One of the most powerful separation of duties controls to confirm that accounts have been prepared correctly is Account Ownership. Account Ownership is a control which gives the Accounting Officer, the person who is responsible for the Annual Accounts, the ability to confirm that all balances are reconciled and supported by appropriate evidence. The owner is then responsible for implementing a process to confirm that the balance is correct.
There are three components to implementing a strong Account Ownership Control:
A policy assigning account ownership roles and standards,
A process to reconcile accounts back to their source documentation, and
Monitoring to confirm that all accounts have been approved.
The Account Ownership Policy
The Account Ownership Policy sets out who owns each account, the frequency that each account should be reconciled, and the materiality threshold for when an account is materially misstated. It needs to assign a minimum of two roles:
An owner who is responsible for confirming the balance is correct, and
A reconciler who prepares a reconciliation between the actual balance in the account and the source.
These two roles provide effective separation of duties in confirming the accounts balance. The account's reconciler prepares the evidence and confirms that the balance in the account is correct. If there are any differences, they will itemize them and arrange for their resolution. This mitigates risks related to valuation, occurrence, and authorization. The owner is responsible for confirming that the process has been performed correctly and signs off that the risks have been effectively mitigated.
An account ownership policy also sets the frequency of reconciliation. Some accounts, such as cash or bank accounts, should be reconciled daily to mitigate operational risks related to theft and fraud. Other accounts, such as long-term liabilities and equity, may only require quarterly or half-yearly review because they are only prepared at the time of filings or external reporting.
The policy should also set a materiality threshold. This can help reduce the manual effort in managing the accounts, and the workload on financial controllers. From a financial control perspective, only those accounts which would materially misstated the financial statements will require correction. The main exception is cash and bank which should not have any differences.
The Chief Financial Officer should approve the policy which provides management tone, a COSO requirement.
Process: Preparing the reconciliation
Each control must have a defined process, and the process which supports account ownership is called is called Reconciliation. Each reconciliation should be divided into three sections:
The actual balance which has been posted into the ledger. This is taken directly from the accounting system.
An expected balance which is taken from the source documents.
The reconciling items should be listed which explain why the actual balance is not the expected balance.
This then should bring the final reconciliation to zero. If the reconciling items are material to the overall balance and would cause a user to misunderstand the accounts, an adjustment should be made to correct the balance.
The main challenge to successful reconciliation is correctly identifying the source. There may be several systems which are used to process transactions, and within each there could be errors. If reconciliations are not implemented between each transfer of data, the final accounts preparation may be misstated because there were reconciling items not identified. It is the responsibility of the account owner to ensure that all items have been fully reconciled.
A strong control environment includes monitoring. The monitoring activity is a member of senior management, usually the CFO or a Director who is above the account owners, confirming that all accounts have been approved. The CFO should circulate a list of unapproved accounts and request that they be signed off immediately. Additionally, a Risk and Compliance Manager, or other second line of defense role, should sample individual reconciliations to confirm they have been prepared correctly, account for all in-scope transactions, and were appropriately signed off.
Preparing these controls is complex and requires a full understanding of the accounting required for each account, an account ownership policy must be implemented, and staff must be training. Advancing to IPO is an expert in designing controls and implementing them. If your company does not have an effective account ownership process, contact us today for a free consultation.