Don't Compromise the Balance of Your Financial Close

October 29, 2019

For regulatory compliance, accurate financial reporting and confident, strategic decision-making, finance and accounting teams must perform detailed monthly validation of their accounts. This process, the financial close, is critical to assuring data quality and limiting opportunities for fraud or irregular dealing. Central to the close process is reconciliation – the comparison and correction of multiple third-party data sources against internal records.

However, leaving often complex reconciliation tasks until the end of the month can easily result in a build-up of transactional activity that requires comparison and correction – compromising the speed of your financial close and the integrity of your data.

With so many transactions being processed by today’s firms, it’s tempting at month end to resort to balance-driven validation, where only balances are compared or validated for each account. Then, should a large enough discrepancy be uncovered, transactions will be manually inspected to determine the cause of balance differences.

But with speed and accuracy so critical to managing this complex accounting process, does the future lie in the balance?

While balance-driven validation will give your staff a more manageable initial workflow, it can also increase your exposure to fraud and costly errors. The superficial level of review means that balance manipulation can easily go undetected. And beyond the more nefarious side of accounting, genuine timing difference and payment errors can be obfuscated when you don’t substantiate transactional activity from day to day.

For an everyday analogy, just think about the average joint bank account.

Throughout the month, there will be a whole range of expected debits – for rent or mortgage payments, utility bills, insurance premiums, weekly grocery shopping and so on. And at the end of every month, you might expect that to leave you and your partner with a healthy balance of $500 dollars, give or take.

But what if one of you has also secretly splashed out $225 on a pair of shoes, while a $250 payment for your car has failed to go out on time?

At balance level, the transactions will pretty much net out and leave you safely in the black – with just enough to spare, so you think, for a last-minute $525 vacation.

Fast-forward another month, though, and you’ll see that you couldn’t afford that break after all. The car payment will have finally been made, you’ll suddenly be $225 short – and it will be too late to return the shoes.

For the modern corporation, the stakes are much higher. When high volumes of unpredictable transactional activity go unchecked, it’s easier for costly mistakes to stack up or balances to be purposefully manipulated. You won’t just get an overdraft charge; you could face criminal proceedings.

The moral of this story is that it pays to stay on top of transactions daily – with a bottom-up, activity-driven approach to validation, powered by highly automated technology.

Rather than reactively investigating errors at month end and delaying your close, you can now automatically match activity between systems and resolve exceptions as part of an everyday process.

But there’s an important twist in the tale. The less predictable your transactions, the more advanced rules and tools you’ll need to automate validation.

Take point-of-sale transactions, which are typically the largest in volume for any organization. These can occur at any time, for any amount, and will often require cross-verification against multiple third-party systems and records.

To constantly keep tabs on such highly unpredictable transactions, you should not only be performing reconciliation on a daily basis but also with a powerful, sophisticated rules engine. So, for accurate financial accounting and a fast financial close, you’ll need much more than an everyday solution to keep activity in check.

Don’t leave your financial close’s future in the balance. With a solution that can cut through the complexity, you can easily manage activity-level validation in conjunction with account-level certification – and deliver a faster and more accurate close.

About the Author
Richard Chapman, Vice President, Strategy and Business Development, Reconciliations, FIS
Richard ChapmanVice President, Strategy and Business Development, Reconciliations, FIS

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