If Financial Directors do not look into adopting new policies and procedures soon, they could find themselves hit with regulatory penalties for lateness or inaccuracies in the accounting close process.
Financial regulations for public companies, such as the Sarbanes-Oxley Act (SOX), mean there is more pressure than ever to complete an accurate and timely accounting close process at the end of each month. As discussed in our previous article, due to SOX, companies can no longer rely on their financial auditor to highlight errors or financial misstatements before regulatory penalties are issued.
Financial Directors and CFOs must therefore investigate new account close processes that will both speed up their monthly account reconciliation and improve on accuracy – but when you’ve ‘always done it this way’ it’s hard to know where to start!
Not all companies will be able to improve on their account reconciliation – at least not without some automation of tasks. However, as a few of us may have experienced the hard way, some accounts pose a higher risk, if not correctly reconciled, than others. So while you may not be able to complete all reconciliations before your monthly close, you should ensure that your high-risk accounts are correct and filed on time.
How to rate risk
Companies should start by determining the risk and magnitude of financial misstatement for each balance sheet account.
Quantitative risk factors– volume and value of transactions – should be the most obvious, but there are also inherent qualitative risk factors that need to be taken into account, such as:
– Complexity of transactions
– Volatility, complexity and subjectivity of accounting rules
– Fraud susceptibility of transactions
– Level of automation vs. manual intervention
– Regulatory oversight
– Quality of internal control over transactions (including the financial reporting itself)
Assessing each account against these qualitative and quantitative risk factors will highlight those accounts where there is reasonable risk of financial misstatement by a material amount (high risk), reasonable risk of financial misstatement by a significant amount up to a material amount (medium risk) and no risk of financial misstatement of a significant or material amount (low risk).
High and medium risk accounts can then take priority over low risk accounts to help minimise overall risk of financial penalties or underpayment should a full reconciliation not be completed in time.
For more ideas on how to improve the efficiency of your accounts department, download our free ebook: Controlling your financial transaction flow.
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