Does Your Municipality Need Bank Reconciliations? Ensure Your Records Match the Bank’s.

A bank reconciliation is a process that compares the records of a local government’s bank account with the local government’s financial records.  

When a local government makes a deposit or a withdrawal from its bank account, it records the transaction in its financial records. Similarly, the bank also records the transaction in its records.  

A bank reconciliation involves comparing transactions recorded in the local government’s financial records with those recorded in the bank’s records.  

Unfortunately, a common finding in many local government audits is the lack of timely bank reconciliation. Another challenge local governments face is the uncertainty of who should complete the bank reconciliation process.  

Why are Bank Reconciliations Vital for Local Governments? 

Since bank reconciliations help local governments monitor their finances, it’s critical to have a robust and well-documented process to:  

• Ensure accuracy: Bank reconciliations keep a local government’s financial records on the up and up. Any discrepancies between the bank and the government can be identified and corrected. This helps to ensure financial records are accurate, a mandate for making sound financial decisions, and maintaining the public’s trust.  

• Detect fraud: Bank reconciliations can also help to detect inconsistencies and fraud. Unexplained discrepancies can be a red flag for fraud, such as embezzlement or theft.  

• Stay in Compliance: The Michigan Department of Treasury audit procedure manual for local governments requires bank reconciliations to be “timely” – completed within thirty days of month end.

• Manage a Budget: Accurate financial records are necessary to make smart budgeting decisions based on reliable information.  

Who Should Perform a Bank Reconciliation on Behalf of Local Government?   

Oversight of this function requires a separation of duties, meaning the person who performs the bank reconciliations should not also have access to the recording of transactions in the accounting records or processing of cash disbursements or receipts. Any differences identified between the accounting records and the bank statements should be adjusted by someone other than the person handling the reconciliations.  

The Michigan Department of Treasury audit procedure manual addresses the importance of appropriate separation:  

Duties must be segregated among different people to reduce the risk of errors or misappropriation. No one person should have control over all aspects of the financial transactions. An individual is not to have responsibility for more than one of the three transaction components: authorization, custody, and recordkeeping. When the work of one employee is checked by another, and when responsibility for the custody of the assets is segregated from the recordkeeping related to that asset, there is an appropriate segregation of duties.

Local governments, including townships, tend to focus on interpreting what a specific statute might say instead of best practices that ensure timely reconciliations and the appropriate segregation of duties.  

The most important thing to consider in bank reconciliation is not who executes the process but having an agreed-upon process documented in a board-approved policy.   

Determining a Strong Internal Process  

The treasury performs both tasks in many local units without a separate finance department, supported by the Michigan Department of Treasury audit procedure manual.   

The treasurer must keep track of the total cash and investments allocable to each fund and reconcile these amounts to each month’s bank statements. A listing of all cash and investments, along with a copy of the bank reconciliations, must be provided to the local unit accountant or bookkeeper each month (this would be the clerk in a local government unit without a separately employed bookkeeper). The accountant or bookkeeper must reconcile the cash and investments recorded in the general ledger to either the treasurer’s reconciliation (if it is adequately reconciled to the bank statements) or to the bank statements directly.

To help strengthen the separation of duties, the person managing cash and deposits should, when possible, be different from the person that handles the bank reconciliation. This can be difficult with limited staff. Some units have success when the deputy treasurer handles most cash receipting depositing responsibilities, and the treasure takes on the bank reconciliation.  

Suppose a local unit still needs to have separation. In that case, the best solution may be to have the person with the least cash/check handling responsibility complete the bank reconciliation and have a second person not involved in the process review and sign-off bank reconciliation. This could be another staff person in the local government or an elected official.

Recapping the Highlights  

• In summary, bank accounts must be reconciled in a timely manner (within 30 days of the month’s end). 
• Where possible, bank reconciliations should not be completed by an individual involved in the receipt/bank deposit process.  
• Small governments might need to identify a separate person to review and sign off on the completed bank reconciliation.  

• Information should be provided to the clerk/accounting team to ensure the general ledger records are correct.  

There is not one solution for a local government, but make sure you have the necessary segregation of duties and have the board adopt a policy reflecting your community’s process.   

Let the Experts Help Craft a Bank Reconciliation Process for Your Government  

The government consulting team at Maner Costerisan is here to help create and review bank reconciliation processes to ensure they work for your local government and include appropriate controls to reduce risk.  

If you need assistance evaluating your current process or could use some additional support with determining best practices for fiscal and operational health, contact Rod Taylor, Senior Governmental Consultant, at rtaylor@manercpa.com or maner@manercpa.com.