This story gets more views than any other on my blog, except for the wooden beer carrier. But nobody ever leaves any comment. Do you like it? Was it interesting? Was it lame? Did it leave you with more questions? OK, I’m going to beg you, please leave some sort of comment after you’re done.
When I was the Manager of Internal Audit at a bank, they had a separate computer application to manage commercial loans. This was because the commercial loan system was new and had not been integrated with the retail system. This situation had been in place for almost a year. But the tellers who processed these loan payments had to enter them into the retail banking system to properly account for the cash, and the retail system did not have any automated interface with the commercial loan system. So the “other side of the transaction” from the debit to cash was posted to a “suspense account.” Suspense accounts are notorious for problems, issues, fraud, errors, etc. They can be set up for any number of reasons. Most of the time, the reason is related to timing of the transaction in that only part of the transaction is completed first, and another part requires time or research or some other manner of processing.
The next step in the transaction was for someone in commercial lending to “move” the payment information from the suspense account into the commercial loan system where the payment could be accurately broken into its component parts – principle, interest, late fees, etc. So here we have a myriad of individual payments flowing into the suspense account each day, every one listed individually. And then, one or more days later, chunks of payments would move out of suspense and into the commercial loan system as the employees in the accounting department got to them. The problem was that when the chunks of payments were transferred out, there was no direct link to the initial individual payments. The process was generally a first in-first out basis, but if there were questions or problems or any complicating factor, a certain payment made on a Monday might not get “cleared” until the following week, while the other Monday payments were cleared in 3 or more big chunks on Tuesday, Wednesday and Thursday. And of course, the chunks that were cleared each day included payments made over several of the previous days.
So you have a LOT of small individual payments flowing into the suspense account every day, and you have larger chunks representing any manner of combinations of those payments flowing out of the account every day. The $64,000 question was, at the end of any particular day, did we know what was left in the suspense account? The answer was no. And the balance in the account was $1 million, give or take. This meant that if someone was creative, they could have easily began “lapping” the payments and stealing money from the suspense account and nobody had any control over the account.
This is why suspense accounts are notorious targets for fraud. Without very strict daily reconciliation controls, it can be the easiest thing in the world to steal from the account and almost never get caught.
So how should you “reconcile” an account like this? Every day, you should be able to produce a list that includes every individual item that was entered into the account, but not yet moved out to where it ultimately belongs. The simple sum of the transaction on the list should equal the ending balance. That individual list then gives you the ability to check it for accuracy, either with some audit sampling plan or other procedure. This daily reconciliation list could get complicated if there are errors in the transactions used to clear the account. The more complicated the account activity, and the greater the volume of transactions, the greater the risk of fraud.
The vice president responsible for this mess was an arrogant SOB who didn’t have a clue what he was doing. I discovered he was also several months delinquent on his personal mortgage payments with the bank. That’s a big problem, but one the bank management chose to ignore. He kept insisting that things were OK, but eventually I was asked to try and get the account under control. There was a huge amount of detail involved, but once I was able to break the chunk transactions into their individual component amounts, I had a basis for matching the individual transactions flowing into the account with the transactions flowing out. I had to use Excel and also reverted to printed reports because it was almost a trial and error process to match the payments up. After about 4 straight weeks of work, I had succeeded in matching up almost a year’s worth of transaction, over 90% of the transactions. And I did not see any evidence of any fraud. This was some good work that involved some basic critical thinking skills and a little creativity. I tried to explain my reconciliation process and procedure to the manager of the unit and to the vice president. I showed them my working papers. They didn’t understand it. And since I had not yet fully reconciled the entire account, they claimed to have no confidence in my work, so the manager proceeded to essentially re-perform my reconciliation work, using several clerk and taking 2 more months to do it. Stupid!
The good news was that the bank president did understand, and forced the vice president out. Naturally, he landed at another bank in an neighboring bank.
accounting, bank auditing, Banking, cash, fraud theft embezzlement internal controls small buisiness, Internal Audit, internal controls