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Automated Statement Processing

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Automated Statement Processing & Reconciliation:
How does it all work and why is it vital to your financial business?

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Introduction

Financial companies around the world often conduct a process called ‘statement reconciliation’. Through it, businesses can compare and contrast the information in the statements they receive from external entities with the information in their internal ledgers.

This reconciliation process is considered to be vital to proper bookkeeping. In fact, Ernst & Young, one of the world’s largest professional services company, states that reconciliation can be used to confirm your alignment with three of the world’s most respected reporting standards (1). These are namely the Sarbanes-Oxley Act of 2002 (SOX), the US Generally Accepted Accounting Principles (GAAP), and the International Financial Reporting Standards (IFRS).

Yet reconciliation is not an easy task to undertake manually, especially at a time when technology has multiplied the sources the statements come from and the formats they can come in. This has caused some companies to assume that the alternative to manually conducting statement reconciliation is not to do them at all, which can cause irreparable harm to your business in the future.

Thankfully, there are solutions that can simplify the process while adhering to the strictest standards, and we explore them below.

Key Points:

  • Reconciliation is the process by which you compare and contrast the information in a bank’s or broker’s statements with those in your internal ledgers.
  • Reconciliation can help you keep an eye on your inflow and outflow, as well as stave off fraud. 
  • Conducting this process manually comes with many disadvantages, so many companies now opt for Automated Statement Reconciliation.
  • Commercial software that can be customised is the best option for SMEs.

What is Statement Processing Reconciliation?

As a concept, statement processing reconciliation is a simple one to wrap one’s head around. Basically, it is a procedure by which a company can check the information in a statement it has received from an entity, such as a bank or a broker, with its internal ledgers and records.

Why are Statement Processing Reconciliations Undertaken?

The statements that need to be reconciled with your internal ledgers can come from a variety of sources, but let’s take a bank statement as an example to help us understand the reasons why such a process is undertaken.

A bank statement comes with a list of all the deposits and withdrawals, as well as other transactional activities, that have taken place from a specific account over a period of time. By reconciling this with your records – which means checking whether the transactions match the ones you noted down in your internal ledgers – you can ascertain that:

  • all your instructions to the bank have gone through;
  • cash inflow and outflow from your bank account are correct;
  • cheques deposited have been credited correctly;
  • cheques written out have been correctly withdrawn; and
  • commissions charged in different currencies by the bank or broker are in line with the agreement.

Statement reconciliation also helps ‘thwart fraud’, with Investopedia using an example of how an altered cheque can result in more money than you planned leaving your account to showcase its point (2). This may go unnoticed without proper statement reconciliation.

All this, therefore, makes it clear why statement reconciliation can prove to be vital for any company. Nevertheless, as important as statement reconciliations are, they can be quite a headache to get done. But before we see why that is so, let’s take a look at why statements and internal ledgers may diverge.

Differences Picked Up Through the Account Reconciliation Process

As we have explained above, reconciling the statements you receive with your internal records is an important step in ensuring that your inflow and outflow are correct. 

Most of the time, the information should be the same, so you can get on with your other business. Nevertheless, there may be times when things do not add up. Here’s why that can be so.

  1. Time Stamps: Each transaction or trade comes with a time stamp. In times when a bank or a broker is dealing with a large volume of transactions, the one you made may appear to happen later than you intended it to. This is not necessarily a problem, but it’s good to keep it in mind.
  2. Incorrect Ledgers: Sometimes you may find that your ledgers and statements don’t match simply because of omissions in your records. This can be overturned through the use of double-entry bookkeeping, where every transaction is listed in both a credit account and a debit account.
  3. Mistakes by Banks/Brokers: At other times, you may notice that the bank or broker in question may have made a mistake. This could be for a number of reasons, that can include the bank or broker transferring more money than you instructed, transferring the right amount to the wrong account, charging you a higher commission than what was agreed, or missing your request altogether.
  4. Fraudulent Activity: Although, hopefully, not a common reason, you may notice that some transactions differ from your ledgers because of fraudulent activity. This activity could be originating internally or externally, but either way, reconciliation gives you the opportunity to flag it up, combat it, and potentially recuperate your money.

Downsides of Statement Processing

So, now that we know what statement reconciliation is, the benefits of undertaking such a process should be clear. Nevertheless, reconciling your statements with your internal ledgers is no mean feat. Indeed, the process itself can result in multiple pitfalls when done manually, because:

  • Bank and broker statement reconciliation requires multiple, experienced, accounting professionals to spend long hours checking each entry. This results in extra expenses for the company, and a headache or two for the employees involved.
  • Most bank and broker statements will come in an entity-specific format, which may have different fields to your internal ledgers. This means that, at times, the process is not as simple as just checking two numbers in two respective fields. Instead, the person checking them has to learn a whole new methodology for each source in order to make sense of the statements.
  • Statements may also include transactions performed in a different currency to the one your company is used to trade in. This may mean that employees will have to check the conversion rate of the day the transaction took place in order to confirm that the amount credited was indeed correct. The same can happen for transactions taking place in different time zones.
  • Most banks and brokers give companies a set amount of time in which they can flag up any inconsistencies or inaccuracies. This can mean that your employees will need to work longer hours or, sometimes, even overnight, to be able to get the job done in time. The alternative is not flagging up potentially money-losing mistakes.
  • As one can see, all this also makes it easier for those conducting the reconciliation process to make mistakes. These mistakes can cost companies a lot of money in both the short and long run. Most importantly, however, such mistakes can also result in the company getting in trouble with the law.

Why is Automating Processing so Important?

With this in mind, it becomes clearer why some companies have opted to automate the statement reconciliation process.

But what does this entail?

In a nutshell, automating the reconciliation process means getting software that can download, normalise, and reconcile data from statements with that in your ledgers automatically and autonomously.

We explore this in further detail below, but even at this point, we can agree that by utilising dedicated software to do the bulk of the work for you, you can:

  • save time;
  • lessen running costs;
  • reduce your chance of errors; and 
  • ensure that your inflow and outflow of cash are properly monitored and above-board.

This is why so many of the world’s biggest software solution companies now offer automated statement processing software in one form or another. But, sadly, our experience has shown us that most of them do not work for Small to Medium Enterprises (SMEs). 

Before we can explore why, we need to look at what such software would need to do to truly be a solution.

Multiple Data Delivery Sources

The first thing that needs to be said is that companies can receive statements from many different entities. 

These can include:

  • banks;
  • brokers; 
  • prime brokers; 
  • custodians;
  • depositaries; and 
  • fund administrators. 

That means that your company will probably have large volumes of statements to reconcile. But that is only the beginning, as many of these entities have their own way of sending their statements, too.

Multiple Data Formats

Technology has had a huge impact on the statement reconciliation process. This is because companies and individuals no longer just receive their statements in paper format. Instead, there are now a plethora of formats in which these statements may be sent to you.

So let’s look at each of the most common formats you may come across, shall we?

By Email: Bank and broker statements are often sent to clients in this way. This would either be included in the actual body of the email or else as an attachment, which may be a CSV file, an EXCEL sheet, a PDF, a structured XML, or even a JPEG/PNG.

Files via SFTP: The Secure File Transfer Protocol allows for files to be transferred, accessed, and managed safely through a secure network. This usually improves efficiency, especially since it has functions that let users schedule tasks and uploads.

Web Portal: Numerous banks and brokers now have websites that clients can log onto to access their statements. This, in a way, makes the process a more seamless one, as the statements are usually uploaded on the same day and at the same time.

API: Application Programming Interface is a system by which you can request the data that you want and need directly from the broker or bank. This is great in terms of understanding the inflow and outflow of funds from your accounts, and it even gives you the opportunity to query your data directly.

FIX: Another novel way for banks and brokers to share their statements with you is through the Financial Information eXchange. This is a data and information protocol which allows for real-time exchanges.

Live Web Data: Some data, which may be required for your reconciliation process will only be displayed live on a website for a certain amount of time. This is especially true for including intraday data. Such statements may be lost if they are not retrieved and saved within the allocated period.

OCR: As we mentioned in the Email section above, sometimes you may receive statements in an image format like JPEG or PNG. For this data to be used in the automated reconciliation process, an optical character reader (OCR) is needed so that it can ‘read’ the text and numbers in the images.

Multiple Transformations Required

Because of all this, statement processing software that can truly help accountants in their reconciliation processes needs to be able to conduct multiple data transformations, which means the data has its format, value, or structure changed.

Among the transformations data needs to undergo for accurate reconciling are:

  • Conversion: As we have seen, data can come in numerous formats (Email, FIX, EXCEL, etc.), but the likelihood is that your internal system only operates in one of those formats (just EXCEL, for example). Moreover, even if the statement and your internal ledgers are in the same format, it is unlikely that the fields converge; for example, the bank may place the timestamp in the first column, while you may place it in the last. This can lead to issues in automatic reconciliation, and so the software must convert the statement into a format that can be compared to your ledger before it can even begin its ultimate job.
  • Filtering: Not all the data in a statement is necessary for the reconciliation process. A human being would automatically know what needs to be checked and ignore what’s not relevant, but software will check whatever is fed to it. For that reason, the software first needs to filter the information to ensure that only the relevant data is making the final reconciliation process.
  • Grouping: Some data in statements may not make much sense when compared to your ledger unless it’s grouped with that from other transactions or even from other statements. This is another transformation automated statement processing software must undertake in order for the process to be successful.
  • Ordering: Data rarely comes in an ordered manner, which means that for Automated Statement Processing software to do its job properly, it must first organise it into the appropriate sequence that will match your internal system. In fact, while this type of transformation is usually overlooked, it is a crucial component in the reconciliatory process.
  • Calculations: Sometimes a transaction may be more complicated than it first appears. Transactions in a different currency or from a different time zone are two such examples. For that reason, the software would need to conduct its own calculations before it can reconcile it with the data in your own ledgers.
  • Exception Management: Automated statement processing software also needs to be ‘intelligent’ enough to understand and learn when exceptions need to be applied. Without this function, your reconciliations will not be accurate, leading to incorrect reporting or else further work for you.
  • Normalisation: Finally, the data you’ve received needs to be ‘normalised’, which means that it is transformed into something that can work with your own system. An example of this would be normalising all timestamps into your local time zone; or all currencies into your preferred currency.

The Functions of an Automated Reconciliation Process

Therefore, for an automated statement solution to truly help you in the process, it needs to be powerful enough to:

  • Download data from multiple sources;
  • Convert data that comes in numerous formats;
  • Group data autonomously, even from different sources or files that come in different formats;
  • Filter and organise data according to your needs;
  • Plug into your existent internal system; 
  • Reconcile the relevant data from statements with your internal ledgers; and
  • Report it.

What types of Automated Statement Processing Solutions are there?

The type of solution you choose usually depends on how large your company is and how many resources you can afford to invest in automating the process.

Most large, multinational corporations opt for a tailor-made system that is designed, coded, and implemented to their specific needs by dedicated programmers and financial experts. This type of system, given it’s done by competent developers, will work seamlessly with their own internal one, and will fully automate the reconciliation process. This will also require practically no human input bar having in-house programmers to maintain and update the system.

But this costs a lot of money both to design and to maintain, which is why many SMEs often resort to off-the-shelf solutions like Microsoft EXCEL, which are, inarguably, cheaper and which can help speed up the process. Yet these come with their own downsides and may require you to have a more active role in the reconciliation process than you’d like to undertake.

Since we like to focus on SMEs, let’s look at what the pros and cons of using most accessible solutions are.

Advantages of Off-the-Shelf Automated Statement Processing Software

Undoubtedly, using off-the-shelf software to automate your reconciliation process can come with some great advantages.

  • The software can download files from one or more sources, and can even be scheduled to download time-sensitive files. This means that you and your employees can spend more time doing more important and fulfilling work.
  • It can transform data from one format into another; such as from a PDF file into an Excel sheet. This may save you copious amounts of time, especially if you don’t need each person working on the reconciliation process to learn new methodology.
  • It can automatically reconcile some of your statements with your internal ledgers. In other words, it can compare and contrast what’s on the statement with what you’ve inputted in your files. Of course, if anything doesn’t match, it can then alert you to the discrepancies.
  • This type of software is a lot cheaper than tailored solutions, and often doesn’t require much expertise to set-up and maintain. This gives you some of the benefits and takes away some of the downsides of the more-powerful, tailored software.
  • Overall, it can save you a lot of time during your statement reconciliation processes. Plus catching discrepancies can also save you money and future headaches.

Disadvantages of Off-the-Shelf Automated Statement Processing Software

The above is all true, of course, but what that doesn’t show is that off-the-shelf software can come with many issues that may, in the end, not make it a worthwhile investment.

Here’s what many of the companies we’ve worked with have reported about commercial automated statement processing software:

  1. The vast majority of ready-to-use broker and bank reconciliation software can only transform data from one particular format into another particular format; although some may even manage a couple. Even so, as we have seen above, companies today receive their statements in a multitude of formats and from various suppliers. For this reason, you may need to invest in more than one type of software to be able to automate some of your bank and broker reconciliation processes.
  2. If the above happens and you have more than one type of software conducting your reconciliation process, then the software will not be able to group data sets from different sources, or even normalise all your statements into one place. So, while a part of the process will be automated, a human being will still need to conduct the final part of the reconciliation process in order to avoid omissions and errors.
  3. Because most off-the-shelf software has to work in as many different scenarios as possible, some of them may not easily plug into your internal system. This may result in you having to create a new system from scratch (which costs time and money, and can lead to serious delays), or else task programmers with creating a way for the software and your system to meet halfway.

Final Remarks on Automated Statement & Reconciliation Software

We’d like to conclude on a positive note, especially for SMEs that have limited resources but understand the benefits of automating their reconciliation process.

More companies are now creating commercial software that can be customised. This may seem like a contradiction in terms, but it’s actually a fantastic solution.

See, this software would have a blueprint of how it should work, but can then be tailored to easily plug into your internal system. It would also have additional components that can transform data from as many sources as you need and from any format into any format.

Because this software isn’t being created from scratch, the price tag is usually smaller than for those tailored systems, yet the benefits remain the same.

Indeed, as time goes by, more SMEs are realising that such software is the best alternative.

SOURCES:

Wakett is made up of a team of experts from the financial and software fields. Our articles are based on experience and expertise, as well as primary and secondary sources.

(1) www.ey.com. (n.d.). How to QA your way to better account reconciliations. [online] Available at: https://www.ey.com/en_us/alliances/how-to-qa-your-way-to-better-account-reconciliations [Accessed 18 Feb. 2022].

(2) Investopedia. (n.d.). Learn what a Bank Reconciliation Statement Is. [online] Available at: https://www.investopedia.com/terms/b/bankreconciliation.asp#:~:text=The%20reconciliation%20statement%20helps%20identify [Accessed 18 Feb. 2022].

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