Last week I was at a client to help them close the second quarter of the year. They do all of their own data entry and account reconciliations and I review the work and answer questions.
The owner had a question about how to enter a May transaction and as a result had not reconciled the June business checking account statement. In preparation for our meeting, she started gathering all the bank statements and noticed something strange: daily payments in June to a Capital One card. The problem is this company did not have a Capital One account!
The fraud totaled more than $100,000 embezzled from their business checking account over 35 days. No one noticed, because neither owner looks at the online banking on a regular basis. Moreover, this is a QuickBooks Desktop file, so there was no daily bank feed to review. Of course, the fraud was reported right away, but who knows how long it will take before the bank returns the funds to their account.
It brings up the question: Can any of your clients afford to take a $100K hit to cash on hand? What could this business have done to catch the fraudulent activity in a more timely manner? The answer is: perform a weekly, interim bank rec!
What is an Interim Bank Reconciliation?
Bank reconciliations are a key bookkeeping function. I’ve had clients ask me about the importance of statement reconciliation. Last week, while interviewing a potential client, the business owner told me, “I post all my own transactions, but I don’t need to do a bank rec and I don’t want to pay someone else to do it either.” This is misguided thinking.
Reconciling your checking, savings, credit card and loan/LOC accounts is the only way to ensure that all the transactions on the statement are in your books as well. You might reply, “Well I use QBO (or Xero) and all the transactions come in via bank feed, so of course they are all in my books.” If so, your reply would be wrong.
Sometimes a bank feed has what I call a "hiccough" and a transaction, or an entire day’s worth of transactions, gets duplicated or even skipped. If that occurs, your client's expenses will be either overstated or understated. You catch the duplicate or missing transactions when you perform a bank statement reconciliation.
Performing a bank rec also helps prevent fraud. Not just in the glaring case at the start of this post, but also by taking a look at the monthly bank statement. Many business owners never even look at then!
When reviewing the statement, be sure to eyeball the check images on the last pages of the statement. Make sure each of those images is legit – a real check from your client's business to a legitimate vendor and not the work of an internal or external fraudster.
Many years ago I performed a fraud audit at a business whose bookkeeper was going to jail. She had been paying her own Chase and Citicards from the business checking, using online banking.
Because the business had a Chase and Citicard, the payments did not look amiss to the business owner. The business owner could not understand why they always had cash flow problems – it was because the bookkeeper stole over $300K to pay her own credit card bills!
How to Perform an Interim Bank Reconciliation
To perform an interim bank rec, login to online banking once a week, on a Monday or a Friday. Go to the transactions and enter the balance as of that day as the ending balance on the bank rec screen. Then, mark off all the recent transactions in the file that matches those in the online banking - just like you would do if you had the monthly statement in your hands.
If you see any discrepancies, you can research them (or report them as fraud) within days of their occurrence. When your work is complete, click “Save for Later” or the equivalent. Then do it all over again next week.
Of course, once the final statement arrives you will complete the bank rec and when everything matches, click “Finish now.” Voila! You are completely on top of all the transactions going in and out of the account on a weekly basis.
I know one bookkeeper who works at a company which has such a large volume of transactions, she does an interim bank rec daily. Decide what timing is right for your clients and for your own firm. You and your clients will be glad you did!
Performing an interim bank rec on at least a weekly basis not only ensures all the transactions which have occurred in real life are entered into your accounting software, but it may also catch fraudulent transactions in a much more timely manner, thus saving you money, time and aggravation.
Jody Linick is an AIPB Certified Bookkeeper, a QuickBooks® Certified Pro Advisor, and a member of the Intuit Trainer/Writer network. Her company, FitBooks Pro (formerly called Linick Consulting), specializes in remote bookkeeping services for professional services firms using QuickBooks Online. You can find her series of Blog posts here.