Automated Statement Reconciliation

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).

• 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.

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• cheques written out have been correctly withdrawn; and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.

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.

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.
  

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.

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.