Practical guidance series, Theme 1, Part 2 of 6

Part 1 covered getting the daily client money calculation right. That calculation only means something if it’s checked against reality, which is what reconciliation does, and it’s where the next layer of CASS audit findings tends to show up.

What it looks like in practice

The most common finding is simply aged breaks: discrepancies get identified, logged, and then carried forward from reconciliation to reconciliation without ever being resolved, sometimes for months.

Close behind is frequency. External reconciliations get run monthly as a matter of routine, even where the firm has daily client transactions, despite guidance making clear that a daily frequency is expected in that situation.

A third pattern is internal reconciliations built, wrongly, from bank statements rather than the firm’s own books and records. The rules are specific that internal reconciliations must use the firm’s own records, not a third party’s, including its bank’s.

A fourth is items marked “resolved” without any root cause work behind them. The discrepancy disappears from the open items list, but the underlying process failure that caused it is never addressed, so a similar break turns up again the next month.

Finally, mismatched cut-off points between the internal and external reconciliation data create discrepancies that look real but are actually just the two processes looking at different moments in time.

Why it tends to happen

Manual spreadsheet processes with a single preparer and no independent review are the common thread. Without a documented policy on reconciliation frequency and methodology, “monthly” becomes the default rather than a deliberate, justified decision.

There’s also a pull toward administrative closure: clearing the open items list looks like progress, so items get marked resolved once the figure balances again, even when nobody has actually established why the break occurred in the first place.

Without an aged-items escalation policy, there’s no trigger that forces older breaks to get attention before they multiply.

Steps firms can take

Reconcile daily wherever the business has daily transaction activity, in line with CASS 7.15.25G. Any decision to use a different frequency should be documented, justified, and reviewed at least annually.

Build internal reconciliations from the firm’s own books and records, never from bank statements.

Fund a shortfall or remove an excess identified by the internal reconciliation by close of business on the day it’s performed, as required under CASS 7.15.29R. Where an external reconciliation reveals a shortfall that can’t be resolved immediately, keep the firm’s own money in the account until the matter is finally resolved, per CASS 7.15.32R.

Keep a discrepancy log, distinct from the correction log described in Part 1, that records the root cause of each break and the action taken to prevent recurrence, not just that the figure was cleared.

Put an aged-items escalation policy in place, with defined thresholds by age and value, so breaks get attention before they become entrenched.

Document reconciliation governance, covering frequency, methodology, and discrepancy resolution, in policies approved by the governing body and reviewed at least annually.

Part 3 moves to the legal foundation underneath all of this: whether the account being reconciled is actually the right kind of account, properly confirmed as held on trust.