Reviewing Bank Reconciliations to Prevent and Detect Fraud

As a CEO, business owner, or executive director at a small or mid-sized company or organization, it is essential that you review bank reconciliations on a monthly basis. While some may consider this a finance or accounting function, small companies and organizations unfortunately often are unable to create an ideal segregation of duties due to limited resources and staffing. In a perfect world, there would be an individual with no access to cash who would perform the bank reconciliation, along with many other controls over vendor management and purchasing, which would help deter and detect potential fraud. However, at smaller organizations there is often only one employee performing substantially all the accounting and finance functions.

That individual could be in a position where they can create a fictitious vendor, write a check to that vendor, and manipulate a bank reconciliation to conceal the fraudulent transaction. While many other controls and monitoring activities should be put in place, a review of the bank reconciliation by someone outside of the accounting function is one of the most basic, and often most important controls that should be implemented.

A review of the bank reconciliation will require two items, the bank reconciliation itself, and the bank statement for the month. A key step in making sure this review is effective is obtaining the bank statement directly from the bank, along with check images. That means either logging in directly to the bank account online, or having paper statements sent directly to the individual reviewing the bank reconciliation. If the individual preparing the bank reconciliation is committing fraud, they could manipulate the bank statement or the cleared check copies.

Therefore, it is essential to obtain the bank statements without them coming from the individual preparing the bank reconciliation. Some of the things you will want to do during the review of the bank reconciliation include the following:

• – Make sure there are no reconciliation differences, and that balances agree to the bank statement.
• – The bank reconciliation detail should include a list of checks and the vendor the check was paid to. Verify that the vendor listed on the reconciliation matches the actual vendor on the cleared check. This could identify an instance where the employee wrote a check to a related individual or company, and to conceal the payment they entered the payment into the accounting system as a check to a different vendor.
• – Review the list of vendors on the bank reconciliation to identify potential fraudulent disbursements. If you see a vendor that you have not heard of, and are concerned it may not be for business purposes, research the vendor and review the supporting invoices or other documentation for the disbursement. If the invoice says it was for a truck repair, check with the operations team to make sure that one of the company trucks was in fact taken to that shop for a repair.

At a very minimum, just having your employees know that you are reviewing the bank reconciliations in a timely and consistent manner may help prevent fraud. If you have never reviewed a bank reconciliation before and need assistance, ask an external accountant to walk you through the process the first month. This will help ensure you perform an effective review and focus in on the higher risk areas.