Should my client close a bank account and open a new one if the bank account for the last 6 months doesn't reconcile?

The client hired me to optimize/re-implement their accounting system, clean up the financials for the current year (starting 10/1), recommend controls. . . note: I have been instructed that there is no fraud and not to waste time looking for it. So that is a non-issue in the solution.

The client has not properly reconciled their bank account - ever. My goal was to make the deposits/withdrawals match for the current year, post an entry to prior period for the out of balance amount and move forward. However, this has been unbelievably difficult. As the deposits/withdrawals amounts don’t matched the bank, it is taking extensive amounts of time to figure out which deposits/withdrawals go together. They are incredibly frustrated with the time it is taking.

As an accountant, I would like for the cash balance to be correct on the Balance sheet. However, this will be expensive and difficult for the client. We discussed setting up a new bank account and closing the other. The client understands:

The cash on the balance sheet will not be correct for at least an additional 2 – 3 months. When all the checks clear. We will close the account and transfer any remaining funds.
Income/expenses may be incorrect in a specific month due to posting errors but should be materially correct over the year

What else should we consider in making this decision? Please help me with the pro and cons of this solution.

Thanks for you help!

Answers

Ken Stumder Finance Director / Controller • April 3, 2013

Dear Anonymous - I can't imagine moving forward on any company financials w/o reconciled bank accounts. Minor differences would not be uncommon, but what you are describing suggests to me that you should be digging in here, not seeking a workaround. I don't know the long-term goal of your client, but whoever was there before you woefully mismanaged the books and their rush and frustration should not equal you skipping what is basically a key operational control.

Final note: because the client has instructed you there is no fraud and not to waste time looking for it does not make that true. I hope the person who has never performed a bank rec is not the individual who hired you!

Final suggestion: you might be better served disregarding all the book transactions and using the bank details to record the transactions. 90% of the transactions will be recurring and typical, leaving you with 10% to investigate.

Good luck, I know what it feels like to inherit messy books.

Regis Quirin Director of Finance • April 3, 2013

Ken is 100% correct. Assuming no fraud, which you should never rule out, an error in one part of the records is rarely an isolated situation. You will never be able to identify other problems, if you do not address this one.

Be careful. You are assuming some liability in this situation. If fraud is identified or anyone questions the books, it will blow back on the Consultant because they should have known better.

Ken has a great suggestion I have used before. When in doubt, follow the cash.

Anthony Pascente CFO • April 5, 2013

I agree with both comments. You can't take the word of your employer that there was no fraud since you will be risking liability for not completing the work and reconcile the bank accounts.

My suggestion is to open a new account and make any new transactions from the new account so that the old one is frozen and you can continue to do your reconciliation on that one.

Good luck.

Len Green Performance Improvement Consultant and ERP Strategist • April 5, 2013

I think you know what needs to be done technically, and the issue of risk for you is great. If the company plans to use the financial statements you prepare (e.g. to file taxes, negotiate credit, etc.) you should make sure your role is limited to being a book keeper and that decisions must be documented by a senior client official for you to act on them. I would not go beyond a trial balance stage until the cash issue is cleaned up.

CYA all the way- hopefully the client may realize that you can't "plug" the cash balance on the balance sheet. You can hire a temp clerk to help at $20/hr or so to reduce the cost to the client.

Sheila Cunha Controller • April 5, 2013

I agree with Ken; use the bank as your guide. Any book transactions which do not agree with the bank will need to be reclassified into a suspense type of account for further research. Rather than open a new account, I highly suggest that you monitor carefully the transactions since your arrival.

You will no doubt have an unreconciled variance that you carry forward until such time as you determine the culprit, but if it remains static you know you are at least on the road to properly recording transactions. Follow the cash. I have seen unbelievably stupid postings to A/P and A/R from spouses and family members who were "helping" with the books which really weren't fraud, but simply complete mistatements of reality.

You cannot in good conscience sign off on any balance sheet where you are unable to reconcile. Depending upon this company's goals (do they intend to use financing for operations?) you want books which will stand up to scrutiny and not smack of fraud. You need to make your client aware of this; regardless of how they try to hurry things along to cut corners. As Len points out, CYA first and foremost. A reputation can take years to build but be utterly destroyed by one bad incident. Please do not be pushed into allowing this to happen to you as a professional.

Philip Russell CFO • April 5, 2013

Have your guard up. Be careful of trusting book transactions when bank recs have not been done. Be alert for fraud. Exercise professional skepticism. Good luck!

Barrett Peterson Senior Manager, Actg Stnds & Analysis • April 7, 2013

If the situation exists as described, a new bank account will not help. You might consider comparing the total deposited for the month from the books, compared to the bank postings, although this will not provide much assurance. Your client's process may be so deficient as to account for deposited amounts in "as deposited" totals. Lockbox receipts may contribute to the situation, but if the process cannot be controlled, fraud or gross negligence is a serious possibility. Also reconcile disbursements. An inability to control cash makes the accuracy of everything else in the records suspect.

Robert Neyens Finance Manager • April 8, 2013

Hi, indeed trust the bankslips.
Another thing. Why should a new bank account solve your problem?
If you don't know the cause of the problem what would prevent it from reoccurring?

Anonymous Consultant • April 22, 2013

Thanks for you comments! Very helpful. I forwarded this discussion to the client and now he is inclined to agree with me that we have to reconcile!

Mike Caruana Director of Financial Services • April 26, 2013

Right on, Robert! It's crucial to understand why they're not reconciling. Perhaps the person doing so doesn't have the requisite skills. Easily solved with additional training or moving the function to another, more capable team member. I'd recommend transitioning it at the beginning of a new period so you can more easily assess the new person, etc.

David Gouttiere Consultant • November 18, 2013

Years ago, I was in a very similar situation, although in my case by the time I was dealing with this issue I had already uncovered fraud and the CEO and CFO had been dismissed. When I joined the company it was 18 months after a LBO and no accounts had been reconciled since day one. What we learned was how data was summarized and posted through the lockbox system and then postings in mainframe system (MSA) made it next to impossible to follow the cash. We tried for months with a team of several very capable people working on it. Final solution was to close the account and start fresh with a new cash account but only after identifying a very clearly defined procedure for reconciling cash through the systems we had in place. If the accounting system is of a similar complexity, I believe the dolllars spent won't justify the end result but to protect yourself I would do the following. Document the situation in detail, the measures taken to resolve, management's statements that fraud was not involved, and the procedures that will be followed to insure that the situation is not repeated. Ideally have an attorney review the document. Then you and all the key personnel at the client sign and date that this is the fact situation and the agreed upon path forward. If the firm is audited have both the internal and outside auditors be part of the conversation. Keep an original copy of the document in a secure place. Then move forward, insuring that bank rec's are done daily so any issue is found and corrected in real time.
Ultimately it is the client's responsibility to insure the accuracy of their accounting system, if they make the determination that they don't want you spending any additional effort and $ searching for it, I believe its their right but its your responsibility to yourself to document the situation. If they won't sign the document, then wish them well and step away. Still document the situation on your time for your files.
Our final right off on that cash account was $5 million, I hope your clients will be less.

Barrett Peterson Senior Manager, Actg Stnds & Analysis • October 15, 2013

Your client's "instructions" are as big a red flag as you are likely to see.

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Should my client close a bank account and open a new one if the bank account for the last 6 months doesn't reconcile?

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