Thursday, March 19, 2009

Protecting The Bottom Line With Diligent Bank Reconciliations

From our audit experience in our practice, we have seen many cases where business owners lost substantial amount of cash from their businesses due to the lack of proper internal control over their businesses’ bank accounts. Their stories sound all too familiar in a way that their employees (usually the book-keepers or accountants) with whom they entrusted the businesses’ bank accounts with, stole money by issuing unauthorized checks to themselves. Before the business owners realized it, their businesses were running out of cash big time.

We are amazed that how so many small business owners and non-profit organizations just never took the bank reconciliation process seriously. If only they did, they would have early on, detected such frauds committed against them.

The following are some of the common fraud schemes used by corrupted employees who are left unchecked with too much trust and control over a business’s disbursement system:

  • Issue company checks to vendors to pay for personal bills.
  • Issue checks payable to “cash”, or to a financial institution to purchase money orders or cashier’s checks.
  • Issue blank checks with the payee line unfilled.
  • Issue checks to pay themselves more than the authorized amount.
  • Set up false vendor into the company’s vendor file so that they can submit false invoices regularly to the company for payments of non-existing products or services purchased.
  • Submit false invoices for payments anyway even the fictitious vendor isn’t on the company’s vendor file.

In order for businesses to secure their bank accounts against insider threats, it’s important that they have a proactive bank reconciliation process in place conducted by an independent reconciler who is cautious, detailed oriented and knowledgeable about bank reconciliations. (eg. an independent CPA, manager, or anybody who is not assigned with the duty of preparing checks or issuing checks)

During the bank reconciliation process, the reconciler should pay attention to the following red flags:

  • Cancelled checks with irregular endorsements.
  • Check payments that have no supporting document in file.

Too often, small businesses and non-profit organizations alike take too lightly the bank reconciliation process and treat it as simply a balancing of the check books. In fact, a bank reconciliation should include examination and verification of the expenses the checks are paying for and the payees the checks are issued to. Any irregularity should be noted and further investigated. Though frauds cannot be completely stopped, having proper control and procedures set up for a bank reconciliation process can surely help to detect fraud more efficiently. Any business or organization should have the following controls in place:

Monthly bank statements with enclosed cancelled checks should be mailed or forwarded to the independent reconciler “unopened”.

  • All cancelled checks have to be reviewed by an independent reconciler for proper authorization, approval and supporting documents.
  • Put in place a monitoring system to monitor the work of key employees.
  • Make sure that the accountant or book-keeper who is assigned the responsibility of preparing and issuing check payments are cleared of background and criminal checks before they are hired.
  • Consider having an employee dishonesty bond for key positions.

Now if your organization has not put in too much thought about bank reconciliations, think again. To find out more information on how we can help your business or organization in strengthening your internal control, or about our affordable services on bank reconciliations, please contact us.

Wednesday, March 11, 2009

Preventing Check Frauds

Given the fact that check frauds bring upon such massive amount of losses to businesses, it's important that your business or organziation make every effort to prevent such frauds. Such efforts include:

  • Always ask for identification and examine the validity of such identification when accepting checks.
  • Learn to identify forged and fraudulent checks and educate your employees to do so.
  • Avoid internal check frauds committed by employees by putting in place good internal control, or merely by being more observant to red flagged employee behaviors.
  • Eliminate any internal control weakness that will provide opportunities for check frauds.

    (Contact us if you need assistance in improving your organization's internal control.)

Facts About Check Frauds

The following statistics on check frauds in America are provided by the American Collectors Association:

  • Check frauds generate an estimated yearly losses of up to $50 billion.
  • About 1.4 million bad checks are written each day which accounts for about $27.3 million worth of fraudulent checks written each day.
  • About 500 million checks are written out of stolen or forged checks each year which produces over $10 billion revenue loss.
  • It is estimated that merchants take in over $13 billion in bad checks each year and such a number increases about 18% on an annual basis.

The U.S. Government Accountability Office reports that prosecutors fail to pursue 75 % of bank checks due to work overload in law enforcement and maintains that in large cities the percentage rises to 90%.