There is little that will sink a company faster than poorly managed balance sheet reconciliation – but where does the risk lie and how can it be controlled? 

Managing financial risk is a burden we all have to bear at some point, but for businesses it is the difference between sink and swim. The financial close process is supposed to be your way of gaining clear a oversight of your financial position, but if the financial crisis has shown us anything it’s that risk can be anything but visible.

Where does the risk of financial error lie?

In the reconciliation of business balance sheets the risk of error is very often human. In very rare circumstances this error has malicious intent; the vast majority of the time it is a simple mistake copying some data into a spreadsheet or across to your ERP software. In fact, most of the time you will not be aware a mistake has even been made. 

As this infographic shows, the expected error rate of Excel spreadsheets is between 0.8-1.8%, which means a company with £100m turnover has a spreadsheet risk of between £800,000 and £1.8m.

Although not impossible, it is also particularly hard to accurately assign responsibility for work done in an Excel spreadsheet back to an individual. Changes are often made without being tracked or approved, and could be made by anyone with access. Given that companies are being expected to have tight control over their financial reporting, this risk of a lack of control could potentially be extremely damaging.

Controlling the financial control

Due to the increased pressure on businesses to take command of their own financial controls, many are now not permitted to rely on their auditor to catch mistakes in their financial reports. A company must now prove that their internal controls would have caught the issue. But how can companies ingrain this level of control?

According to recommendations contained within the Basel II financial directive, companies should implement the “three lines of defence’ model to gain full control, not just of the financial process, but also of the control process itself.

The three lines of defence model looks like this:

 three lines of defence, financial controller, CFO best practices

Source: Vattenfall 2012 corporate governance report

  1. Each business unit is the first line of defence. It owns and manages the financial risk for the business and is where the buck finally stops.
  2. Risk organisation should be elaborated routines in small companies (or a board risk committee or a separate department altogether in larger enterprises) but there is a responsibility for managing and controlling the risk at a front-line level.
  3. The internal auditor is your final line of defence. They should pick up any errors before they are reported, as well as help to improve the risk control and management process. 

The challenge of control facing CFOs

The ‘three lines of defence’ model is great for helping to clamp down on risk in the financial reconciliation management process.

  • But don’t you want a slimmer solution, allowing small companies to afford it?

Because when the problem of Financial Reconciliation is rooted in unavoidable human error or using error-prone Excel spreadsheets to reconcile accounts in, the element of risk can be a real challenge to overcome.

The challenge for CFOs is to think creatively around these issues, investigate new technologies and ideas and maybe even capitalise on your financial team’s “cognitive surplus’ to discover innovative solutions for better finance processes.

The new Adra Match enhanced balance sheet reconciliation and reporting software BALANCER, provides executive level risk management . With the automated reconciliation you can be confident that the potential human error is absolutely minimised, while also providing a strong audit trail and accountability. With it companies of all sizes minimizes risk astonishingly.

Take a look at the full business benefits and inner-workings of BALANCER enhanced balance sheet reconciliation and reporting software.