Internal Control Tip: What’s in Your Bank Account?

Do you reconcile your bank account to the penny? Do you watch transactions hitting your bank account like a hawk? I don’t know about you, but my personal bank account nowhere resembles that of a school district’s bank account.  From millions of dollars in state aid, property taxes and grants receipts to millions of dollars in disbursements for payroll and accounts payable, we should invoke our hawk-like behavior, especially if you are responsible for reconciling your bank accounts.

I know many individuals that are PDF masters, which is a great talent when you are working with documents that call for manipulation. However, bank statements are one type of document that should never be edited. Unfortunately, it’s been done before and to the tune of $4 million. The perpetrators altered the bank statements and shared those documents with the auditor and other staff involved in the reconciliation process. While this was a very severe and tragic fraud and more of the exception than the norm, we still have be sure that we are able to verify the transactions within the banking system and the general ledger.

So what’s the work around? If you have access to the banking system (read-only is perfectly fine), you should download the activity directly from the banking system versus waiting until the end of the month for the paper bank statement to arrive in the mail. This is especially important if the original doesn’t come directly to you. If you are not responsible for preparing the bank reconciliations but are tasked with reviewing them on a monthly basis, the same bank transaction download should occur for your purposes.

Here are some items for your consideration

  1. Source documentation for receipts should agree to the amounts shown in the bank accounts. Your organization should perform a three way match when reconciling bank accounts. That is, review the source documentation, like tax office receipts, to the bank account, and the general ledger. At times, you may find yourself posting to the general ledger directly from the bank account transactions. However, stop and think about what actually transpired at the respective department. Could more have been receipted but a lesser amount deposited?
  2. The four critical parts of a bank reconciliation are (1) the bank balance at the end of the month, (2) deposits in transit, (3) outstanding checks, and (4) the ending reconciled balance. Anything else is what we scientifically refer to as a Granted you may have some transfers between accounts, but those should net to zero.
  3. Scan the vendors paid for unusual activity. Do you see a lot of interesting entertainment venues? What about wires? Remember that wire transaction descriptions are set by the requestor. It’s okay to ask for the supporting documentation for a few transactions just to make sure.
  4. Reconciliations should be completed a few days after month end. There is no reason to wait, especially, if you have been monitoring the transactions throughout the month. As a reviewer, a delay in the bank reconciliation process should be a definite red flag. Life happens, but when the bank accounts go unreconciled for about six months, how can you be sure where you truly stand in all other areas?

Finally, if you are the reconciler or the reviewer you should not have the ability to receipt any funds or disburse any funds. That would be a segregation of duties issue. See it more as protecting yourself. If you hold the keys to the kingdom (i.e. you can receipt money, pay money and reconcile all of those transactions) the moment something goes wrong all eyes will be on you.

 

Whitley Penn contributes to the TASBO Internal Control Tips at www.tasbo.org/IC-Tips

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