Putting off reconciliation can have serious consequences for businesses. We discuss inaccurate accounting risks and the importance of timely reconciliation.
Properly applied payments reconciliation ensures a smooth transition between payments processing and dispute resolution. Any delays in a business’s reconciliation can result in serious risk of compliance and security issues, asset loss, and fraud.
Bank statements and general ledger records are the backbone of business operations. They keep track of receipts, outstanding receivables, and collections. Payroll and operating expenses have to be checked, recorded, and verified every tax season.
Timely reconciliation ensures that most back-office functions and processes, and some middle and front-office as well, are performing effectively. Without it, businesses can easily fail to detect, and correct, issues before they become serious.
Dispute resolution and reconciliation begin once a merchant has initiated the settlement process and fulfills the customer order or after fulfillment during the course of settlement. The lifecycle proceeds as follows:
Errors and delays can become a concern at any point in the reconciliation process, and for a wide variety of reasons. Operations staff can make manual data entry errors in accounting. Payments processing with multiple platforms using different data types may not integrate well. Varying settlement times for different payment networks might not match up.
It may even be a simple matter of outdated reconciliation processes and systems or lack of consistency. Whatever the cause, delayed reconciliations can have serious, lasting consequences.
Delayed bank reconciliations, as we have noted, may result from a number of factors. The smallest mistakes in data entry or transfer, payments reporting, or disbursement of cash for payroll or expenses can result in inaccurate accounting.
Staff or improperly managed systems may also overcorrect in order to reconcile accounts, leaving gaps in reports. These kinds of oversights, when not corrected over time by internal controls, lead to unreliable financial reporting and affect a business’s ability to comply with other applicable laws and regulations.
Consistent reconciliation keeps business practices regulated and aboveboard, avoiding painful issues with the IRS during tax season.
Another common effect of delayed reconciliations, asset loss often comes from a business’s failure to track faulty systems and processes. Legacy systems unable to integrate with new payment methods or platforms may have trouble matching transactions or handling cases from different networks. Errors in manual data entry may lead to improper case management, requiring the company to offer customer refunds.
Without a clear trail that is regularly updated and monitored, companies may go months or years before realizing the source of revenue leakage. Reconciling in a timely manner can tighten processes for maximum efficiency and keep asset loss to a minimum.
Fraud is a constant concern for many businesses, but few are looking internally for potential issues. Timely reconciliation helps detect both fraudulent customer payments and fraud committed by staff or executives. When data is pouring in from many different sources, it’s nearly impossible to identify specific patterns or issues until the reconciliation process begins.
When reconciliation is delayed, potential issues like an unusually high number of second chargebacks or refunds, or business operation funds being spent for personal use, can go unnoticed. Larger fraud concerns on a company-wide level, such as embezzlement, are more likely to be caught earlier on if there is a regulated system in place.
Delays in reconciliation make it hard to address external security threats, such as cyberattacks and hacks. While some cybersecurity threats are more obvious, data breach risks, especially in mobile and digital payments, are harder to expose.
Perpetrators may not leave an obvious trail and a business could be unaware they are even under attack until they are able to take a closer look at their current financials. Reconciliation systems are designed to accurately manage bonafide exceptions and report unusual activity.
By delaying reconciliation, businesses open themselves up to a vast amount of risk from both internal and external sources. Having a system and internal controls in place to ensure accurate reporting and dispute resolution can help them keep their processes in check and running smoothly.
As digital payments dominate the business world, it is imperative for companies of all sizes to prioritize timely and consistent reconciliation.