Beautifully Balanced Bank Reconciliations

Are Your Cash and Investment Accounts Ready for the Year-End Audit?

Preparing for the cash and investments part of the audit can be a breeze. Your auditor will also have high hopes of flying through this section and moving on to other areas. Don’t shoot the auditor down though with bank reconciliations that don’t balance or that have reconciling items that are stale, questionable, or just flat out wrong. Squeaky clean bank reconciliations are key to making this part of the audit go off without a hitch. 

Why are beautifully balanced bank reconciliations so important?  Because the bank reconciliation is a bridge the auditor must cross to get from the account balance the bank says you have versus the account balance shown on your books. You see, the auditor simply wants to verify that the Balance per Books is correct, but that process must start with what the bank says the balance is as of the year-end date.

As you know, the Balance per Bank rarely agrees to the Balance per Books. And YOU must explain WHY. The WHY comes in the form of reconciling items.

Reconciling items are customarily made up of Deposits in Transit, Outstanding Checks, and the sometimes dreaded Other Reconciling Items. Therefore these will need to be listed in detail on the bank reconciliation itself or on supporting schedules.

All of the reconciling items must be clear and verifiable. If they are not, you potentially have some dangerous holes in your bridge. Therefore keep an eye on the reconciling items throughout the year so if problems emerge they get resolved quickly and don’t grow into a crisis by year end.

Specifically, here is what you should do with your bank reconciliations during the year and especially when preparing for the audit: 

  • Checks that don’t clear within 90 days most likely will never clear.  Investigate these and take appropriate action. (Void and reissue if needed)
  • Deposits in transit not shown clearing on the subsequent bank statement could indicate a big problem. What happened to the money? Investigate immediately!
  • A reconciling item for a transaction not posted to the books technically doesn’t exist. Simply post the transaction!
  • Other items contributing to the bank versus books balance difference should also resolve themselves within the subsequent month. Don’t let these hang around.
  • Displaying a reconciling item that says “Amount to Reconcile” or “Unidentified Variance” simply means the account wasn’t really reconciled. Don’t even go there.

But what about the investment accounts? If your governmental entity invests like most others you are not likely to have fancy investments. Due to the need for safety of principal and liquidity, you probably have CD’s and government investment pools. If this is the case you will simply have an easy bank reconciliation to complete for each of these. If you keep up with posting transfers to and from these accounts and post interest income then a reconciliation may not even be needed.

In addition, there are other things you need to do during the year in order to steer clear of problems in the cash and investments area at audit time. Make sure you’ve considered these other important tasks as well:

  • Don’t pool money together that is required to have it’s own bank account.
  • Make sure pledged security coverage will be adequate at all times during the year.
  • Ensure the Depository Contract with the bank is current.
  • Get the Investment Policy reviewed and approved by the governing body annually.
  • Make sure the Investment Officer gets 10 hours of training every two years.

Okay Did you Get all That?  Don’t Worry, Here’s the Summary Checklist.

The Summary Checklist for Cash and Investments

Do This During the Year, Before it’s too Late!
1. Only pool the cash accounts into one common bank account that are allowed to be pooled.  For example, you must keep debt service money, funds received from bond issues, and money held in trust for others in a separate bank account. You can pool General Fund money and most special revenue fund money together for administrative efficiency.
2. Review the amount of pledged securities provided by the depository bank.  If it appears the bank is cutting it too close, request an increase.  You could also leave a reminder for yourself to transfer money out to investment accounts more quickly during the heavy tax collection months. Audit findings in this area are easy to avoid but you must plan ahead.
3. Make sure your organization invests its funds in accordance with an Investment Policy that is reviewed and approved by the governing body annually.  Also, make sure the Investment Officer gets at least 10 hours of investment training every two years.
4. Make sure your organization has a current Depository Contract with its bank.  Among other things, this is also the document that requires the bank to provide the pledged securities listed above, and in what amounts.
5. ​The importance of a clean bank reconciliation as of year end is mentioned below.  This doesn’t mean you can go all year without doing them and then just get them ready at audit time.  It is important to prepare the bank reconciliations in a timely manner thoughout the year. Within two weeks after the end of each month is a good guideline.  In addition, a best practice internal control is to have someone outside of the bank reconciliation process review and document the approval of the bank reconciliations with a sign-off.
Do this After the Year-End, When You’re Getting Ready for the Auditors
1. Prepare a bank reconciliation for each bank account that is free from stale, potentially invalid, or unverifiable reconciling items.  Investigate the stale items and resolve or remove them accordingly.  Do you really think outstanding checks greater than 90 days old are going to clear? Outstanding deposits greater than a month old could be an indication of a big problem!  Also, remember that there is no such thing as a reconciling item for a transaction not posted to the books. Simply post the transaction!
2. Before you provide the bank reconciliations to the auditor, verify that the Balance per Books shown on the bank reconciliation still agrees to the actual Balance per Books in the accounting system.  Sometimes you reconcile the statements, but then transactions inadvertently post to the prior period after the reconciliation has been completed.
3. Investment accounts, especially with the investment pools, usually don’t need a reconciliation.  You might just need to post interest income as of year end.