Are your Internal Controls like Swiss Cheese? Part 14 - Gene Bucciarelli, MBA CPA

Are your Internal Controls like Swiss Cheese?
Part 14
by Gene Bucciarelli, MBA CPA

Understanding the Bank's General Ledger (GL) should be part of everyone's job. When all personnel have an understanding of the GL and how it works, internal controls and financial reporting are significantly improved.

This article will cover the assets of the bank. Assets are resources that the bank can use to conduct its business now and in the future. The most common categories of the assets on the GL for small and medium size banks include:

Cash and items in collection due to be turned into cash in day or two. The Cash Vault Departments and the Branches are responsible for these accounts. Accounting uses cash on hand to calculate its daily reserve balance at the Fed.

Due to and from banks - DDA accounts established at other banks and the Federal Reserve to facilitate the clearing of checks, wires, and other inter bank transactions. The Wire Room, Accounting, and Bookkeeping are responsible for these accounts.

Investments and Interest Receivable from investments- deposits and borrowings that the bank is investing to earn a return on any money it has not yet lent to a customer. These accounts are the responsibility of the Investment Officer or Accounting depending on the size of the bank.

Loans and Interest Receivable from loans - deposits and borrowings that the bank has lent to its customers and the interest that is due from those loans. The Note Department and Credit Administration are responsible for these accounts. The loan application system feeds most of these accounts automatically.

Deferred Fees - fees the lenders have received from loan customers. These fees cannot be recognized into income immediately due to accounting or government regulations. They will be recognized as income based on the term of the loan. The Note Department and Credit Administration are responsible for these accounts

Bank Premises, Autos, and Improvements - costs of the bank's buildings, land, premise improvements, and autos. Accounting is responsible for these accounts.

Prepaid Expenses - cash paid in advance for services to be provided to the bank in the future by various vendors such as insurance companies. These will eventually be charged to expense. Accounting is responsible for these accounts.

Other Assets - any other specialized assets that do not fit into the categories listed above such as the cash value of life insurance policies. Any department could be responsible for these accounts but usually it's Accounting.

Suspense Resources - temporary holding account used for customer and non customer transactions that cannot be processed immediately due to the need for more information. Almost any department, but mostly Branches, Bookkeeping and the Note Department use this account.

Branch Clearings - a suspense type account used for sending transactions that are received by one department but are the responsibility for processing by another. (For example, a loan payment received at a branch). Used by almost any department but mostly Branches, Bookkeeping and Note Departments.

If you look at the numbering system for the GL accounts, you will find that the cash accounts usually start with a one series and the remaining major categories are sequential after that.

Due to Sarbanes Oxley, many Accounting Departments are preparing an accounting manual and a descriptive chart of accounts. The manual will describe the major transactions and the proper accounting for those transactions. The descriptive chart of accounts will describe each account and what is the proper type of transaction that should be processed into that account. These documents should make it easier for all employees to process transactions and improve financial integrity and reporting for the bank. You should inquire if your Accounting Department has prepared an accounting manual or a descriptive chart of accounts.

Improve your knowledge of the GL and its accounts and you will improve your value to the institution and your contribution to its internal controls. If there is no training program at your bank that covers GL basics, ask for one.

Gene Bucciarelli, MBA CPA is the principal of Internal Control Systems, a community bank auditing and consulting firm. He can be reached at genebucc@aol.com and 925.828.7360.

Access the previous articles in the Swiss Cheese series

First published on BankersOnline.com 9/12/05