I’m sure we’re all aware of the standard definition of reconcile – but what does it mean when we’re talking about money, and more specifically, accounting?

Well, reconciling is a pretty basic accounting procedure where the accountant’s records are compared with the bank statement of the company to see if everything ‘checks out’. Sometimes, a discrepancy is apparent, but it’s only because of the time difference – something hasn’t been recorded yet, or things have been recorded on one but not the other – that there’s an issue.

Sometimes if an outside accounting is reconciling, they won’t realize that the business is using a system different from GAAP, or the generally accepted accounting principles. The majority of businesses do follow GAAP (There are books upon books about the GAAP system), so much so that it’s presumed unless stated otherwise. If these principles aren’t used, it can be very easy for the person reading the documents to not understand what they’re looking at, or worse – presume they know and report something incorrect to the company.

Think of GAAP as the standard of standards. No one really uses anything else – and not disclosing that it does makes the company legally liable for any misunderstandings associated with it. After all, it’s not like someone just tossed together the rules of GAAP in a night and said ‘I guess this works’!

But it’s not all cut and dry. The G in GAAP does stand for general, and you have to realize that these guidelines can be open to interpretation. Sometimes this can lead to creative accounting, which I’m sure you’ve heard of before.

Creative accounting, or massaging the numbers, is when a business pushes the numbers a little to make the company appear more profitable on paper then it is in reality. It’s never right, but this isn’t always a serious issue. Not unless it gets out of hand. Because this sort of behavior can lead to accounting fraud, or cooking the books (A little salt, some basil…).

The end result of accounting fraud isn’t good for anyone. Just look at the news – what happened to Enron was accounting fraud, and you need to consider that massaging the numbers a little could be the first step to something worse.