What is data reconciliation and what is it used for in finance?

Data reconciliation (DR) is a term that describes the phase of a data migration during which the destination data is compared to the original source data to confirm that the migration architecture has successfully transferred the data.

• Missing records
• Missing values
• Incorrect values
• Duplicated records
• Badly formatted values
• Broken relationships across tables or systems

Without the data reconciliation step, these errors can go unreported, causing significant harm to the overall quality of your data, erroneous insights, and customer service concerns.

Reconciliation in finance

Reconciliation in finance is the process of comparing different accounts, amounts, data points, etc. to find out if they are matching or to explain why there are differences between them.

A business entity is mandated to periodically compare two related sets of accounting records to check if figures are correct or are in agreement. Any difference between two figures/data points should be double-checked and, if needed, rectified. The Oxford Dictionary of Accounting defines reconciliation as “a procedure for confirming the reliability of a company’s accounting records by regularly comparing (balances of transactions). An account reconciliation may be prepared on a daily, monthly, or annual basis.”

What is reconciliation in accounting?

Account reconciliation is an important internal control mechanism in the financial reporting process of every institution. Public companies are required to perform the reconciliation process as part of their financial close. Account reconciliation is primarily used for explaining how two financial records or account balances are in sync or out of sync. Certain differences in accounts occur because of the timing of payments and deposits and they can be easily rectified. However, there are also certain situations of unexplained or mysterious discrepancies that require serious efforts to rectify. These discrepancies can be indicators of fraud or cooking the books, and serious investigation may be needed to figure out the truth behind them.

According to the Generally Accepted Accounting Principles (GAAP), carrying out proper account reconciliation will provide accuracy and consistency in financial accounts. The process is necessary to ensure that all cash outlays and inlays match between cash flow statements and income statements. According to GAAP, account reconciliation is to be done through account conversion or double-entry accounting.

Understanding banking reconciliation

Banking reconciliation is the process by which the bank account balance in an entity’s books of account is reconciled to the balance reported by the financial institution in the most recent bank statement. Bank reconciliations are usually done by comparing the bank reconciliation statements provided by financial institutions with the entities internal books of account. For the use of big institutions with a large number of transactions, banks usually provide a spreadsheet format of transactions to be used by those institutions’ accounting software.

Discrepancies in accounts can happen due to a number of reasons, including:

• Cheques issued by an entity have not been presented to the bank till the date of preparing the statement.
• Fees or charge made by the bank has not yet been recorded in the entity’s accounts
• Either the bank or the entity has made errors such as duplication, omission, date error or amount error.

Most of the differences can be corrected just by looking at the bank reconciliation statement sent by the bank and the entity’s accounts (eg. Cashbook). To tally the balance, certain adjustments need to be made in the entity’s accounts or reported to the bank for rectification.

Importance of reconciliation in business accounting

It is imperative for companies to reconcile their accounts to prevent errors in the balance sheets, check for fraud, and avoid negative opinions from auditors. In general, companies do balance sheet reconciliations every month, post the closing of books of account for the previous month. During this process, all balance sheet accounts are reviewed to make sure that transactions were properly recorded in the correct general ledger account. If there are incorrect entries, companies will have to adjust journal entries.

GAAP mandates that cash inflows and outflows need to be in agreement with the income statement, balance sheet and cash flow statement. In case a company is using the direct method of presenting the cash flow statement, it should reconcile cash flows to the income statement and balance sheet. If it uses the indirect method, the cash-flow-from-operations section is presented as a reconciliation of cash flow statement, balance sheet and income statement. There should also be reconciliations to convert non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), into their GAAP counterparts.

The major benefits of account reconciliation in business accounting are:

• It helps avoid balance sheet errors and other accounting mistakes that can lead to serious ramifications.
• It can help against fraud (eg. fraudulent withdrawals from bank accounts) and ensure financial integrity.
• It helps understand the accounts better with clear details of incomes and expenses.

A robust and steady reconciliation process helps improve the accuracy of the financial reporting and allows the finance department of a business to publish financial reports with confidence.

Reconciliation methods

Reconciliation of financial records can take place in two ways:

Documentation review: It involves the examination of existing records or documents. This is the most common approach of account reconciliation and is generally done by using accounting software. For example, while reviewing its receipts for discrepancies, a company identifies that its telephone expenses were charged twice. The company can then lodge a complaint to the vendor to get it reimbursed.

Analytics review: In this method, a company looks at an account or financial statement and attempts to identify any irregularities by comparing its historical activity. For example, a multi-national company projects an annual revenue of US$100 million from a country, based on historical activity. At the end of the year, the company records US$ 9 million revenue from the country, way below its estimates. After reviewing the account, the accountant finds an accounting error – the omission of zero while recording entries. Later, a rectification is done, bringing the annual revenue to US$90 million, in line with the company’s estimates.

Both these reconciliation methods can be used to identify mistakes and later make adjustments for the accounting balance to match the supporting information.

How should you implement a Data Reconciliation?

Spreadsheets (eg. MS excel) are the most widely used reconciliation tools now, with almost 90% of companies using it today. However, spreadsheets are still prone to human error and lack efficiency as the depth and breadth of reconciliations keep growing.

The conventional method of data reconciliation depended on basic record counts to see if the intended number of records had been moved. Field-by-field validation needed a lot of computing power. The problem is that missing records is only one type of error that might occur during a data migration (as you can see above). As a result, the other problems will go unnoticed.

The argument for reconciliation software

As a result, modern data migration solutions (such as reconciliation software) provide data modelling and comparative reconciliation capabilities, allowing for full volume data reconciliation testing and identifying where errors like duplicate entries have occurred.

Many countries have come up with legislation to protect shareholders and the general public from ill effects of accounting errors and fraudulent behavior within businesses, along with improving the accuracy of corporate disclosures. For example, the Sarbanes-Oxley Act (SOX) in the US in 2002 emphasized the need for balance sheet account reconciliation to be included within a company’s own procedures, not depending on external auditors only. These regulations increased the pressure on organizations to reconcile accounts in a more effective and error-free manner. Certain industries with large numbers of transactions felt it more painful and they wanted to automate a good number of repetitive manual reconciliation processes. As a result, the accounting industry saw a number of reconciliation software that help improve reconciliation speed with no/limited errors.

The possibilities of tech are effectively made use in the reconciliation process today. By using different software solutions, organizations can largely automate their reconciliation, helping them save on time and cost. There are dedicated reconciliation software available in the market today and they can significantly reduce human errors while automating many repetitive processes. By and large, they provide centralized control, better monitoring, operational cost savings, increased effectiveness and efficiency, better accessibility, improved data security and reduced audit risks.

There are also reconciliation software solutions powered by modern technologies such as artificial intelligence and machine learning. In comparison to rules-based solutions, they go a step ahead and enable completely automated reconciliation, while providing superior accuracy in matching and effective exceptions management.

Speak to a member of our team today to learn more about our market leading reconciliation solution.