Are your Internal Controls like Swiss Cheese? Part 12 - Gene Bucciarelli, MBA CPA

Are your Internal Controls like Swiss Cheese?
Part 12
by Gene Bucciarelli, MBA CPA

"Assets = Liabilities + Equity, a fundamental internal control tool."

The Bank's General Ledger (GL)

The General Ledger, also known as the Statement of Condition, is one of the most basic of internal control processes. An Italian monk and mathematician, to assist the merchants of Venice in keeping track of their shipping activities, created the equation in the late 1400's. This transformed a merchant's ability to keep track of his/her activities. For this tool to be used properly each employee needs to know and understand GL basics. My experience at community banks indicates that the knowledge of the how the GL works and what it contains is limited to a handful of senior officers. Many employees have working knowledge of a few accounts that they use daily but very little understanding of any other part of the GL. I have also observed that many internal auditors do not have a good grasp of GL basics. The majority of community bank employees never see their department or branch GL, don't know how to retrieve one from their daily reports, and would not know how to read it if they had one. This lack of knowledge creates the opportunity for employee fraud and errors and in my opinion is an internal control weakness. Many branch managers and supervisors pay special attention to expenses and some revenue lines, but usually ignore and don't understand the remaining portions of their own GL. The World Com fraud of 11 billion dollars was discovered because one non accounting employee noted that some asset accounts were increased for expenditures that should have been expenses.

The GL is an amazing piece of software that enables many sources of input. This enabling also creates many internal control problems. Generic purchased systems must be tailored to the needs of the institution. Operations, accounting, and credit personnel decide which accounts are posted manually and which are posted through automated means from other applications or from third party vendors. This process is called setting the system parameters. Since the parameters decide how a generic system works, changes should be limited to only a few prsonnel and all changes should have a second party review.

The major sources of input to the GL are as follows:

• Handwritten tickets - many, but not all, accounts will accept manual items. These include cash, suspense accounts, property, expense, and revenue accounts.
• On line posting - many systems have the ability to do on line posting which eliminates the need for the handwritten tickets. In many programs these are called "block entries". Any account that is accessed through handwritten tickets will also be available for on line posting.
• Automated input - many applications feed the GL automatically such as DDA, Savings, COD, Loans, and Accounts Payable. These systems create the balances and the related accrued interest and interest expense or revenue accounts. Manual entries are not allowed for these accounts.

In order to ensure that these automated accounts are in balance most systems have a daily application balancing routine with a report. This report will compare the application data totals to the GL totals account by account and list any differences. Investigate and correct any differences immediately. Keeping the applications and the GL totals synchronized is a major internal control process. The bookkeeping or accounting department usually performs this function daily. This is the equivalent of certifying or reconciling the manual accounts to a control total. Any Asset, Liability, or Equity account that is not automated should certified by the department that is responsible for and uses the account. Accounts not used but still on the GL should be made non postable.

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.

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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 2/9/04