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Mary Schaeffer

Weak Check Processes Can Get You in Internal Control Trouble

Here's how.

November 6, 2008
by Mary Schaeffer

What can go wrong when issuing a check? The answer to that seemingly no-brainer question is: “unfortunately, a lot.” The way organizations handle checks throughout the whole production cycle is filled with loopholes in which appropriate internal controls can be overlooked. Here are some of the more common ways internal controls fall by the wayside.

  1. Does Your Check Stock Have Adequate Controls?

    Your check stock should incorporate a number of safety features to ensure that altering a check and copying is not only difficult, but impossible. Changes in the UCC (Uniform Commercial Code) can make organizations liable for fraud against checks if they don't exercise “ordinary care.” And the first step in ordinary care is what you print your checks on. ANSI (American Standards National Institute) standard X9.51 advises organizations to use at least three security features. Note: While a great control when they work, Void Pantographs do not work with some of the newer copy machines and thus should be avoided.
  2. How Do You Store Your Check Stock?

    Today checks are either printed on check stock imprinted with all company and banking information or on laser stock without any of the banking information. When it comes to check stock, the stock with the preprinted information needs to be stored, with greater care than the blank laser paper. Proper storage is only the first step to ensuring minimized check loss. If your check stock is not adequately stored anyone walking by could filch stock and write a fraudulent check on your account. Control is lost when access to the storage location is not limited.
  3. Where Do You Keep Checks Awaiting Signature?

    In many organizations once checks are printed, they need to be signed. Some place a facsimile signature during the check-printing process and add a second manual signature over a given dollar amount. The requirement for a second signature varies from one company to another with some requiring a second manual signature on everything, while others only require the second signature for very large checks.

    This second signature requirement introduces problems. These checks must be collated with the backup before they are given to the signer. This collating task can take hours or even, in rare cases, days. How the checks are cared for during this process indicates whether the organization has strong internal controls surrounding the process or not and whether there is the potential for trouble. The checks should be held under lock and key with limited access just like blank preprinted check stock.
  4. When Are Signed Checks Taken to the Mailroom?

    Once the checks are signed and ready to be mailed they should be held in accounts payable and taken to the mailroom right before the mail is brought to the post office. Temporary employees as well as delivery personnel providing services to your company pass through your mailroom. While most are honest, a few are not — and you have no way of knowing who’s who.

  5. Do You Use Positive Pay?

    This is another touchy issue when it comes to checks. By now most professionals know they should use positive pay and a large percent of organizations actually do use it. Most run the file and send it to the bank as soon as they have printed their checks.

    However, if you don’t use payee-name positive pay (few companies do), it takes several days to get checks collated, signed, un-collated and into the mail. An unscrupulous employee who knows the check numbers and dollar amounts can easily circumvent your positive-pay controls.

    While this may only happen once in any organization and the odds are small, it is a risk. Therefore, it is best to get your checks into the mail as soon as the checks are printed. If you can delay the transmission of the positive-pay file until the checks are printed, that may be a good idea, although it will require some additional coordination.

Conclusion

The next time you walk by an empty office and see a pile of checks waiting to be signed, don’t walk away. This is a sign that internal controls have broken down and the checks are an invitation to trouble. This takes place every day at many organizations and a few are going to pay the price. Don’t let it happen in your company. The lack of strong internal controls at the grass-roots level can do too much harm to any organization.

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Mary S. Schaeffer is the author of over a dozen business books including The Controller & CFO’s Guide to Accounts Payable (2007 John Wiley & Sons) and the just-published Fraud in Accounts Payable: How to Prevent It. She serves as the editorial director of Accounts Payable Now & Tomorrow, a newsletter for professionals interested in payment issues, writes a free weekly ezine e-AP News and directs the organization’s consulting practice. You can read her thoughts on timely payment issues on the AP Now blog.