Published : 11 years ago, on 28/10/2013

By Mario Spanicciati, Executive Director for EMEA and EVP of Operations for BlackLine Systems

Mario Spanicciati

In today’s economy, organisations tend to allocate capital only for projects they are confident will deliver tangible ROI. This leaves less room for extras, but, for many companies, is seen as something of a necessary cost-cutting measure. Leveraging technology to automate traditionally manual processes is usually a sure fire way to generate solid ROI. But, is automation of all processes the answer, and what are the risks and benefits? One area where companies can almost certainly ensure ROI is through automation and optimisation of their balance sheet account reconciliation process.

Account reconciliation is hugely critical, but often underappreciated and undervalued. Without it, financial integrity is compromised. Weakness and inefficiency in the process often leads to mistakes on balance sheets, which can lead to much bigger problems in the overall financial close.

For global companies, maintaining multiple sets of standards including IFRS, GAAP or statutory accounts, creates a huge burden when closing the books each month – and this problem is only set to get worse. Automation of the process ensures the manual labour required for each financial close cycle is minimised, as well as the risk involved. . Despite this, more than 90 percent of organisations globally still carry out their monthly account reconciliation process manually – ordinarily with Excel spreadsheets.

A preparer opens a spreadsheet, manually enters the balance, reconciling items and other information, in order to validate that the account balance is correct. The spreadsheet is then typically printed following approval and placed into a binder. For tracking purposes, the preparer then logs completion of the reconciliation into another spreadsheet. Clearly this is not a fool-proof system, given that manual data entry leaves the process open to human error. One small mistake can dramatically disrupt the resulting figures in a company’s financial statements and, if not caught ahead of time, further problems can ensue.

A study earlier this year found that around 88 percent of spreadsheets are thought to contain mistakes. During the 2012 London Olympics, the organising committee (LOCOG) discovered an error in one of their spreadsheets that had led to four synchronised swimming sessions being oversold by 10,000 tickets. Upon further inspection, the error appeared to be the result of a rogue keystroke by an employee, entering “20,000 tickets remaining” into the spreadsheet, instead of the correct 10,000. The error was discovered when LOCOG reconciled the number of tickets sold against the final seating configurations for venues. Had this not been picked up it could have had serious implications for not only the synchronised swimming events, but the integrity of the Games.

It may not be possible to altogether eradicate human error from the face of the earth – after all, aren’t machines only as effective as the people operating them? However, by automating previously manual processes which significantly reduces the possibility of incorrect information going undetected – or being entered incorrectly in the first place – we’re one step closer to virtually eliminating human mistakes.

Consider a simple example, similar to the Olympics debacle, where a journal entry is made incorrectly in a spreadsheet, off by a single decimal point (i.e. a factor of 10). Depending on the size of the company, this could result in a single account reconciliation that is off by millions of pounds, or even more.

The single discrepancy in the numbers can increase exponentially when multiplied by the number of times there is an incorrect number input into a spreadsheet and with the number of accounts to be reconciled. There is also the case where a company realises, only after implementing a technology solution, that there are accounts which have never been reconciled, yet somehow they are ending up in the company financial statements! Or worse yet, they are NOT being accounted for at all!

Whilst LOCOG managed to salvage their ticket situation before an extra 10,000 angry synchronised swimming fans turned up at their door, it certainly conveys that no organisation is totally safe from the impact of human error and acts as a wakeup call for many organisations still battling with Excel.

So what are the key benefits to ditching Excel and switching to an automated process? Key benefits include:

• Centralised visibility and control. Management and executives have real-time dashboards and reports and can rely on improved accountability from specific account ownership.
• Monitoring. Balance changes, new accounts, delinquencies and other risk-associated events can be monitored proactively through email alerts.
• Increased productivity and efficiency. Standardised templates with pre-defined formats, including access to policies and procedures, allow reconcilers and managers to concentrate and communicate on content rather than form.
• Reduced operational costs. Just the cost savings from the elimination of paper, binders and storage associated with the account reconciliation process can add up significantly. IT support and maintenance costs are other potential hard cost savings. Accountancy staff can be reassigned to more strategic roles within the organisation.
• Reduced audit cost and risk. Data presented in a consistent format as well as the direct accessibility of reconciliations empowers auditors to revise their audit approach and do so from their offices, reducing both personnel and travel costs. Complete and consistent reconciliations across the entire organisation reduce the risk of unrecorded adjustments or material misstatements popping up.
• Availability and access .24/7 access anytime, anywhere from any mobile device to all important reconciliations, numbers, reports and supporting documents.
• Security. The confidence in knowing all key information is backed up electronically.

The benefits of automating the account reconciliation and financial close processes far outweigh the costs. However, technology alone is not enough. Proper training in account reconciliation techniques and best practices, standardised templates, ongoing monitoring and support from upper management are all vital factors in creating a world-class reconciliation process. Given the risks and errors inherent in a manual approach, the smart combination of technology, proper training and continuous process improvements will lead to a faster, more controlled financial close, producing greater confidence in an organisation’s financial results— ultimately resulting in a justifiable ROI for the project.

Mario Spanicciati is Executive Director for EMEA and EVP of Operations for financial close software provider BlackLine Systems, heading up EMEA efforts from the company’s European headquarters in London.