Pub. 2 2013 Issue 3

12 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s A bank customer was having trouble with cash flow and was writing checks before he had money to fund the checks. The checks would appear on the daily overdraft listing. The loan officer for the customer gave instructions to the bookkeeper to call the customer daily letting him know how much he was overdrawn. The customer would then bring in deposits to cover the overdrafts. This kind of event happened with Jonathan’s Veterinarian Hospital several times a month and then several times a week. Eventually it became a daily occurrence. The bookkeeper and Jonathan talked daily. One day Jonathan could not make it to the bank and asked the bookkeeper to hold the checks until the next day. She agreed. She recorded the checks as being returned to the correspondent bank, but did not send the items to the correspondent account. The next day, Jonathan brought in a deposit to cover the checks and the held checks were charged to his account crediting back the correspondent account. This extra-day holding method started occurring frequently. Occasionally Jonathan would not bring in deposits to cover the checks. The bookkeeper started holding more and more checks longer and longer. Eighteen months later it was discovered that over $500,000.00 in checks were being held in the bookkeeper’s drawer. Jonathan filed bankruptcy and the bank had a huge overdraft loss. Similar situations have occurred in several different banks. On at least one occasion, the bookkeeper, and not the customer, served jail time as a result of the actions. In each of these cases, the loss could have been prevented altogether or at the very least discovered quickly if the bank had very basic procedures in place. The checks were neither returned to the correspondent account nor charged to the customer’s account. This resulted in the bank’s records showing a balance in the correspondent account which was higher than the actual balance in the correspondent account. In each case, the bank’s correspondent account was either never balanced or balanced only by the bookkeeper who was holding the checks. Every bank must require all correspondent accounts, suspense accounts, and transit accounts to be balanced regularly and balanced by a second person at least monthly. A balancing of the correspondent account, if done regularly and properly, should be a simple daily process. You list as reconciling items any amounts which the correspondent bank shows as being sent to your bank but not yet recorded by your bank. You also list any items your bank recorded as being sent to the correspondent bank which the correspondent bank had not yet received when the account statement was printed. These reconciling items should equal the difference in the balance recorded on your bank’s books compared to the balance shown on the correspondent bank account statement. If the correspondent bank recorded a different amount as sent or received than your bank recorded on its books, the errors need to be immediately researched and corrected. If a reconciling item is more than five days old, the item needs to be researched to determine whether the correspondent bank records or your bank records are in error. There should be no reason that any reconciling amount is carried on the books for more than a couple days. The carrying of a reconciling item for more than a day or two indicates that the books of the bank are out-of-balance with the actual funds in the correspondent account. When a second person balances the correspondent account at least monthly, such person needs to complete the full balancing process from start to finish including both the determination of which reconciling items are necessary and whether each reconciling item is valid. Simply adding up the columns to see if the reconciliation is mathematically correct is not the same as having a second person balance the account. To be an adequate procedure, the second person needs to have a complete understanding of the process and verify the validity of each reconciling item. The over-helpful bookkeeper problem as described above is only a small part of the problems that develop when a bank chooses not to properly balance its correspondent account, transit account, or suspense account. Allowing these accounts to remain out-of-balance can result in embezzlements in banking. The correspondent account, transit account, and suspense account are used most often by dishonest employees. Many of these embezzlements start as small amounts which the embezzler justifies in his own mind as “borrowing“ the money. He simply pulls a check drawn on his own account from the processing stream to prevent the check from being processed and bouncing. The result is an out-of-balance correspondent account or transit account. Occasionally, after payday, the employee will go ahead and run his check through processing, charging his account for the check. However, once the line is crossed, it is easier to steal money again the next time his account is short. These types of embezzlements usually start small and grow larger and larger until the theft is discovered. These kinds of losses can be discovered quickly while they are still small if a bank uses proper procedures in balancing its correspondent, transit and suspense accounts daily and always has a second person balance the accounts at least monthly. For more information, please give us a call at (785) 228-0000. SECURITY OFFICER’S BY-WORD OUT-OF-BALANCE CORRESPONDENT, TRANSIT, ORSUSPENSE ACCOUNTS RESULT IN LARGE LOSSES By Charles M. Towle, Senior Vice President Kansas Bankers Surety Company