By Don B. Rogers, Flavio Vicente and Jessica Pizzo, Ernst & Young
As insurance companies face shifting regulations and a challenging economy, their CFOs and CIOs are concerned about their organizations' ability to maintain account integrity and respond to expanding reporting requirements. Their overburdened back-office operations, finance staff and technical infrastructure are under pressure to meet ever-increasing demands.
Our experience indicates that challenges within core financial processes and typical legacy finance architecture can result in problems with account integrity, including poor data quality, that make timely and meaningful reporting problematic.
Reconciliation Challenges Some aspects of the reconciliation processes can impede its effectiveness as a control point and increase complexity. For example, using self-implemented solutions to address an enterprise-wide reconciliation process can cause a lack of uniformity which can spur multiple adjustments with inconsistent explanations. Further, with no central oversight of different points of GL-to-source-system reconciliations, the ownership of account and break resolution can be unclear. Multiple teams may examine the same accounts while ignoring others. This can also delay the handling of critical accounts due to unclear escalation paths and confusion over who is responsible for approval.
Reconciliation Approach: Tactical and Strategic CIOs and CFOs together must make tactical (immediate) and strategic (long-term) progress to optimize reconciliation processes. They may benefit from having a "critical" team resolving out-of-balance conditions alongside a "strategic" team improving the overall process. Typical "critical" initiatives can include:
• Identification of unclaimed accounts • Establishment of controls around peripheral accounts • Establishment of interim tracking of inventory, which allows tactical progress to be made while the strategic solution comes into focus
Simultaneously, the strategic effort should target the long-term environment, including:
• Organization model • Operating procedures • Reconciliation accountability and processes • Data management • Technology and tools
Ernst & Young recommends a four-stage reconciliation strategy framework to address the long-term effort:
Stage 1: Current State Assessment The key objective is to document and understand existing processes, policies, systems and resources, including:
• A review of existing documentation • A review of current reconciliation initiatives to understand defined goals and objectives, assess current status and identify issues and concerns • Workshops with business units to discuss the current environment and identify unmet needs • Identification of the initial inventory of immediate and long-term opportunities for improvement
Stage 2: Define the Future State Management should consider the organization's future goals and operating characteristics, including the potential for:
• Common business processes and reconciliation systems • An effective and sustainable control environment • Reduced operating costs • Clearly defined roles and responsibilities for data integrity and reconciliations • Enhanced analytical capabilities through increased automation, elimination of off-line processes and integrated data and systems
Stage 3: Gap Analysis An analysis should be conducted to contrast an organization's desired goals with its current state. Typical activities include:
• Assessing gaps between the current state and the future state and leading practices • Developing options for future initiatives, processes and organizational changes • Reviewing gaps with management and key stakeholders to identify options for the account integrity roadmap
This analysis enables the creation of an opportunities portfolio, which identifies initiatives that should be considered, according to the following criteria:
• Ability to implement • Cost/benefit • Time to implement • Risk to implement • Impact on the current operating model
Stage 4: develop recommendations and roadmap Analysis from the prior stages is used to finalize recommendations for achieving the future-state vision and to develop a roadmap. The roadmap includes a timeline and project sequence detailing how each initiative fits into the plan.
Enabling technologies While technology can be an important enabler, it should only support the process, policies, controls and resources needed to ensure account integrity. Companies will often leverage an array of tools for reconciliation management in order to manipulate data and reconcile accounts.
Today, however, companies are streamlining and standardizing their processes with new technology. Companies typically seek to leverage ERP and financial consolidation software functionality however; these solutions will not suffice, as many reconciliations are external to ERP systems. Some current market solutions are designed to automate the reconciliation process. Most of these tools can extract and compare the details and balances between the GL and reconciliation statements, subledgers and third-party systems.
Considerations on Continuous Improvement While implementing the long-term initiative will bring significant improvements and efficiency, there must be an ongoing effort to track and monitor the overall process going forward. Organizations must identify process owners and establish roles and responsibilities, as well as key performance indicators (KPIs), to measure success and track future changes. They should also monitor KPIs to remain aligned with the organization's priorities. Examples of these are:
• Statistics on the reconciliation status for the period by reconciler and reviewer • Absolute value of aged balances for unreconciled accounts by department head • Absolute value of all write-offs by account category and department head • Number of reconciling and risk items identified by department head, month and for the year
A Long-Term Vision for Change While a short-term effort will bring some temporary control over the reconciliation process, a more comprehensive strategy is required. This concept is gaining priority among CFOs, CIOs and controllers, particularly in light of tighter regulations and a control environment driven by such recent developments as IFRS and the financial crisis. Moreover, companies have found that account reconciliations can also be used to drive improvements across the finance organization.
Editor's Note: This essay corresponds to a longer white paper by the authors that is available by clicking here.