Indeed, anyone could be fooled into believing that reconciliation is a straightforward concept even with the auditor’s perspective in mind, but is it really understood the way it’s believed?

In my experience, it is a classic case of being easier said than done, thereby never being understood in substance. Had it been, it would never have been left as something done by auditors as part of their procedures, but practiced by every business manager in everything that needs managing!

How is it so? That’s what I’ll unravel here.

Simply put managing is the act of planning, organizing, controlling, coordinating activities and actions to an end (fulfilling business objectives). It’s not possible to reach that end without ensuring that everything has been managed the in a manner it was meant / desired to be.

Both, the desired manner and the end (goal / objective) represent criteria. To ensure that the act of managing led through the desired manner to the end requires reconciliation with the laid-out criteria. Yes, reconciliation is that basic and pervasive. Let’s see how:

Reconciliation was never just meant to be for the records, it’s essential for every managing act and component. Reconciliation of records became commonplace owing to accounting and external auditing. Undoubtedly, accounting profession and external auditing came to practice the concept in a way, it seemed to be their proprietary, but it was never meant to be so.

The accountants and their brethren in external auditing both hailing from the accounting profession understand reconciliation in an identical manner, yet somehow even they at times differ and falter in its application, leading to records mismatch and even financial statement frauds.

Traditionally known as the core substantive assurance procedure in external auditing, whereby balances of the underlying and source records are matched to the summation records that form part of the financial statements or matching an external record balance to an internal record balance, with the help of items called reconciling items, reconciliation is the undoubtedly the biggest weapon in the external auditor’s armory.

And it’s the easiest one to grasp and use as well. Matching records, balances, finding items to equate and equalize balances, identifying causes of differences, reviewing and resolving these to settle complex mismatch issues, agreeing totals, counting physical quantities to records and identifying differences amongst sales receipt and consumed inventory leading to fraud discovery for instance, are all classic examples of reconciliation.

So why is it that something that’s so useful and naturally understandable not frequently applied apart from traditional accountants use and why even accountants sometimes falter in its application?

The answer lies in our approach which is lacking in its understanding of the art of reconciliation. Approach towards almost everything we come across!

Accountants’ problem is simple; despite having sound understanding of reconciliation, they relegate use of reconciliation to preparation of financial statements and external auditors keeping its application confined to substantive assurance. That’s when they sometimes falter and that faltering yields into disasters.

Accountants need to ensure that not just the accounting records but also the non-accounting records that they prepare for instance, invoices register, receipts records, etc. duly reconcile with the accounting records. Similarly, the external auditors should use the capabilities of reconciliation in all records they obtain from the audit client to corroborate the information and do not just keep its use limited to agreeing ledger balances.

Likewise, apart from accountants, people behind the wheel in all functions / departments of an entity, need to take a leaf from the auditor’s playbook. All records that are produced in sales, marketing, HR, production, IT, procurement, etc. should be prepared in a manner that the data stands fully aligned and reconciled with the factual position of the events.

The records prepared need to reconcile with the actions taken. The actions taken need to reconcile with decisions made. The decisions made need to reconcile with information assessed and evaluated. The information used needs to reconcile with the data. The data needs to reconcile with the events that occurred.

Yes, that’s how reconciliation is needed at every step of the process and clients need to comprehend that their theoretical knowhow of reconciliation is somehow greater than the practical use, so that the practical deployment of reconciliation keeps improving and evolving.

But then, what will the internal auditors do, if internal audit clients do not just gain the correct understanding of reconciliation but also start practicing it? Auditors might believe if the clients grasp the true art of reconciliation, their need will dwindle, but that’s just not possible.

It’s going to be the internal auditors who will be performing their own reconciliations of varied types, for instance a cross reconciliation between the accounting and non-accounting records or a reconciliation between several non-accounting records produced by different teams.

And who do you think will guide the client on which data to reconcile to which information, internal auditors certainly!

But yes, the internal auditors’ use of reconciliation is certainly limited, to the extent of our imagination!