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Just Because it’s Reconciled, Doesn’t Mean it’s OK

By Marilou C. Vroman, CPA, CFE

Most dealers and their personnel in financial management roles are quite familiar with the fundamental requirement to reconcile cash balances with the bank.  Many of our clients perform daily reconciliations in addition to a full monthly reconciliation to ensure all transactions have been captured, and the GL is an accurate representation of the dealer’s cash position from one day to the next.  Because of the inherent risk in cash, is common for an outside auditor to request copies of bank statements and the related reconciliations to ensure proper cash controls are in place.  However, is viewing a reconciliation which balances to zero and ties out to the bank and GL balances sufficient to know your cash is properly controlled?

We often examine bank reconciliations and supporting statements, but from a different perspective.  We know bank reconciliations are usually expected by the controller or CFO and are likely reviewed.  However, our goal is to identify anomalies which may otherwise be missed.  Both auditors and managers will perform procedures such as testing for proper cutoff and ensuring deposits in transit have cleared the bank in a subsequent period for example.  However, one of the blind spots we have found is in the list of outstanding checks.

Outstanding checks are virtually guaranteed to appear in a typical bank reconciliation.  Most outstanding checks will typically be less than a month old.  I don’t know about you, but I have not yet met a person who collects checks instead of depositing or cashing them.   However,  it’s not uncommon to see outstanding checks age several years without clearing the bank.   Even though some dealers have check stock which expressly states “void” after a certain period, such as 90 days, we have seen banks clear stale-dated checks, nonetheless.  At a certain point however, the oldest checks are unlikely to ever clear because they were either lost or replaced and should have been voided.  As such, the detail of outstanding checks is often overlooked when a bank reconciliation is reviewed for completion, since the oldest items seem to stay from one month to the next.  So what type of risk could reside in your outstanding checks?

A simple scheme to divert a dealer’s funds without detection is to use aged outstanding checks to offset or clear  inappropriate disbursements.  For example: Check #51052 was issued for $1,000 to reimburse a customer’s deposit but has been on outstanding for over two years.  An individual with access to cash and the bank reconciliation could easily issue a new check payable to cash for $1,000, void the GL posting in the DMS, and cash the check.  When the check later clears the bank, it can be reconciled with the old outstanding check #51052.  The old check will drop off the reconciliation and no one will question it. With some dealers having outstanding checks totaling millions of dollars, this exposure can be significant.

In a perfect world the bank reconciliation is performed by an individual with no access to cash (segregation of duties).  In reality, smaller accounting departments may not be able to fully segregate all cash functions from the reconciliation process.  In this case, when verifying the monthly bank reconciliation is complete, we recommend looking at changes in reconciling items from one month to the next.  This includes changes in outstanding check numbers, dollar amounts and/or dates.  An outstanding check will normally drop off the reconciliation by either being voided or by clearing the bank.  If neither of these things happened, there may be larger be problem. If an aged item suddenly disappears from the reconciliation or is changed, question it to find out why.  Stay one step ahead and inspect what others don’t expect.

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