Comprehensive Bank Reconciliation

Comprehensive Bank Reconciliation with Theft and Internal Control Deficiencies Small business issues with fraud and internal theft.

In the case of most embezzlement and internal theft, there are severe issues with cash management that allow these issues which include lack of internal control, accounting records, and bank reconciliation. This lack of policies created a situation in which an employee could pilfer the money (at least in the short term) and place the company at risk. In a comprehensive assessment of accounting practices, the problem is identified. Internal Controls

Many companies make a large mistake in allowing the job of cashier and bookkeeper to be the same. This allows one person too much control over the money. This mistake allows for the individual to use four methods for stealing money. These methods include:

· Altering the value of checks to reflect lesser amounts which hide temporarily the money taken.
· Showing unpaid checks as paid which reflected a lesser amount in the bank statement.
· Changing totals of outstanding checks to show lesser amounts on the bank statement.
· Reducing deposit amounts to reduce the balance on the statement.

These problems are allowed to occur due to a lack of internal controls. There are three primary areas in which there was a lack of internal controls starting with a lack of physical controls. There needs to be physical controls or policies which dictate how cash and checks are dealt with and handled such as locking the checks and securing them, entering them in the records as they are collected. Errors and theft are far more likely to occur when only, “…one individual is responsible for related activities it increases the potential for errors and irregularities” (Kimmel, Kieso, & Weygandt, 2012, p. 340).

Another area of lack of internal control occurs in check handling. While checks appear to be using a pre-numbered system, which is efficient, there must be transaction policies for dealing with transaction entering or for cash disbursements such as:

*limiting the number of authorized signers of checks *dividing the approval authority for payments and payment recording between personnel
*use prenumbered checks and matching checks to approved invoices; after payment
*storing blank checks in a safe with limited access
*using indelible ink when printing check amounts
*reconciling bank and book balances monthly
*bonding personnel
*use background checks when hiring (Kimmel, Kieso, & Weygandt, 2012, p. 366).

There must be a means of obtaining appropriate authorizations and approvals, securing assets, or reconciling cash other than on the statement. More steps are needed to ensure improved physical controls in most companies (Kimmel, Kieso, & Weygandt, 2012). The handling of cash is often an extremely bad issue because there needs to be more than one person involved in the cash verification processes. The signatures of both the personnel dealing with cash should be required on all transactions (Kimmel, Kieso, & Weygandt, 2012, p. 368). This is best achieved by having two parties such as a manager as well as having an accountant. This might appear to be counterproductive, but there needs to be two personnel involved in the verification process. Duties should be broken down in the following manner or in a similar way:

The accountant should have neither physical custody of the asset nor access to it. Likewise, the custodian of the asset should not maintain or have access to the accounting records. The custodian of the asset is not likely to convert the asset to personal use when one employee maintains the record of the asset, and a different employee has physical custody of the asset. The separation of accounting responsibility from the custody of assets is especially important for cash and inventories because these assets are very vulnerable to fraud. (Kimmel, Kieso, & Weygandt, 2012, p. 346)

Lack of segregation of responsibility is a large problem extending into many different areas of the accounting process at many businesses. There are a variety of controls such as depositing money every day, recording deposits, and cash intake, and most issues could be fixed by having another person or manager involved in the cash handling and accounting process. Perhaps the largest issue is the fact that most small companies lack a timely reconciliation process. The person in charge of the reconciliation often has little oversight and this allows a dishonest person to hide problems for long periods of time. Managers should have some form of reconciliation process such as going through receipts or having a control system setup that tracks assets throughout the week. This would also fix the issue of having a separation of duties where one person handles cash but others deal with the record keeping. When a proper separation of duties occurs, then no one person has total control over the entire cash receipts, handling, storage, and recording processes and this reduces the chances of fraud (Kimmel, Kieso, & Weygandt, 2012).

When proper controls are in place it is less risk of fraud and internal theft. These problems are likely to continue in many small companies that do not implement new policies and practices which reinforce good accounting practices.

References

Kimmel, P. D., Kieso, D. E., & Weygandt, J. J. (2012). Financial accounting: Tools for business decision making. Hoboken, NJ: John Wiley & Sons.