Reconciliations are essential for maintaining financial accuracy in your enterprise, which impacts every other aspect of your business. You can’t plan for the future without knowing exactly how many resources you can allocate and where.
This is also why mistakes in the reconciliations should be addressed and corrected immediately to ensure they’re always up to date. However, closing reconciliation discrepancies is easier said than done, especially as more documents pile up.
If you are unfamiliar with the process of closing discrepancies, we have compiled a guide with methods for making it as simple as possible. We will also explore what these discrepancies are, what causes them, and why it’s important to close them.
What Are Reconciliation Discrepancies?
Reconciliation discrepancies are the differences in balances between any two corresponding sets of records. They are mistakes that need to be corrected to ensure that your financial data is accurate and up to date.
What Causes Discrepancies?
Discrepancies can be a result of various errors, such as:
- Data entry errors: Some of the most common causes of discrepancies. They can be small typos or incorrect amounts entered into the ledger.
- Unrecorded transactions: When the financial systems are not aligned and not efficient, they can lead to missed transactions and differences in the ledger.
- Timing differences: This happens when you don’t keep track of your transactions. For example, if a client makes a digital payment toward the end of the month, processing delays might cause the transaction to post on the bank statement in the next month, leading to wrong transaction dates.
- Undocumented bank fees and interest: Banks may charge fees or add interest to your account without notifying you immediately, which means that they will most likely go undocumented.
- Duplicate entries: If you’re not careful when entering data, you may accidentally enter the same transaction twice, resulting in an inflated balance.
- Reversed transactions: Small errors, such as bounced checks or returned payments, can create discrepancies if they are not caught and recorded immediately.
Now, let’s go over why closing discrepancies is important and what happens if they’re left unresolved.
The Importance of Closing Discrepancies
Closing discrepancies ensures that your financial statements are error-free and ready for auditing. With a clear overview of your finances, you can plan strategically and make accurate projections for the future.
Consequences of Unresolved Reconciliation Issues
Discrepancies in account reconciliation can have serious consequences for enterprises if left unresolved. Here’s what might happen if you don’t close discrepancies:
- Inaccurate financial reporting: Your financial statements become unreliable, which can lead to inaccurate projections for the next fiscal year.
- Fraud risks: Discrepancies can hide fraudulent activities. When numbers don’t add up, it might indicate deeper issues, including misappropriation of funds.
- Operational challenges: Inaccurate data can lead to poor day-to-day decisions. For example, if you overestimate your cash balance in the books, you might end up spending money you don’t actually have.
- Compliance issues: Your financial data should always be correct and ready for regulatory bodies. Persistent discrepancies can lead to fines or other legal consequences.
- Damage to reputation: Consistent errors can harm your business reputation among stakeholders and partners, causing untrustworthiness.
Closing discrepancies helps balance the numbers and maintain the integrity and reliability of your financial data.
Common Types of Reconciliation Discrepancies
Let’s go over some of the most common types of discrepancies:
- Timing errors: As we mentioned earlier, this is a very frequent financial error in reconciliations. If you don’t keep track of all transaction dates, you’ll likely occasionally enter the wrong one.
- Mathematical errors: Simple calculation errors or misapplied formulas can also lead to incorrect totals, especially if you do this manually. This is why it is best practice to automate journal entries and avoid human errors.
- Missing entries: Transactions may not be entered in the ledger. This could be due to oversight or system issues.
- Duplicate entries: Another common error is accidentally entering the same transaction twice. This happens if two different people are appointed to the job or if your financial system is faulty.
- Adjustments and corrections: If you conduct a reconciliation audit without immediately correcting all the errors you find, you will miss the same discrepancies again.
How to Fix Reconciliation Discrepancies
Reconciliation discrepancies are usually discovered during audits, after which they must be corrected to reflect the right balances. Here’s how you can fix any discrepancies in your financial records:
Manual Fixes
If you plan to upgrade your financial system later, you can make manual corrections for now. Verify which transactions have discrepancies, compare them with the corresponding records and make adjustments.
Don’t forget to look for missing transactions. Go back to the last audit and start reviewing any entries after that date. If the total doesn’t add up, you have missing transactions.
Finally, always double-check your work. Giving everything a second glance gives you more confidence that all the discrepancies have been corrected.
Keep in mind that manual methods are time-consuming and unsustainable long-term, especially for enterprises. Instead, look to automate as many financial processes as you can and bring manual work to the minimum.
Automated Solutions
Automated reconciliations are less prone to errors because they eliminate the human factor. They also speed up the reconciliation process.
Aico’s Account Reconciliation dashboard provides a clear overview of your reconciliations. You can monitor workflow, risk status, late reconciliations, unreconciled accounts and balances and other potential bottlenecks - in real time.
Here are the different types of automated solutions you can integrate into your system:
- Transaction matching software: Automatically match transactions to their corresponding records and enter them into your ledger.
- Account reconciliation software: Auto-reconcile accounts with one click to avoid human errors. It’s an all-in-one solution for enterprises looking to optimise their financial processes and free up time for more big-picture tasks.
- Account monitor: Perform ongoing monitoring of your general ledger and catch discrepancies as soon as they happen.
- Compliance task manager: Remain compliant at all times with compliance software that monitors and adapts to regulatory requirements. This is especially important for enterprises in data-sensitive industries that have a lot of legal obligations.
Best Practices for Effective Reconciliation
Aside from automation, there are other practices you can implement to ensure compliance and data integrity:
Set a Reconciliation Schedule
The frequency of reconciliations depends on the size and nature of the business. For enterprises, it all depends on the scope of your financial activities. For example, daily reconciliations are recommended for enterprises with high-volume transactions on a daily basis to be able to keep track of all data.
For tasks like payroll and expense management, enterprises with a moderate flow of transactions should perform them weekly. Deeper financial reviews, such as balance sheet reconciliations, should be a standard practice and performed quarterly. Finally, always perform an annual reconciliation of all records to successfully close the books and start the new fiscal year on a clean slate.
Train Your Team
Ensure that your team is digitally proficient and capable of using automated reconciliation solutions to close discrepancies. If reconciliation is done manually, make sure every team member clearly understands their role in the process (e.g., one person makes journal entries, and another double-checks for discrepancies).
Review and Updates Procedures
Stay up-to-date with the latest reconciliation practices to continuously improve the workflow. As your enterprise grows, you’ll naturally have to incorporate new methods to keep up with the increasing complexity.
Maintain a Discrepancy Log
Document all discrepancies as you identify them and outline the steps you took to correct them. That way, you can go back to them if they happen again.
These practices will help you maintain a smooth and error-free reconciliation process.
Automate with Aico
Struggling with reconciliation discrepancies? Aico’s automation tools help you resolve discrepancies, saving time and reducing financial risk. Our advanced technology ensures accuracy, compliance and efficiency in your financial records so that you can say goodbye to manual errors and tedious reconciliation processes.
Book a consultation today to see how Aico can transform your financial processes. Call us now or schedule a demo to experience hassle-free reconciliation.