Industry Sound Practices for Financial and Accounting Controls at Financial Institutions

By Tschirhart, John E.; Farley, Roseanne T. | The RMA Journal, April 2006 | Go to article overview

Industry Sound Practices for Financial and Accounting Controls at Financial Institutions


Tschirhart, John E., Farley, Roseanne T., The RMA Journal


Over the past two years, the Federal Reserve Bank of New York reviewed financial and accounting controls at a number of large, complex banking institutions to identify industry sound practices. The effort included selected critical financial controls common to financial institutions, such as chart of accounts and account ownership policies, general ledger (G/L) account reconciliations, suspense accounts usage, aging and charge-off policies, month-end closing procedures, and intercompany processes. In addition, the project reviewed the independence of the accounting and finance staff, as well as board of directors and senior management oversight. This article provides an overview of some of the practices institutions may wish to consider with respect to financial and accounting controls.

Financial and accounting controls are critical factors contributing to an institution's operating results and risk profile. Weaknesses can lead to inaccurate or incomplete financial reporting and potentially result in legal fees, fines, loss of reputation, and loss of business. After a two-year review of financial and accounting controls at a number of large, complex banking institutions, the Federal Reserve Bank of New York has identified 11 sound practices that may be useful to banking organizations seeking to enhance their financial control environment.

Institutions establish clear accountability for the development, implementation, and review of financial controls.

The structure for designing and implementing financial controls depends on the culture and environment in each institution. Controls can be developed and exercised in centralized accounting functions, in individual business lines, or in both. In a centralized environment, all accounting and finance staff report to either the CFO or controller. In a more decentralized environment, business line accounting and finance staff report to the business line CEO, with indirect reporting lines to the corporate CFO, although a few functions may be controlled centrally. In both structures, the corporate CFO typically takes the lead in addressing accounting matters. The key component of all types of control structures is clear accountability at both the corporate and business-line level, as evidenced by organization charts, job descriptions, process flows, and other documentation clearly illustrating the roles and responsibilities of the respective finance functions.

Accounting and finance staff are knowledgeable and independent.

The accuracy of financial information depends on knowledgeable, independent accounting staff who accurately report financial data. Accounting and financial staff at the institutions we reviewed possess such qualities; accounting staff has direct or indirect reporting lines to the CFO, who, in turn, is part of senior management. Even in institutions with matrixed reporting lines, accounting and finance staff assigned to a specific business line generally report through the corporate finance function. Accounting staff members are insulated from any responsibilities for business line results that could compromise their independence.

Institutions develop and periodically update their corporate accounting policies and procedures framework.

Institutions have an appropriate framework for corporate accounting policies and procedures to ensure that controls are appropriately designed and implemented consistent with their specific management structure and approach. The majority of the institutions develop policies at the corporate level for general ledger (G/L) and chart of accounts management, the intercompany reconciliation process, and the financial statement closing process. Other policies relating to reconciliations, aging and charge-offs, inactive accounts, and suspense accounts are developed at the corporate level, the business-line level, or both. Many business lines develop their own policies and procedures to supplement the corporate policies. …

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Industry Sound Practices for Financial and Accounting Controls at Financial Institutions
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