September 28, 2020
By: Kevin B. Stouffer, CPA - Member of the Firm
Bank reconciliations should occur and be reviewed monthly in order to strengthen an organization’s internal controls. Internal control is most effective when bank reconciliations are prepared by someone a) other than the person who receives the bank statements directly, and b) who is not responsible for entries in the receipt and disbursement records. We recommend that someone other than the designated accounting personnel receives the unopened bank statements, prepares the bank reconciliations, and reviews the bank reconciliations. It is a best practice to segregate the following functions of the bank reconciliation process:
- Opening the bank statement, reviewing it for unusual or unexpected items, and signing off to indicate the review.
- Preparing the bank reconciliation by someone without cash receipt or disbursement duties.
- Reviewing the prepared bank reconciliation along with the related bank statement and signing off on the reconciliation to indicate the review.
The individuals involved with the reconciliation process do not need to have a robust accounting background. Someone with a high-level understanding of the organization would be able to identify any unusual or unexpected transactions. The reviewer of the prepared bank reconciliations should look for the following matters:
- Transfers – The reviewer should make sure that all matching inter-bank or inter-organization transfers have the same date. This procedure could detect thefts concealed as inter-organization transfers.
- Reconciling Items – The reviewer should trace all reconciling items to supporting documents. They should also pay special attention to old reconciling items. The reviewer should consider the possibility that other reconciling items, individual immaterial, may result from a significant amount “sliced up” for concealment.
- Paid Items – The reviewer should examine all check fronts and backs, if possible. They should look for payee names that are similar to but not the same as typical vendors, discrepancies between the payee and the check register/check, erasures or white-outs of payees or amounts, endorsements by employees when the payee is not the employee, variations in endorsements by the same payee, multiple endorsements on checks payable to businesses, and endorsements by check-cashing agencies on checks drawn to businesses.
Controls can be put into place regardless of how many office employees the organization has. It may mean that a Board Member is called upon to assist with the segregation of duties. It is imperative that reconciliations are performed on a timely basis each month to identify any errors or other problems that might not be recognized otherwise. It is also generally easier and less time-consuming to reconcile accounts while transactions are fresh in mind. We recommend that all bank accounts be reconciled each month prior to preparing the monthly financial reports provided to the Board.
Please contact us if you have any questions related to bank reconciliations or internal control.