What is Multi-Step Reconciliation?

Multi-step reconciliation can come in various forms, and the term broadly applies to any form of reconciliation where more than two systems of record are involved in the reconciliation process.

For example, consider reconciling a corporate credit card payment. Reconciliation must be performed across three systems of record: the credit card network, the bank, and the internal record through which all the transaction information must be confirmed and matched.

Multi-step reconciliation can take many forms and varies depending on both the number of systems of record that need to be concurrently reconciled and the nature of the industry in which the reconciliation is taking place. In different industries, there are different regulatory and financial standards that can impact how, when, and why multi-step reconciliation is necessary.

How Does Multi-Step Reconciliation Work?

Let’s return to our example of reconciling a corporate credit card payment. For the multi-step reconciliation process, we need to consider the credit card network (e.g. Visa, Mastercard, American Express, Discover), the bank records, and the corporation’s internal record of the card’s usage.

First, it is important to gather all of the relevant data and information across all three sources. This can include statements from the card network, bank statements, receipts or invoices from the internal record keeping system, and any other relevant documentation.

Next, we need to match each transaction across all three sources, which can be difficult depending on how each source documents the transaction, what information is included in the documentation, and how the transactions may or may not be batched. This ensures consistency and accuracy, and allows for the identification of any discrepancies in the records. In the case of a card, discrepancies may result from things like payment timing differences, processing delays, currency conversions, fees, or errors in recording transactions.

If there are discrepancies in any of the three systems of record (i.e., too much or too little money), they will need to be investigated and resolved to ensure accurate accounting of all funds. This can involve contacting the credit card company or the bank, or reviewing additional internal documentation to pinpoint the timing and nature of the discrepancy.

At many companies, this type of reconciliation is largely done manually, which is complex, time consuming, and prone to error. This type of manual reconciliation becomes even more complicated when it needs to be done at a large volume or at scale.

Looking at our example above, imagine that a company needs to complete reconciliation for more than one corporate card—or in the case of large companies, many hundreds of cards. At scale, this is a monumental talk to complete by hand. For companies that need to complete complex, multi-step reconciliation at scale, having a payment operations platform that streamlines these steps is paramount for efficiency and cost.

Different Types of Multi-Step Reconciliation

There are many different types of multi-step reconciliation. Here we will look specifically at two: Three Way Reconciliation and Intercompany Reconciliation.

Three Way Reconciliation

Three way reconciliation is a specific type of reconciliation process that involves comparing three sets of records to ensure they are consistent and accurate.

The three sets of records typically involved in a three-way reconciliation are:

1. Book Balance: The recorded balance of an account as per the organization's financial records.
2. Bank Statement Balance: The balance reported by the bank or financial institution where the account is held. It includes all transactions processed by the bank, such as deposits, withdrawals, and bank fees.
3. Actual Balance: The balance of the account in question. Depending on where, how, and why a three way reconciliation is being done, the account in question can change.

Let’s look at an example of how three way reconciliation can apply to real estate transactions.

Imagine you are the escrow agent managing an escrow account for the real estate sale of a home. Your job is to act as an impartial third party for the buyer, seller, and lender while safeguarding and accounting for the money being held in escrow during the transaction. Before the sale of the home can officially close, you are responsible for making sure that the funds held in the escrow account have been properly reconciled, to ensure that the correct amount of money is transferred to and from buyer to seller.

In this instance, the three systems of record that must be reconciled are:

1. Book Balance: The record of the account balance and transactions that have occurred in the escrow account. This can include transactions—like deposits or disbursements— to and from both the buyer and the seller.
2. Bank Balance: The bank’s record of the balance of the escrow account and the associated transactions.
3. Escrow Balance: The actual balance of the escrow account.

As the escrow agent, you must perform a three way reconciliation to confirm that the balance and listed transactions of all three of these systems of record match. This process involves comparing the transaction and balance record of each of the three items against one another and confirming that the transactions occurred and the relevant details are correct.

Intercompany reconciliation

Intercompany reconciliation is the process of reconciling financial transactions and balances between different entities or subsidiaries within the same parent company. This type of reconciliation is necessary when transactions occur between different parts of the same organization, such as when one subsidiary buys goods or services from another subsidiary, or when funds are transferred between different bank accounts held by different subsidiaries.

The primary purpose of intercompany reconciliation is to ensure that transactions between different parts of the same organization are accurately recorded and balanced. This helps maintain the integrity of the organization's overall financial records and ensures transparency and accuracy in all financial reporting.

Accurate intercompany reconciliation is crucial for several reasons. It ensures that financial statements accurately reflect the financial position and performance of the entire organization, provides transparency and accountability in financial reporting, helps prevent fraud and errors, and facilitates compliance with standard accounting standards and regulatory requirements.

Intercompany reconciliation generally follows the same process as most types of reconciliation: gathering relevant data and documentation, matching transactions, flagging and investigating any discrepancies, and keeping detailed records of the reconciliation process. Depending on the size and complexity of the organization, the number of systems of record can vary.

Intercompany reconciliation can also be complicated by the nature of the different subsidiaries involved in the intercompany reconciliation. If two subsidiaries need to reconcile against one another but operate in different countries, they may face problems with currency conversion, for example. Similarly, if record keeping standards are not uniform across a parent company, different subsidiaries may keep records differently, making accurate reconciliation a challenge.

To complete intercompany reconciliation, the relevant subsidiaries must provide and compare transaction records for the necessary time period to ensure that they match—if the records do not match, the subsidiaries must also work together to uncover and remediate any discrepancies.