Financial Reconciliation: The Part Your Accounting Team Plays
Monday, February 1, 2021
What exactly does it mean to reconcile an account? It isn’t as complicated as it initially seems, referring only to a simple comparison. To reconcile your books, internal financial documents are positioned next to documents from external sources like bank or credit statements. Reconciliation is an excellent way to find errors, catch fraudulent activity, and identify discrepancies.
While companies that are publicly held are required to reconcile on a regular basis, nonprofits can forget this essential part of bookkeeping when resources are thin–but they shouldn’t.
Accurate books are important, but they can save your nonprofit a lot of money too. Your budget should never have to make room for completely unnecessary things like overdraft fees, disappearing cash, or accidental errors. When you reconcile your accounts, you keep things accurate and ensure reliability in all accounts and transactions, which leaves you with more money in your budget.
What causes account discrepancies?
There are a variety of reasons your accounts may not match up, ranging from the mundane to the mysterious. Typically, they’ll fall into one of four categories:
- Timing. Occasionally, something your accounting department has recorded won’t show in a bank statement because the statement came out before the money cleared. This happens with the increasingly rare paper check, but has become less of a problem with advancing technologies that have increased the speed of most financial transactions.
- Accidents. Mistakes happen, even in financial transactions. Someone in accounting may have mistyped a number or made an organizational error. Reconciling is a great chance to catch these small mistakes that can lead to big problems.
- Missing Information. Occasionally, transactions won’t get recorded for any number of reasons. People don’t mean to do this, but perhaps they’ve had a busy day or are distracted in the chaos of working from home.
- Criminal activity. Fraud can and does happen in all businesses, even nonprofits. Regularly reconciling your accounts decreases the likelihood of fraud occurring or going undetected for too long. Often, criminals are inexperienced at covering their tracks and will be easily caught if you’re paying attention.
More on other places to reconcile
Although looking through bank accounts is great, you should also reconcile other areas of your business to strengthen your finances. Each month, look through these areas too:
- Bills. This is an easy place to make mistakes, so look through bills regularly. Sometimes a person will write a check and record a bill, which, on paper, looks like double the expense. Keep a report of unpaid bills to simplify this process.
- Invoices. Keep track of invoices, both paid and unpaid, in a central location so that your statement of activities is current and unpaid invoices aren’t left sitting.
- Fixed assets. Review your fixed assets on your balance sheet so that you can look at depreciation, update new purchases, or record things you may have gotten rid of.
- Balance Sheet Accounts. If the account is on your balance sheet, it should have an accompanying schedule to understand what makes up this balance. This could includes items such as loans, endowment accounts, or inventory accounts.
Remember that this is not a comprehensive list, but a small sampling of reconciliations you might choose to do. Many companies look at things like prepaid expenses and deferred revenue, but finding the right combo will be up to you.
Manual or Automated?
Reconciliation, while vital, can be incredibly time consuming. For many, the idea of manually performing such a task with regularity is too overwhelming, especially in organizations like nonprofits that may operate with smaller staffs. When trying to decide how to tackle reconciliation, it is important to consider a few factors:
- Bank. Bank reconciliations can be done manually or using automation, consisting of flagging transactions that don’t match up. Automating is helpful because it allows you, the human, to spend your time only investigating the parts that don’t match up. This is especially helpful if you have multiple bank accounts. By automating part of this process, you’ll give your accounting staff more time to dive into the tricky stuff.
- Subledger balances. While this step can be done manually or using automated software, automation will save your accountants a lot of time, especially if you find the right product to work within your existing systems and frameworks (like payroll and human resources). Reconciling various subledgers can get complicated, and if you’ve got multiple sources of data (related entities, etc.) automation is probably the way to go.
- Roll-forward schedules. While the other two examples check data against balances, schedules exist on their own, usually as spreadsheets. This can present challenges in things like version control, which can interfere in reconciliation, since it relies upon closing balances matching opening balances. To reconcile, you need only to add all increases and subtract the decreases to find your ending balance.
How to begin the reconciliation process
As with most things, there are a variety of ways to reconcile your accounts, and determining which is right for your organization is the first step. You may choose to use accounting software, which will do a lot of it for you, with human assists in cases where there is a difference in accounts.
You may also choose to do the reconciliation using your accounting department. In this case, you will need to:
- Look at your internal accounting documents as compared to your bank statements. Monitor payments and deposits, noting places where they do not match and places where there are inconsistencies for which you have no other proof (like a receipt).
- Look for places in your bank records that aren’t reflected on your internal accounting documents. Things like checks that haven’t cleared, autopayments that haven’t cleared, check fees, service charges, and overdraft fees are good examples of this.
- Ensure there are no bank errors, which are infrequent, but can happen.
- Make sure that incoming dollars show on both your own records and in your bank accounts. Depending on your timing, you may need to manually add these to your bank statements to ensure accuracy.
- Finally, look at your balances and make sure they’re a match. Do this often.
What happens next?
After you’ve taken time to thoroughly review your documents, you may be left with some inconsistencies, which is where the real work begins–you haven't reconciled anything yet. If you find a discrepancy as you go through reconciliation, you’ll need to become a bit of a detective.
First, identify what exactly you’re looking at. Earlier, we discussed potential causes for differences in numbers. Make an educated guess about what may be to blame, and then go about proving or disproving your assumptions. Find a paper trail where you can, talk to staff and bank representatives if you need to, and do your best to identify what went wrong and what your books should look like.
Make notes detailing what happened and what should have happened, and share them with appropriate parties. If you’ve solved the problem, congratulations! Take steps to ensure, where possible, that it doesn’t happen again. If you cannot identify what happened, you may be dealing with fraud.
What to do if you suspect fraud
If you’ve reasonably ruled out other reasons for the difference in your records versus your accounts, it is probably time to consider that your nonprofit organization may have been the victim of fraud. To deal with it, you’ll need to follow a few best practices:
- Protect the evidence. If you’re suspicious of fraud, the person committing it may know and will try to get rid of evidence. Secure computers, paper, or hard drives/thumb drives as necessary why you (with the help of relevant authorities) conduct an investigation.
- Enlist help. You may need to hire a forensic accountant or other specialist to find evidence, depending on how large the fraud is. Hopefully, you’ve been regularly reconciling accounts and you’ve got the issue before it has grown large. You may need to hire a lawyer or involve law enforcement, so make the appropriate phone calls now.
- Ask questions. At some point, assuming you’re dealing with internal fraud, you’ll have to confront the employee or volunteer you think may have stolen from you. Don’t come at them with a list of accusations though. Instead, begin asking fact-finding questions that may lead to a reveal. You should also limit their ability to access company data and resources prior to any sort of discussion. As a precaution, you may choose to do so company-wide. Sometimes, you’re dealing with more than one person.
- Contact insurance. Let your insurance provider know what’s going on, since they’ll be involved anyway and may have a timeframe in which things must be reported.
- Establish loss. If you’re not able to prove loss, you won’t have much of a case. Document everything you know, and officially file a claim with your insurance.
While fraud is rare, it does happen and should always be a consideration. Regular reconciliation helps protect your organization against internal and external fraud, ordinary mistakes, and bank error. While it may seem like a lot of work, there are plenty of ways to go about automating or outsourcing it to ensure accuracy, ease, and an easier year for you.