Avoiding Management Letter Comments – Bank Reconciliations

July 17, 2014

closeup of blank checkPerforming monthly bank reconciliations should be a standard practice for your organization. Occasionally, something goes wrong and a management letter comment is issued.  Some of the most common comments relate to stale checks, incomplete outstanding check lists, deposits in transit that don’t clear in a timely manner, and lack of approval of the reconciliation itself.

Stale checks – Stale checks are generally considered to be any checks still on your outstanding checklist that are over a year old. Organizations need to reach out to the payee of the checks to see why the check hasn’t been cashed. It maybe that they never received the check in which case you would need to void the original check and reissue a replacement check.  You can’t just void the check and go on your way, the money doesn’t belong to you. If you can’t get a hold of the payee to issue a replacement check or have them send you confirmation that you do not owe them that money any more, you will need to submit that money to the state government based on your states escheat laws.  To learn more about escheat laws see this article that was previously published in this blog.

Incomplete outstanding check lists – Having an incomplete outstanding check list causes issues with cutoff and could materially overstate your cash balance.  Things that could cause a check list to be incomplete are recording a check or wire in the wrong period or noting a check as cleared when it hasn’t.  An outstanding check list could also include too many items if a set of checks are cut at year end but are then held for a period of time before being mailed out.  Held checks should not be included on the outstanding check list but should be kept in your Accounts Payable balance.

Deposit in transit – Typically you would expect a deposit in transit to clear the bank within two to three days. It would be concerning to see a deposit in transit on the bank reconciliation that hasn’t cleared after more than a week.  This could be due to someone recording the deposit but then not actually taking the check to the bank.  Deposits should be taken to the bank the same day they are recorded.  Occasionally, there is a valid reason for a delay in the deposit clearing, such as if the bank places a hold on it for some reason, but this is not a typical occurrence for an organization.

Approval – Bank reconciliations should be reviewed and approved by someone other than the person preparing the reconciliation in order to ensure completeness and accuracy.  If someone is not reviewing the bank reconciliations, errors could occur and not be caught.