Please help/advise on whether this is a material weakness 1930

  • I work at a foreign branch of a US insurance company and am ensuring that they are SOX compliant for 2007.
    I am in the middle of working on the process narrative for bank reconciliations. On the company’s side, the system entry in the bank GL account is a lump-sum number with no details as to what makes up that number. Instead, the IT people provide a PDF report that gives the breakdown of what comprises that number. This report includes all claims activity that affects the bank account (i.e. checks issued, reversals, adjustments, etc.) Sometimes there is no check number reference at all since the claims people can enter in dummy numbers in the check number field too.
    Every month, the person who does the bank reconciliation spends considerable time re-keying the information from the PDF report into an excel spreadsheet. He does a totals check against the GL to make sure that everything is accounted for but I don’t believe he goes through and verifies every little detail (i.e. check numbers in the excel sheet are correct). After the rec is complete, the manager does sign it but I highly doubt he goes through it in detail verifiying all the data.
    The fact that he re-keys all the information into an excel report from which to work from is a weakness I believe because the probability of error is definitely there especially since he doesn’t verify all the data, only the grand total. However, would this be considered a material weakness? Or does the fact that the manager signs the bank reconciliation provide sufficient control to overcome this weakness?
    Also, would it be advisable to suggest that this report be outputted by IT in two formats? (i.e. one in excel and one in PDF). The fact that he wouldn’t have to re-key the data would eliminate this opportunity for error (Assuming of course that proper implementation procedures were followed.)
    Thanks for your help.

  • the system entry in the bank GL account is a lump-sum number with no details as to what makes up that number
    I really do not like the sound of this. I would also be worried about the breakdown coming from IT in pdf format. I would prefer to see Finance getting this information directly from the bank.
    Whether it is a material deficiency will depend on the materiality in the context of the group as a whole.

  • This sounds like a very inefficient process. I agree with Denis that this process should be looked at from a materiality perspective in relation to the whole group.
    The fact that a bank reconciliation is being prepared and reviewed would seem to properly address a significant control. As long as there is adequate segregation of duties in relation to cash receiptes / disbursements / recording and reconciling the accounts, there is probably not a control weakness at all. The fact that the reconciliation process is inefficient is more of an operational efficiency issue than a control issue.

  • My apologies. Maybe the way I worded things was not clear.
    the system entry in the bank GL account is a lump-sum number with no details as to what makes up that number
    What I meant here was that the system entry is all the data being fed into the general ledger related the company’s day-to-day operations not data coming from the bank. When these amounts are fed into the general ledger, it only comes out as a bulk number. i.e. For the entire month of December, it’ll have a single number of say USD1 million dollars worth of checks issued. Then at month-end, a PDF report is generated to give you a breakdown of what makes up that USD1 million dollar journal entry.
    The Finance department does get physical bank statements directly from the bank including something called an ‘Account Reconciliation Report’. This account reconciliation report lists each check cashed by the bank and is used to match items in the data keyed from the PDF report. I am told also that the US home office receives some sort of data transmission from the bank on a weekly basis which lists the items cashed by the bank on a daily basis but for some reason, it is never provided to the branch office for use nor is it ever fed directly into the general ledger.
    The bank reconcilation relies entirely on the physical matching of items between the bank statements and the system report.
    Oh by the way, thanks for your input Denis.

  • I agree with kymike, this sounds like a inefficient process but that does not make it a material weakness. It would appear that you are satisfied that the GL reconciles to the bank account using independent data from the bank? Some of the concern seems to lie around the potential for keying errors but as long as the individual entries on the pdf agree to the bank statement and then the rec is agreed to the total in the GL that concern would be addressed.
    Do you believe you have sufficient control around the processing of the payments and receipts as that should give you comfort that the bank’s figures are materially correct. In addition are you comfortable that these processes feed correctly into the GL even if it is aggregated into a large batch figure?
    As Denis and kymike indicate you should look at this ‘holistically’ and establish what comfort you get from the overall process.

  • Thanks for your advice everyone. I look at this whole process in a ‘broader’ scope with the pointers you have mentioned.

Log in to reply