Failure to Examine Bank Statements: What is at Risk?
We are all taught somewhere near the end of our teenage years about the need to reconcile our bank statements. Some folks are very careful about doing this. Others have the attitude that the bank will let them know when they are overdrawn. But, a relaxed attitude toward this is not appropriate for businesses.
A significant area of business risk is the embezzlement of funds by a trusted employee. It is outside the scope of this article to discuss internal controls in a thorough way. But, we will focus on the risk involved in not properly examining bank statements as soon as they are available for inspection.
The law places the obligation on the bank customer to promptly review bank statements once the bank statements and the returned items are available. Of course, in this day and age, returned items are almost always a scanned image, rather than the actual check. If a forgery or an alteration can be spotted from the examination, the customer has the duty to report it to the bank. If the report is not timely made, the bank may have no liability if the failure to report causes the bank to suffer a loss. This can happen when the report is too late for the bank to move quickly enough against the guilty party to recover the loss.
Another common, and potentially more important, consequence from the failure to examine and report is that a bank generally has no liability for subsequent forgeries or alterations. A bank generally has not liability for subsequent forgeries or alternations made by the same individual that occur after the first statement cycle on which the initial forgery or alteration appeared, provided that the information is made available to the customer, and, provided that it is not timely reported to the bank. This is important because most embezzlement patterns start with small amounts done on an infrequent basis. As forgers become emboldened, the amounts and frequency generally increase as well. Therefore, missing one or two small forgeries in the first statement cycle, and failing to report them to the bank, may absolve the bank from liability for much larger numbers if the embezzlement goes undetected for a period of time. (I have worked on cases where embezzlements went undetected for a period of years, and the amount over time became quite staggering.)
Even if there are other circumstances in play that would still allow a recovery, it should be obvious that the prompt review and reconciliation of bank statements, preferably by personnel who do not have access to a checkbook or the authority to sign checks, is a critical part of financial risk management.