A Cautionary Tale


by John Sparks, SVP/Branch Services Administrator

There is never a better time than the first of the year to review internal controls. One area in particular that comes to mind, and crosses my desk several times per year, concerns forged and unauthorized checks at the hands of employees. Normally the situation involves more than one check and runs over a period of time. This situation occurs so often in the banking industry that it has its own set of guidelines, and is referred to as the “Repeater Rule”.

Ms. Ima M. Bezzler, a dishonest employee, is employed at our fictitious example business, ‘XYZ Auto Parts’ as their accounts payable clerk. She is also responsible for maintaining and balancing the checkbook. Ms. Ima M. Bezzler mis-appropriates two checks on the XYZ Auto Part account and signs an authorized signer’s signature to each of them. These checks get paid by XYZ’s bank and are detailed, along with all other checks cleared that month, in their monthly bank statement. Since she maintains and balances the checkbook, no one was the wiser. Ms. Ima M. Bezzler continues this practice for the next several months. Inevitably, her misdeeds come to the attention of XYZ’s management who then audit their records and discover that Ms. Ima M. Bezzler has been subsidizing herself for six months and the sum has added up into the thousands.

Now we learn about the “Repeater Rule”. Regardless of where you bank, and regardless of whether it is titled “Repeater Rule”, this topic is likely detailed in your account disclosure in the section pertaining to Statement Errors. 

XYZ takes their statements to the bank in anticipation of seeking a recovery, only to discover that they are only entitled to recovery on the checks drawn in the initial month of the theft, plus checks written up to 30 days following the mailing date of that initial statement. As the mailed statements went directly to the attention of Ms. Ima M. Bezzler at XYZ to be reconciled, the issue was compounded for XYZ. Courts have ruled that the actual mailing of the statements to XYZ’s address met the bank’s obligation. It was immaterial that the statement went to the wrongdoer and not a defense for XYZ’s lack of discovery of the issue. While the illustration can vary from situation to situation, there are two characteristics that are typical. First, that the perpetrator has access to bank checks and second, lengthy timeframes before bank statements are reviewed by anyone else. Either creates the opportunity, combined they present a perfect situation for a bad outcome. Please take a moment and review your practices.

Consider safeguarding these items and give consideration to: 
  • Facsimile stamps (store securely under lock and key)

  • Use checks with security features

  • Store excess check stock securely under lock and key, perhaps in dual custody where no single employee has access

  • Periodically reassign staff involved with account reconcilation

  • Provide clear examples to your bookkeeper of authorized signatory’s signatures for check review

  • Spot check your accounts (easy to accomplish via Online Banking)

  • Use Positive Pay - to confirm your checks before they are paid

Provide protection for yourself by ensuring you have appropriate checks and balances in place, particularly when it comes to your balancing your bank statements.

View Scott Valley Bank - The Vault - February 2012