Reconciliation Risks in Higher Education

April 18, 2019

With tightened budgets in higher education, decreased funding from the state and increased expectations for state-of-the-art facilities, the University must carefully account for every dollar no matter the source of funding. Reconciliations of University accounts are one of the most effective methods available to meet this need, yet UK Internal Audit (UKIA) has recently noted a number of units that don’t perform this essential process on a regular basis, if at all.

Without a complete and thorough reconciliation process in place, issues like accounting misclassifications, unsubstantiated expenditures, and missing documentation can put the unit – and the University – at risk. The impact of these occurrences includes the potential for paying for another unit’s expenses, accounts going over budget, or schemes for personal profit going unnoticed, all of which preclude a department’s ability to plan and appropriately budget.

Reconciliation Requirements

Reconciliations simply refer to the process of comparing two sets of records to ensure that they agree with each other, i.e., that the money leaving an account matches the amount that is shown to be spent. There are two main types of reconciliations, bank reconciliations, and balance sheet reconciliations. Bank reconciliations involve confirming that the general ledger statement matches the corresponding bank statement. Balance sheet reconciling, on the other hand, is the process of verifying the reliability of accounting records by comparing general ledger balances with another internal or external statement or document. For UK, the policy for this involves comparing supporting documentation maintained by the department with the information in the SAP system.

During the reconciliation process, there are five requirements that all transactions should meet:
1. Reasonable – A payment should be fair and sensible and not be excessive. It should reflect a prudent decision to incur the cost on behalf of University business
2. Allowable – It should be a necessary, reasonable, and appropriate purchase of goods or services that are permitted by University policy.
3. Allocable – A cost incurred that is for the benefit of a cost object and directly related to its purpose.
4. Accurate – All payments should be correct in its details, and adequately represent the transaction.
5. Appropriate – Transactions should be suitable in its circumstances, and proper for usage by the University.

Vetting transactions frequently for all these requirements is essential. However, this is not always done. Sometimes a few of the requirements are checked for, but not all five. For instance, the reconciler may check to make sure that a purchase was approved and accurate but may not check to make sure it is reasonable or allowable. It is critical that transactions are assessed for all five requirements to protect the University.

Reconciler Duties

While carrying out their duties, reconcilers must not only make sure they have all the documentation and information needed to reconcile; they must also have a discerning eye for what they are checking. Extra attention must be paid on high-risk items such as food, computer equipment or easily resold objects. The reconciler should also be particularly vigilant on areas with a high potential for inappropriate activities to occur, such as payments for personal service contracts, special activities, and travel expenses.

Reconciliations should also be timely. Ledgers should be checked for all cost objects on a monthly basis and corrected immediately. Errors left unchecked can significantly affect the department’s ability to adapt and plan. Furthermore, the reconciler should perform variance analysis to compare actual operations to budgeted amounts. Once reconciliations are complete, they should be reviewed and approved by appropriate management personnel in order to properly safeguard against reconciliation errors.

As we work together to develop solutions that will help the University of Kentucky to overcome the financial challenges it now faces, outstanding financial stewardship is imperative, and consistent and timely reconciliations are an essential component. If your unit would benefit from some additional financial guidance, please contact University Financial Services or UKIA.

If you would like to receive news and information about current risks, fraud concerns and more, please subscribe to UKIA’s listserv by sending an e-mail to with the following text in the message body: subscribe INTERNALAUDIT-L.

Photo By: Ken Teegardin