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Finance Leaders can manage risks through a Balance Sheet Focus

Updated: Jul 8

By Darshana Sanghavi

Managing Director APAC, B-eye Solutions

Strong leadership from the CFO of any organisation is critical at this point in time.


The challenges that many businesses are facing in an extremely short period of time are varied, with the majority seeing an impact on the revenue streams.




The focus is firstly on immediate survival actions, and then the next focus is to stabilize the business and address risks better. In my earlier post on LinkedIn (link here), I had mentioned about aspects and areas of immediate survival.


In this post, let us talk about the opportunity that finance leaders have to address business risks better.


Risk management is no longer about reporting on risks from a compliance requirements perspective to check on a box. Risk management is important in relation to the safety and financial integrity of an organization. And risk assessment is an important part of any organisation’s strategic development.


You are required to provide a reasonable assurance that the organization can achieve the objectives of:

• Effectiveness and efficiency of operations

• Reliability of financial reporting

• Compliance with applicable laws and regulations.


When you certify the financial statements what is of utmost importance to you? Are you assured that you are aware of all the risks in the numbers? If not then is there a plan to get there? And what would that entail?


How do we control the inherent risks either due to complex transactions or due to the high degree of judgement and estimation? How do we ensure the required set of internal controls are met?


Account reconciliations

There is a significant opportunity to perform a deep diagnostic on the balance sheet. There is a value in ensuring the balance sheet accounts are clean. Here lies the importance of account reconciliations.


Balance sheet account reconciliations are one of the oldest and most important accounting processes. Yet, in many companies account reconciliations is quite underappreciated as an internal control over financial reporting.


In many companies this control exercise is undertaken after the financial reports are published. As a result this process is seen more as a corrective role effective only in identifying misstatements for correction. Many companies are yet to recognize the importance of an accelerated balance sheet account reconciliations as a process of detective controls whose timely completion is helpful in identifying and correcting errors before filing of financial statements.



Risk assessment

The value of the balance sheet reconciliation process lies in ensuring that this is not just another excel file provided to auditors but more of a risk rating of the balance sheet account itself. The last thing you want is another avalanche of excel spreadsheets which no one wants to look at again. Ensure that the reconciliation actually substantiates the balance and is not just a repeat of the general ledger.


The value in reviewing impairments of intangibles like goodwill, aging analysis of receivables and payables and so on can ensure the focus on key metrics during the uncertain times.


The reconciliation process needs to be defined basis the risks involved in each balance sheet account.


The layer of risk assessment ensures that account reconciliations is no longer just a process whereby A (GL balance) = B (substantiation).


It is this B i.e. the substantiation itself which opens the doors to a very effective risk management.


If the business is driven more basis customers or basis vendors, that should be part of the reconciliation process where for instance preparers substantiate the balances by customers or vendors as required. Third party balance substantiations coupled with aging buckets provide quality inputs to the quality and the risks associated with the balance itself.


Conclusion

The above is a bird’s eyeview to the vast potential of the less appreciated account reconciliation process.


This approach of intertwining risk assessment as part of the balance sheet reconciliation process provides valuable insights for forecasts and plans as well as for specific strategic decisions.


To achieve that we need a seamless integration of the GL with the consolidation and close and the FP&A teams



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