliation to transactional reconciliation

Automation of the interco reconciliation process can provide an opportunity to review and optimise accounting close processes.

Sigma Conso offers a transaction-level intra-group account reconciliation software package called Mona InterWeb. The application’s strong point is that it can be implemented over time (balance > balance, balance > transactions, transactions > transactions) to help improve group processes.

A transaction-level intra-group reconciliation application makes it possible to: 
  1. Match all closely associated transactions based on a list of predefined criteria (including materiality thresholds, currency variations, etc.). 
  2. Send the data that couldn’t be matched to the counterparties. The application assists the counterparties with the reconciliation. 
  3. Enable counterparties to use a collaborative platform to process data which can’t be reconciled as is. 
The automation of interco reconciliation can be illustrated as a funnel.

1.- Automatic reconciliation:
Matching: the tool works first at the transaction level: matching automatically reconciles as many items as possible. Automation is required because a group can quickly be faced with high volumes when working at the transaction level. For example, the software we installed at one of our client’s automatically reconciles up to 97% of transactions. Only 3% have to be reviewed in more detail. The rate of automatic reconciliation at our clients’ is generally about 70% to 80%. 

2.- Semi-automatic reconciliation:
The tool assists counterparties and provides gradual, assisted reconciliation: only transactions that haven’t been reconciled are looked at. This step allows for matching or “marking by type of interco difference” using increasingly less restrictive criteria.

3.- Manual process:
This yields only those data that can’t be reconciled as is. The tool includes an interface to review even more detailed information about the transactions (local account, order number, store number, names, etc.) and a collaborative platform to help the entity with its research and, potentially, to attach accounting documents to specific transactions.

The interco reconciliation process becomes part of the accounting process and of the local accounts close, well upstream of account consolidation. 

The process is iterative. The transactions are imported a first time. After automatic and semi-automatic reconciliation, the manual process can highlight local accounting errors which can be corrected. Transactions can then be imported a second time. Previously identified differences have been removed at this point (faulty accounting has been corrected!). The application creates a perfect audit trail between local accounting and the consolidated accounts. 

Consolidators are no longer involved in analysing differences. This work is left to the accounting teams which have the knowledge and information required to document the reconciliation.

Interco reconciliation becomes an internal control tool and leads to an improvement in data quality and relevance. 

In fact, when we refer to an effective intra-group reconciliation process, we need to remember that the final goal of reconciliation isn’t to get to zero. This can lead to instances of “forced entries”, a partner artificially aligning their accounts to be in sync with their counterparty. Where is the financial data quality? The process must ensure that everything that can be reconciled is, in fact, reconciled. However, in addition, it must be able to explain and justify the remaining differences: exchange differences, timing differences, accounting differences between income statement and balance, whether or not VAT is recorded, etc. 

The group then has several options depending on its structure: 

• Once the campaign is complete, the application can feed the balances into the consolidation software under consolidation team supervision. This will avoid re-entries and, in particular, ensure accounting data integrity throughout the process. 
• Or, the consolidation tool can directly retrieve entity data from accounting (which are cleaned of all interco transactions and corrected if need be). The consolidation team can enter the required adjustments. 

Not all groups are ready to start working at the transaction level right away (heterogeneous accounting systems, etc.), so it’s important that the system enable them to start working with balances. The system enables data centralisation and facilitates analysis. It ensures the exhaustiveness and perfect coherence of reconciled interco balances with those included in the consolidated accounts and, therefore, highlights any anomalies that wouldn’t otherwise have been found.

Groups that opt for this interco reconciliation approach have all of the right cards in hand: intercos are reconciled and differences are justified before the close process starts. The close is done using reliable final data and is much quicker. During the audit phase, auditors are thankful for the time saved on research, discussions with consolidators and with group entities. All of the detailed information they need is available, including electronic exchanges with the counterparties in question, document exchanges, automatic or manual transaction marking...everything is traceable.

It’s clear how an effective intra-group account reconciliation process can contribute to Fast Close.

Process optimisation: actions to improve the closing process

Automation of the interco reconciliation process can provide an opportunity to review and optimise accounting close processes.

Sigma Conso offers a transaction-level intra-group account reconciliation software package called Mona InterWeb. The application’s strong point is that it can be implemented over time (balance > balance, balance > transactions, transactions > transactions) to help improve group processes.

Good practices are gradually implemented in the group via consistent entry rules for seller document references, seller issue dates, materiality thresholds, etc.

Use of these new rules will later enable the optimisation of automatic transaction reconciliation...with significant productivity gains for the subsidiaries.

If you would like to know more about other steps to improve management of intra-group transactions and optimise the reconciliation process,  you can download our white paper:

However, relying on software isn’t enough. Change management for software implementation and its use by the entities is also crucial.

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