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Fraud involving back dated checks

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#1
irc162  
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I do annaul tax prep for a profitable company. To make a long story short, a company's cash balance per books does not reconcile to the bank statement. The company provides a computer generated reconcilation, prepared a few days after the end of the year. Usually it is a simple matter to subtract out the few January amounts to arrive at a reconciled year end balance. Not this year. Cash on the books is short by $5K+.

Multiple emails were sent to the company bookkeeper asking for assistance to resolve the problem. Mostly, those emails were ignored. She would only say that her numbers do reconcile, and the the problem is a check dated December 8 that was not cashed until January 14. That check is not on the bank reconcilation. I asked the bookkeeper to explain this. Since she claims to be in balance, I asked her to provide a reconcilation as of 12/31 that clearly shows the bank statment reconciles to the cash balance shown on her financial statements. She did not respond to either request.

There is another problem. The computer generated reconcilation shows a begnning bank statement balance. This is the ending bank statement balance from the prior month. It does not match what is shown on the bank statement as the starting bank balance for the month. The bookkeeper made a credit adjustment on the books in the current month to correct the balance error.

I think the problem in the curent month is that the December 8 check was a backdated check. That by itself is not such a big deal, but combined with the error in the bank balance for the prior month, the whole thing makes me uneasy.

I notified management of the problem and basically punted it back to them. I made it clear that it is their responsiblity to deal with this. I also mentioned that bank reconciliation failures can be a sign of problems in a company's system of internal control.

So far, so good. But it has left me wondering. What is going on here? There are two long time employees who have the ability to prepare checks for signature and make entries in the accounting system, as well as the two company owners. I have worked with this company for 15+ years and the owners are usually very straight arrow about their accounting practices. The bookkeeper is not the easiest person to work with, but there mostly haven't been any issues previously. Has anyone seen anything like this?
 

#2
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How much was the Dec 8 check for.? Was it to a regular vendor?
 

#3
irc162  
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The December 8 check was just over $5000. It was to a vendor that receives payments maybe 3 times a year. The error in the opening bank statement balance was an understantement of $6000 or so.

The bookkeeper did provide me with a copy of the December 8 check. The check number is in sequence for a check written in early December. It is signed with a stamp. There is no proof on the copy that the check was cashed. I only have the front of the check. Back in the day, when a check was cashed, the amount got printed in MICR code on the bottom front of the check near the account number. Do they still do that? There is nothing on this check. It appears to be a copy of the check before it was cashed.

This company is consistently profitable Moving $5k from one tax year to another by backdating a check does not appear to provide any material tax savings.

Aside from seeing problems in two months with the reconcilation of cash, the other thing that makes me uneasy is the bookkeeper's deliberate silence about these events.
 

#4
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irc162 wrote:The bookkeeper did provide me with a copy of the December 8 check. The check number is in sequence for a check written in early December.


So...why do you continue to call it a backdated check? What evidence do you have?

Fraud is a pretty serious allegation. Accounting outages happen all the time. It's usually sloppiness or individuals who don't understand anything about accounting being put in charge of the books.

I would have emailed the owner, manager, whoever your contact is, CCed the bookkeeper and let them know that I cannot move forward with the returns until I receive a reconciliation between the bank statement and the financials, and the outage has been resolved to my satisfaction.

Unless your engagement includes procedures designed to detect theft or fraud, or to provide feedback on their internal controls, I'd be careful about straying outside of scope and giving the client a different impression than what you agreed to in the engagement letter. There might be liability ramifications for doing so.
 

#5
irc162  
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If a check is dated December 8 but does not appear on the books in any form until mid Jan, does not show up on a bank reconcilaition dated January 6 and is not cashed (if it was cashed) until mid January, then yes, this may be back dated check. If it was a handwritten check, then I might have assumed that someone did a manual check and forgot to record it but that does not seem to be the case. It's a computer generated check signed with a stamp.

The fact that the check is in sequence is only one piece of the puzzle. If I find old checkbook with an unused check and issue that check now, that is not going to make that check a 2005 payment, even if all of the other checks in the checkbook were used in 2005.

I have not accused anyone of anything. As I mentioned in the email, I have emailed the/ownerand notified them that there is an accounting issue: both the suddenly appearing check and the misstated bank statement balance in the prior month's reconcilaition.. I indicated that it is their problem to deal with. My engagement letter is also clear that I take no responsiblity for identiofying or resolving irregulatirites.

As I also mentioned, I did request a reconciliation that shows that the cash balances to the books. The bookkeeper and owner/manager have not responded to that request. Other than a vague explanation about this check, the bookkeeper and owner/manager have been mostly silent. Multiple requests for documentation, like a reconciliation, have been ignored. If this is simply an accounting error, why not say so? This is not typical of my dealings wtih this company.

What I am trying to find out if anyone has experienced something like this where it did turn out to be some type of fradulent activity. If what I am seeing could be a red flag that something havey cavey is going on,as opposed to accounting inefficiency, I will consider whether to continue the engagement.
 

#6
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Respectfully, I think you're overreacting.

Get the reconciliation, sure. Raise reasonable concerns that come to your attention, sure.

But fire a 15+ year, otherwise good client because you suspect that an employee or IC -- not management or the owners -- defrauded the company out of a few thousand is a bit much IMHO...
 


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