Examing Your Bookkeeper’s Trust Account Bank Reconciliation

By Emmet R. Wood, Director, Audits and Investigations

What are some of the things that a Broker-in-Charge can do to check the bank reconciliation performed by your company’s trust account bookkeeper? Reconciling the ending balance shown on your trust account bank statement to the corresponding balance on the trust account journal or check stubs (bank reconciliation) is a procedure required by the Commission. You need the following items:

• Current month’s bank statement

• Journal showing the currents month’s transactions

• Last month’s bank reconciliation

The most important procedure that you can do is to have each bank statement delivered directly to you not the bookkeeper. Open that bank statement and examine the checks for valid payors and valid endorsements. Look for online banking transfers to unfamiliar bank accounts. Then, give the bank statement to the bookkeeper. Just receiving the bank statement before the bookkeeper is an internal accounting control that will help to deter a trust account embezzlement.

Next, perform the following procedures:

Compare the trust account ending bank statement balance to the beginning balance on the current month’s bank reconciliation. They should agree. Place the mark “@” to show that you have compared the two balances and that they agree.

 

Check the math on the current month’s reconciliation and, if it is correct, mark it with “@”.

 

Verify that the deposits-in-transit shown on the prior month’s bank reconciliation cleared on the current month’s trust account bank statement. If someone has taken trust money out of the trust account, they may try to hide the embezzlement by recording false deposits-in-transit and thus inflating the cash on the bank reconciliation.

 

Verify that the deposits-in-transit shown on the current month’s bank reconciliation appear on the Journal near the end of the month but not on the bank statement. If you have a deposit in transit that is dated more than three days before the end of the month, some trust monies may not have been deposited within the time frame required by the Commission.

 

Compare the debits/withdrawals on the bank statement to the outstanding checks on the prior month’s bank reconciliation and the current month’s journal. Show that each debit/withdrawal on the bank statement agrees in amount and check # (if applicable) with the corresponding disbursement shown on the journal by marking each disbursement on the journal with “t”. The disbursements not marked with a “t” should agree with the check #s and amounts on the outstanding checks on the current month’s reconciliation. If there is a debit/withdrawal on the bank statement that also appears on the current month’s bank reconciliation as an outstanding check, the books may not be in balance with the bank.  If there are unmarked  disbursements on the journal that do not appear as outstanding checks on the current month’s bank reconciliation, cash on the bank reconciliation has been inflated and there may be an embezzlement.

 

 

Just by checking the bank reconciliation on a monthly basis, you are putting into place some internal controls to help safeguard the funds in your trust account. If you are not comfortable checking the bank reconciliation, consider hiring an accountant outside your company to assist you with the process.

This article came from the January 2008-Vol38-3 edition of the bulletin.