Let's Work It Out: The Importance of Reconciliation
Melinda Ordway and Marcia Bohinc - Technical Assistance Bureau
All too frequently, headlines around the Commonwealth have reported the occurrence of missing money, misappropriations, or unauthorized spending in cities and towns. While the risk that a community may fail to detect fraud or otherwise safeguard its assets is a very real and critical problem, perhaps the strongest internal control for managing the situation is the performance of regular accounting reconciliations.
The Division of Local Services (DLS) has continually preached the importance of conducting frequent and prompt reconciliations. A reconciliation involves comparing two separately controlled sets of records to verify whether related account balances agree. This fundamental accounting process helps identify any unusual postings that could be caused by bookkeeping errors, or worse, by deception. The process of proving that transactions are in balance is essential for ensuring the integrity of general ledger data and mitigating fraud.
As a best practice, every community should conduct reconciliations of its two largest assets, cash and receivables, at least monthly to ensure records are accurate and no money is missing. However, the local volume of transactions may dictate that these reconciliations occur weekly, or even daily, given how time-consuming it can be to determine the source of discrepancies.
As the custodian of all revenues, tax titles, and tax possessions, the treasurer must keep a timely and accurate cashbook and reconcile this comprehensive journal of receipts and payments (including bank deposits and withdrawals) against bank statements each month. The collector maintains listings of the community’s various outstanding receivables, each of which is based on a receivable control. In this record of original entry, it begins with the initial tax commitment and tracks each processed collection, abatement, exemption, and tax title transfer, and is adjusted for each issued refund, resulting in the outstanding receivable balance.
After the treasurer and collector have internally reconciled their records, they should provide the balances to the accounting officer for comparison with the general ledger. The financial officers should then meet to discuss any identified discrepancies (caused by missing information, keying errors, timing differences, etc.) with the goal of resolving them. The results of these reconciliations should be reported to the community’s central manager or executive body to verify they were done and provide explanations for any outstanding variances.
Beyond cash and receivables, there are other bookkeeping records that must be periodically reconciled with the general ledger. These include the treasurer’s debt schedule and payroll with holdings, the assessors’ commitment and overlay charges, and other municipal and school department revenue and expenditure records.
To provide guidance and reinforce accountability, local officials should formally adopt a reconciliation policy that identifies each reconciliation to be conducted, assigns responsibilities, establishes deadlines, and requires the results be reported to the chief administrative or executive officer. Sample policies can be found in manuals posted on the Technical Assistance Bureau’s webpage. It should be every community’s goal to prioritize and complete regular reconciliations. Apart from the risk of potentially undetected revenue losses, the lack of timely reconciliations could delay or otherwise negatively impact the certification of free cash by DLS. It could also delay an audit engagement and result in a comment in the audit firm’s management letter.
Friday, December 8, 2017
from the Division of Local Services
May - 2016
The decision to borrow money can be intimidating. To make matters more uncertain, the mechanics of issuing debt may be the least understood financial process among citizens, local officials, and even some professional staff. Generally known is the statutory requirement that a town meeting or a city council can authorize borrowing only by a two-thirds vote. State law also specifies what expenditure purposes may be funded through debt and the allowed duration of the borrowing term (M.G.L. c. 44). The terms of a borrowing are made final when a majority of the board of selectmen or the mayor affixes their signatures to required documentation. However, between authorization and issuance much more occurs with little notice outside the treasurer’s office.
Short-term Debt Short-term debt can be classified best as borrowing through the issue of notes in anticipation of either paying them off or permanently financing the debt. Short-term borrowing also allows communities to make interest-only payments. However, such debt usually has a maturity date of no more than two years, though in some cases, statute dictates a shorter time frame. Additionally, a community might choose to reissue short-term debt and/or to make principal payments under certain circumstances. The various types of short-term debt vehicles used in Massachusetts include the following:
Revenue Anticipation Notes (RANs) – These notes, issued for a maximum of one year, are used to stabilize cash flow when the treasurer’s cash balances are low or forecasted to go negative (M.G.L. c. 44, §4). These notes are issued to fill a cash need, usually until receipt of quarterly or semiannual tax payments or local aid distributions from the Commonwealth.
Federal and State Aid Anticipation Notes (FAANs and SAANs) – These notes are issued to fund spending in anticipation of grant receipts, with the expectation that the note will be paid off upon receiving federal, state or other funds (e.g., Chapter 90 highway project reimbursements).
Bond Anticipation Notes (BANs) – These notes are issued to provide funding for capital improvements. BANs are usually paid off with the proceeds of long-term financing instruments, such as general obligation bonds. However, state law allows for the reissue of a BAN for up to five years if principle payments are made in accordance with an amortization schedule that would be required if the outstanding balance were financed as long-term debt (M.G.L. c. 44, §17). Since short-term debt normally carries a lower interest rate than permanent, this strategy may make sense under certain circumstances.
May - 2016
The decision to borrow money can be intimidating. To make matters more uncertain, the mechanics of issuing debt may be the least understood financial process among citizens, local officials, and even some professional staff. Generally known is the statutory requirement that a town meeting or a city council can authorize borrowing only by a two-thirds vote. State law also specifies what expenditure purposes may be funded through debt and the allowed duration of the borrowing term (M.G.L. c. 44). The terms of a borrowing are made final when a majority of the board of selectmen or the mayor affixes their signatures to required documentation. However, between authorization and issuance much more occurs with little notice outside the treasurer’s office.
Short-term Debt Short-term debt can be classified best as borrowing through the issue of notes in anticipation of either paying them off or permanently financing the debt. Short-term borrowing also allows communities to make interest-only payments. However, such debt usually has a maturity date of no more than two years, though in some cases, statute dictates a shorter time frame. Additionally, a community might choose to reissue short-term debt and/or to make principal payments under certain circumstances. The various types of short-term debt vehicles used in Massachusetts include the following:
Revenue Anticipation Notes (RANs) – These notes, issued for a maximum of one year, are used to stabilize cash flow when the treasurer’s cash balances are low or forecasted to go negative (M.G.L. c. 44, §4). These notes are issued to fill a cash need, usually until receipt of quarterly or semiannual tax payments or local aid distributions from the Commonwealth.
Federal and State Aid Anticipation Notes (FAANs and SAANs) – These notes are issued to fund spending in anticipation of grant receipts, with the expectation that the note will be paid off upon receiving federal, state or other funds (e.g., Chapter 90 highway project reimbursements).
Bond Anticipation Notes (BANs) – These notes are issued to provide funding for capital improvements. BANs are usually paid off with the proceeds of long-term financing instruments, such as general obligation bonds. However, state law allows for the reissue of a BAN for up to five years if principle payments are made in accordance with an amortization schedule that would be required if the outstanding balance were financed as long-term debt (M.G.L. c. 44, §17). Since short-term debt normally carries a lower interest rate than permanent, this strategy may make sense under certain circumstances.
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