Pub. 8 2013-2014 Issue 1

May | June 2013 21 Extraordinary Service for Extraordinary Members. Out-of-Balance Correspondent, Transit, or Suspense Accounts Result in Large Losses Charles M. Towle , Senior Vice President, Kansas Bankers Surety Company SECURITY OFFICER’S BY-WORD A BANK CUSTOMER WAS HAVING trouble with cash flow and was writing checks before he hadmoney 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 sev- eral 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. Occa- sionally, 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 discov- ered that more than $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 corre- spondent account that was higher than the actual balance in the corre- spondent 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 corre- spondent 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 prop- erly, 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 cor- respondent bank that the correspon- dent 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 cor- respondent 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. Q Large Losses — continued on page 22