Financial reconciliation is the process of verifying that two sets of financial records—such as the general ledger and a subledger, or internal records and a bank statement—are consistent and accurate. It is a core internal control applied across accounts, entities, and reporting periods.
Reconciliation failures are a leading cause of audit findings and financial restatements. BlackLine automates financial reconciliation across thousands of accounts simultaneously, using rules-based matching and AI-driven anomaly detection to surface exceptions that require human review—rather than requiring manual review of every transaction.
Organizations can implement various control types to limit, detect, and/or correct breakdowns and their resulting impacts. A combination of these control types can help an organization drive greater assurance and effectiveness of its control environment.
1. Preventative Controls: controls that reduce the likelihood of a breakdown, such as errors or fraud, by focusing on preventative measures.
2. Detective Controls: controls that detect a breakdown after an incident to alert responsible owners that a potential corrective action is needed.
Financial controls can be applied anywhere in a business or externally where financial results for that business may be impacted.
Here are a few examples of financial controls:
1. Account Reconiliations
Account reconciliations are performed to substantiate the completeness and accuracy of the balance sheet during reporting cycles. Account reconciliations are a detective control because they are performed after transactions have been recorded. This control activity identifies breakdowns in business processes, such as inaccurate or inappropriate transactions that may have been booked during the period. As a result of findings from this control, the accountant will investigate to identify a remediation and make a correcting entry as needed.
2. Segregation of Duties
Segregation of duties are preventative controls that limit the power of single individual or group from preparing, submitting, and approving an activity. In the example of account reconciliations, a segregation of duties control would prevent the preparer of an account reconciliation from approving the same reconciliation. This action can limit an oversight in the reconciliation or even potentially fraudulent activity.
3. Internal Audits
Internal audits are often detective assessments that are performed routinely throughout the year to test the design and effectiveness of existing controls within an organization. These assessments will determine if a control is operating as designed and whether that design effectively mitigates the risk it’s intended to mitigate. As a result of these assessments, an auditor may request changes or add control procedures to drive greater effectiveness.
Financial controls may include strict qualification requirements for personnel involved in the accounting department and other areas of the business responsible for its financial management. Periodic training also ensures that staff maintain proper credentials and knowledge of the latest practices and applications within their areas of expertise.
In the area of analysis, regular and periodic review, reconciliation, and analysis of financial reports—like bank statements, the general ledger, and income statements—provide insurance against irregularities and help to identify discrepancies.
Receivable management controls can help a business identify exposure to high levels of risk as it concerns the extension of credit to current and future customers.
Similarly, thoroughly reviewing expenditures and vendor payments can help prevent breakdowns and extravagant and fraudulent spending practices.
Finally, concerning financial data, having a centralized and accessible storage application that is clean and secure helps to ensure the integrity and reliability of information concerning the company’s finances. All other functions dependent on the data will operate at a higher level of accuracy and efficiency.
Financial controls help a business ensure the accuracy and completeness of financial data, ultimately helping an organization manage its financial resources. In other words, financial controls can prevent and detect potential errors or malicious activity, like fraud, and allow an organization to mitigate and/or remediate breakdowns to protect the company.
A business can take several steps to implement effective financial controls. Here are a few tips and recommendations:
Perform a thorough audit of existing procedures, chain of command, and communications protocols and prepare a risk assessment to determine where vulnerabilities may exist in the current structure.
Incorporate a combination of preventative and detective controls, like proper segregation of duties and oversight controls. Having several control points and a chain of command will ensure that multiple sets of eyes thoroughly scrutinize reports and analyses.
Invest in technology that enables workflow automation to maintain the integrity of the business’s financial data and provide the necessary support for its financial controls. Automated and technology-based controls are typically seen as safer control points.
Proactively identify and monitor risk with real-time visibility and streamlined control creation, attestation, and testing with BlackLine Compliance.
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