March 2003
By JAMES S. ANCHIN CPA
As long as there have been checks, there has been check fraud. Industry experts estimate that $50 billion a year in fraudulent checks are cashed each year. To combat the problem, certain security measurers are critical, and include the following; using checks embedded with security features (special ink, watermarks, micro-printing), effectively safeguarding both cancelled and blank checks, using imprest balance accounts, using direct deposit for payroll and reconciling all bank accounts on a timely basis.
Another effective measure, although it may not be practical for everyone, is the use of "positive pay." With positive pay, a company will send the bank a daily transmission of checks written. Checks not on the list will not be honored by the bank.
In addition to the above measures, more and more payments are being processed electronically. This has opened up a whole new field for the criminally minded, namely "Automated Clearing Hour" fraud, or ACH.
Essentially, ACH transactions refer to any funds that are transferred electronicallyÑwhether it's payroll checks, tax payments or routine consumer bill-paying. In 2002, nearly seven billion payments were transacted through the ACH system to the tune of more than $20 trillion. Increasingly, businesses and consumers are finding it cheaper and more convenient to forego paper checks in favor of electronic funds transfer. Industry experts forecast 15 billion ACH transactions a year by 2006.
Be mindful though that now is not the time to stick your head in the sand and take an "ACH fraud will never happen to me approach" Ñ particularly when businesses have a very limited window of opportunity to catch and reverse an invalid charge. With the latest business software, it's very easy to initiate an ACH transaction, valid or otherwise.
The good news is that contractors are already working with banks to nip this potentially devastating fraudulent activity in the bud. For starters, banks are advising contractors to separate their electronic and paper accounts. One account exclusively for ACH activity can afford more control over electronic transactions by quickly highlighting any suspicious disbursements and simplifying reconciliation. With two separate accounts, a problem with fraud in one won't disrupt activity in the other.
Increasingly, electronic banking is moving to provide real-time balance activity. Contractors should closely monitor information on debits and, ideally, credits, as they are posted during the day. As with paper checks, banks allow corporate customers some leeway to stem fraudulent activity. But unlike consumers who have 60 days to reverse an invalid ACH debit, business customers have only 24 hours from the posting of the item to rescind an unwanted ACH debit.
An ACH block is another useful tool. By allowing the bank to block incoming ACH debits or credits before they're posted to their account, contractors can fight fraud. While it's useful on virtually any account, the debit block works particularly well for contractors when they initiate it on their disbursement accounts in tandem with positive pay, which acts to combat paper check fraud.
More advanced tools are also available. One is receipt authorization, which enables a contractor to let the bank know which companies are authorized to initiate debits against his or her account. Contractors can also add further controls concerning amounts and dates for authorized transactions. For example, contractors can specify an exact or maximum amount of debit from their authorized companies as well as a date or range of dates within which the transaction can occur. Stipulations can also be set in motion on a one-time or recurring basis.
Banks are also offering an ACH Reverse Positive Pay tool. According to this arrangement, businesses can view incoming ACH transactions and make a decision whether to accept or reject them. Typically a 24-hour window is allowed for an accept/reject decision; if no decision is made, the bank will automatically reject the transaction. If the business opts to accept the ACH transaction, the bank can establish an authorization record to enable the business in question to make future postings to the account.
Not all ACH tools will work for all contractors. Different accounting and management systems, as well as the amount of transactions and size of the accounting staff, are all variables that factor into a decision on which tools will serve a contractor well. However, in this age of soaring electronic funds transfers, it's critical that contractors act proactively to tighten their banking activity and work with their bankers to build the right protection measures into the system.
In the end, it's the contractor's responsibility to get it right. Incorrectly assuming that fraudulent activity is a remote possibility and that the bank will absorb the losses can have a devastating outcome. Managing the risk is far better for a contractor's bank account and peace of mind.
About the author: Mr. Anchin is a managing partner of Anchin, Block & Anchin, LLP, a regional certified public accounting firm with offices in New York City and Westchester, that specializes in meeting the needs of contractors in the tri-state area.