What is Suspense Account Fraud?

Great question!

Suspense Account Defined: A suspense account, according to accountingcoach.com, is a general ledger account in which entries and discrepancies are temporarily recorded. It is the section of an organization’s financial records where unclassified debits and credits are posted. Placing an entry in a suspense account is designed to be a temporary measure, pending the ultimate disposition.

For example, a financial institution receiving funds via a wire transfer with incomplete or confusing instructions, may need to book the debit to cash and enter the credit temporarily in a suspense account. Once the appropriate instructions have been received and determined to be accurate, the suspense account would be cleared.

These general ledger suspense accounts are unfortunate but a necessary part of any general ledger system. By the very nature of the business, financial institutions are required to rely on various types of suspense accounts. Therefore, reliable internal controls governing the process are imperative to prevent internal fraud risks.

Suspense Account Fraud: In a suspense account fraud scheme, an embezzler makes fictitious debit entries to a suspense account and offsets the entry with a credit to an endpoint under their control – a means to remove the funds from the financial institution. (e.g., a personal checking account, an official check, or a wire account). These entries are continuously cleared by ongoing and increasingly large, fictitious debit entries – similar to a fraudulent lapping scheme.

There are several types of suspense accounts at financial institutions that a fraudster might utilize, including:

• Loans in process
• Interdepartmental transfers
• Currency in transit
• Refunds on insufficient funds charges
• Due from banks

Fraud Prevention: Suspense accounts are cleared by reviewing individual transactions. The objective of reviewing items is to move the transactions to the appropriate account as soon as possible. Transactions will prove to be more difficult to clear as time passes, especially if documentation is minimal. For this reason, aging must be tracked and minimized.

Suspense accounts are also considered a control risk. Sarbanes-Oxley (SOX) requires that these accounts be analyzed by type of product, aging category, and business justification. This information must also be provided to auditors.

Bank insiders with exclusive access to suspense and corresponding accounts should not be responsible for the general ledger and reconciliations. A lack of segregated duties and oversight through continuous, automated monitoring of journal entries is imperative and will ultimately prevent disaster.

This Q&A originally appeared in Bankers' Hotline. For more information, sample issues, and to subscribe, click here or email bh@bankersonline.com