What is Automatic Bank Reconciliation, is it possible and is it desirable?

For many people, accountancy andbookkeeping is just a chore and a cost that they would like to keep to a minimum. The less you have to do the better, and there have been huge advances in how accounting software can help the accountant and client, as our own Prelude Accounts is testament to.  But just how far can one go in automating accounts and accountancy practices, from a technical viewpoint?  Also is it really desirable, from a corporate governance and managerial perspective?

One new feature being promoted by many accounting software providers is ‘Automatic Bank Reconciliation’.  In layman’s terms, this is promoted as a new function that can speed up the accounting process by marrying up your bank statement or bank account with the records held on your accounts package. The inherent promise of this is that you are removing the time consuming process (and therefore the associated cost to your business) of having to manually input your bank account transactions into your accounts package or spreadsheet.

It sounds very desirable, doesn’t it?  After all, who really wants to pay a bookkeeper or an accountant to do this if some software can do it all for you?  However, I personally believe this to be problematic for a couple of serious reasons, not least because I don’t think true automatic bank reconciliation is actually possible.

Maybe I am splitting hairs here but for me ‘automatic’ or automation implies that a manual human action is no longer required beyond starting the process in question.  In other words, an automated process would involve pressing a button that triggers a whole series of functions to be carried out without my intervention or supervision until I am notified about or presented with the final result or product of that process.  For me, automatic bank reconciliation does not meet that description.

From the materials I have read about accounts packages that offer “automatic bank reconciliation”, reading beyond the headline I find that the function actually requires a lot more of the user that just pushing a solitary button on your screen.  First of all, there is no technical way for your accounts package to automatically synchronise with your bank account given the levels of online security that most bank accounts have applied to them, and rightly so.  Think of all the passwords that have to be inputted as well as the manual key fobs with the ever changing code that have to be activated and inputted every single time you log into your bank account.  Even if this behaviour can be replicated in an accounts package, would you actually want it to?  What would that tell you about the online security of your business bank accounts?

So having dismissed the ‘magic wand’ definition of automatic bank reconciliation as an impractical and undesirable myth, what does this function actually entail?  As far as I can discern, it involves a three stage process with each of those stages involving human input; a user must download their account statement from their online bank account as a CSV file, which they then must upload to their accounts package. The accounts package will then attempt to marry up the incomings and outgoings of your bank account with your own invoices and those of your suppliers as recorded on your accounting software package. The user must then ‘sign off’ this report, having first checked for and corrected any mismatching errors that may have arisen due to the accounting software confusing one transaction for another with the same amount and/or date for example.

So far, this does not sound like a great labour or time saving application. Given the comparative ease most modern accounting software packages offer for the manual input of or confirmation of data in your books, surely it would be just as simple to quickly do this yourself accurately the first time than have to edit an automated report that may be riddled with confusion and inaccuracies?

To my mind, given that many organisations have standardised pricing for either their products or services, I struggle to see how an algorithm can accurately marry up multiple entries of income for the same amount on the same day with multiple invoices. How would it know that payment X is from customer Y for invoice Z, if you charge the majority of your customers the same amount for the same services or products?

I would argue that this process would be further complicated by the fact that many organisations may pay you from bank accounts that do not clearly identify the company that was invoiced or with a reference that doesn’t clearly identify the invoice being paid. For example, if you have invoiced a company called Acme that happens to be a subsidiary of a larger company called An Example Company, and An Example Company actually makes the payment into your bank account, how would an automatic bank reconciliation process know that An Example Company is doing so on Acme’s behalf for that specific invoice?  Of course, it might be possible to instruct your software to make the connection between the two, but that would require further proactive effort by the user, and that means we are moving yet further away from anything approaching automation or a time-saving function.

Consider also your supplier invoices and other outgoings.  Do you always enter these in your accounting software and write cheques and make online payments in the same consistent manner that an automated bank reconciliation process can reliably identify?

The same questions arise whether the software is attempting to predict payments and receipts from your entered customer and supplier invoices if you haven’t entered the payments and receipts, or is attempting to match the bank’s records with your entered customer receipts and supplier payments if you have entered them.  The problem is compounded if you have entered some but not all invoices, payments and receipts.  Also what about credit notes and refunds?

But let’s dismiss for a moment all the technical questions and concerns I have raised above along with my querying of what ‘automatic’ actually means in this context; even if automatic bank reconciliation was possible and deliverable as implied by some marketing literature, is it really desirable?  Would it ultimately help the management processes, efficiencies and governance of an organisation or company?  I remain sceptical.

For one thing, technical error is not unlikely and is equally as problematic as human error.  A good bookkeeper or an accountant is just as competent and capable as good accounting software, and it is the marriage of the two that gives companies and individuals the assurance that their affairs are clearly in order.

Also, unlike software, a human user has intuition and experience that can be applied to a scenario.  If accounts get muddled, or if mispostings have occurred, a human user can more readily deduce what has happened than software can. The accounting software will have no insight into the real world dynamics or misunderstandings that lie behind accounting errors and it will not be able to reconcile or explain what may have happened.  Isn’t it better to do this at the point of inputting information into your accounting software rather than untangling what has been interpreted through automatic bank reconciliation? I would argue so.

Finally, there is a danger of automating everything as it takes away the insight and supervision required for the financial health of a company or an organisation. By having vital steps hidden out of sight or carried out automatically, you are removing opportunities for employees or owners to flag inaccuracies or concerns about possible errors, misuse of funds or forthcoming financial difficulties that a company may be facing.  As much as such things may be seen as chores or burdens, I would argue they are vital actions that keep businesses sharp, functional and compliant.

You won’t be surprised that I am against the idea of automating bank reconciliation in principle and I urge you to be sceptical of claims made of the benefits it can bring.  In practice I think many exceptions to the rule would have to be managed so as to cancel out any time-saving benefits that may have been gained.

Notwithstanding this, of course automation is always something to be sought to achieve with software for processes and tasks that can and should be automated.  We have received much good feedback from many accountants and their clients and in the coming months we will be introducing new and useful automation features to Prelude Accounts.