Forensic Investigation

kiting accounting

Along with recovery, a person may also be charged with certain monetary (involving cash penalties or non-monetary penalties, which may include suspension of accounts maintained. Depending upon the value of the kited transaction, penalties that may be imposed may vary. For example, when a kiter commits a minor kiting activity where money also gets subsequently recovered by banks/ FI then, they may deprive them of some of the rights and privileges associated with the accounts.

The employee records an in-transit increase in one bank account in Year 1, but records the decrease in the other account in Year 2. This fraud is most convenient and prevalent at period end, especially when there are often several legitimate items of cash always in transit between accounts. Kiting may also take place within the one entity, where the entity has more than one bank account. The bank balance can be verified by looking at the bank confirmation, by looking at the year-end bank statement, and by looking at the bank cut-off statement. The book balance can be verified by looking at the general ledger account.

kiting accounting

Cash is usually not counted in a nonfinancial entity audit because the amount of cash on hand is rarely of a material amount. In addition, internal control frequently requires the counting of cash on a regular periodic basis, so little additional evidence QuickBooks is provided by another cash count by the auditor at year-end. If cash is to be counted, all cash and liquid assets should be counted at the same time. The person with custody of the cash should do the counting, while the auditor observes the count.

The whole idea behind check kiting basically revolves around the fact that this is an act of fraud whereby the conspirators take advantage of their individual skills and brilliance in executing their theft. It’s more or less what you would call a modern day type of con where a lot of skill is needed.

If there is evidence that cash receipts are routinely being applied to the wrong customer accounts, then there is likely an active lapping scheme in progress. Because it takes a few days for the check to be processed, it temporarily appears as though there is more money in the account than is really there. Following is an example of an actual check kiting investigation performed by the Federal Bureau of Investigation. The names have been changed, but the basic facts of the case remain the same. In looking at the possibility of kiting, the auditor gets a bank cut-off statement and seeks evidence of all inter-bank transfers around the end of the year. Each of those transfers is scheduled so that the auditor can ensure that all appropriate receipts and disbursements have been recorded in the appropriate time period.

Academic Research On Kiting

Without further digging, the fraud will never be found. Which of the following is an important control over cash disbursements?

In effect, a check kite is obtaining an interest-free loan from a bank without the bank’s knowledge. One of the challenges of check kiting investigations is proving intent; it must be proved that the fraud occurred by design and wasn’t due to an accident, mistake, or bad business decision. Intent can be proved through establishing the pattern of the check kite – the consistent movement of checks among bank accounts without any purpose other than to inflate bank balances. Maybe it was a cash flow problem or the subject purchased expensive assets or went on extorbitant trips. This activity, which involves playing the float, is sometimes used when a company is facing an overdrawn checking account. Assume that a company has a checking account at NY Bank that is about to overdraw.

We reported our findings to the building owner and his attorney. A large bank holding company was one of the largest junk bond customers of Drexel Burnham Lambert, Inc. There are a number of steps companies can take to prevent accounting fraud.

Public users are able to search the site and view the abstracts and keywords for each book and chapter without a subscription. “They were moving money from one account to the next, and whenever the musical chairs stopped, they didn’t have any money,” said Altieri. “It will basically eliminate our earnings for the second quarter,” Altieri said. Carrollton CEO Robert Altieri confirmed in an interview that the customer is A&B Check Cashing of Baltimore. Carrollton will recognize the loss in its second-quarter, which ended June 30. Typically, the cashier prepares the bank deposit slip, which is reviewed and approved by a second party who actually makes the deposit.

We traced over $1 million in diverted funds to support claims against management and insiders of the company. Three related automobile finance companies and two dealerships were involved in several lending schemes. We analyzed the financing activities and discovered illegal lending practices.

Thus, deposits can be made into the account without the company keeping any official record. Check kiting is taking advantage of the float to overstate your balance sheet’s cash or bank balances. Those who are usually involved in check kiting need to be aware of the repercussions that they’re likely to face as this is something that the government takes seriously. The first and most important thing to note is that check kiting is illegal in most, if not all countries. The United States prosecutes culprits of check kiting under quite a number of existing laws set against bank fraud, misapplication and required entries. The charges can draw a fine of up to a million dollars, imprisonment of up to thirty years or even both in some cases.

kiting accounting

StoneTurn, a global advisory firm, assists companies, their counsel and government agencies on regulatory, risk and compliance issues, investigations and business disputes. Periodic outside audits are a great way to verify A/R whether you have one employee managing A/R or multiple. It’s the same concept as mentioned above – more eyes mean more visibility and less chance of fraud or errors. Additionally, kiting accounting each person should be required to take a vacation, letting a third person rotate in. All the rotation ensures more people have access into what’s happening within A/R. There are many deceptive ways that thieves can make off with your hard-earned money. In this article, you’ll learn about various types of accounts-receivable fraud, helping you better to identify and eliminate such fraud.

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A bank reconciliation is especially important to the auditor because the reconciliation often has to be manipulated in some manner to cover up the theft of funds that have been stolen from the company. Therefore, if the reconciling items can be verified, this is evidence that no cash has been stolen from the entity. However, the auditor should use great care when reviewing the reconciliations of a number of multiple bank accounts that an entity makes use of, as there can be kiting issues to consider. Second, you start to play the game of check circulation. You and your team of cheaters wrote the checks on each other. You and your team did not deposit extra or new money in their bank accounts. Now, you took the loan or products on credit from someone.

The illegal practice of defacing a check by increasing the amount of money written on it. One may take advantage of bad handwriting, for example, by changing “ten” to “twenty” on the check. The illegal practice of deliberately misrepresenting the value of a security or transaction in order to extract more funds from a counterparty.

  • The consequences of check-kiting may be minor or severe, depending upon the size of bank/ FI and level of fraud.
  • Not having an account can make it difficult to receive payroll deposits, make purchases, and pay bills.
  • This is actually a very brilliant act of trickery as it will enable the written checks to clear, as opposed to bouncing which they would normally do.
  • What the conspirators basically do is try to take advantage of the float so as to make use of non existent funds in a particular bank account.
  • Before the check has a chance to clear, the bookkeeper writes another check from a different company account into the main company account.

In order to prevent lapping, the duties of the clerk responsible for recording the accounts receivable subsidiary ledger should be segregated from that of recording in the general ledger. After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. Which is most likely when the assessed level of control risk increases? The paper discusses how banks can detect kiting and check the history of kiting from past transactions and how banks can collect losses from customers and from insurance bonds. In conclusion, the author examines the criminal aspects of kiting including how to prosecute and defend. When someone uses a financial document or instrument fraudulently, they are said to be kiting.

Do Banks Usually Prosecute Check Kiting?

In case a firm fails to receive securities within the settlement period, it needs to buy from open market for netting off the transaction. In the case where such firms knowingly fail to buy short securities, it will be considered as a delinquent act of kiting. A pyramid scheme is an illegal investment scam based on a hierarchical setup that pays members higher up in the structure with funds from new members.

kiting accounting

This is especially true in the case of corporate kiting, which may be considered a Ponzi scheme, and involves much larger sums of money and the penalties, fines, and jail time may be substantial. Check Kiting is a form of white collar crime and check fraud. KITING, when used in the context of banking, refers to the practice of depositing and drawing recording transactions checks at two or more banks and taking advantage of the time it takes for the second bank to collect funds from the first bank. Can also refer to illegally increasing the face value of a check by changing the printed amount of the check. When used in the context of securities, it refers to the manipulation and inflation of stock prices.


The scheme usually involves several checking accounts at several different banks. In effect, a bank deposits accessible money into an account while waiting for cash to be processed from an account at another bank when in actuality the other account holds no money. Instead of depositing all of the company income checks, a bookkeeper can cash one of the checks for him and put it in his own bank account. Since the company needed this cash to pay bills, the company checking account will overdraft without these funds. The bookkeeper then writes a check to cover the bills knowing that the account will be in overdraft. Before the check has a chance to clear, the bookkeeper writes another check from a different company account into the main company account.

Managing Accounts Receivable, An Essential Part Of Business Activities

They all involve “taking advantage of the float”, where they take advantage of the time it takes from writing the check to when the check actually clears through the bank. If the account closes before you can cancel the transaction, the money will get Certified Public Accountant sent to the closed account. The company will not issue a check or forward the money to another account until the direct deposit funds are returned. A lapping scheme can be detected by tracing how cash receipts have been applied to customer accounts.

Lapping occurs when cash is stolen upon receipt from one customer’s account. Now imagine if I had two bank accounts in my name at two seperate banks in 2 seperate ends of the world and I write one bank account a check from the other bank account. While the check is in transit , BOTH of my bank accounts will show I have money in them when in reality I’m still waiting for the one check to clear and show that one account actually has less than it does. But in accounting, it is fraud which is done by writing the cheque. After knowing this, you issue the cheque of higher amount for paying someone. The group financial statements based on the above recorded values will show total cash at bank of 260 at year end, whereas the correct amount is 200. Note that the same principle applies to one entity that has more than one bank account.

Outstanding checks can be verified by examining the checks that clear the bank shortly after the end of the year, which are detailed in the bank cut-off statement. Deposits in transit, like outstanding checks, can be verified by examining the transactions reported in the bank cut-off statement. This general process can also be performed for beginning bank and book balances and for outstanding checks and deposits in transit, if this work has not been performed during the prior year-end audit. Carried out within the banking system, kiting typically involves passing a series of checks at two or more banking institutions, using accounts that have insufficient funds.

A write-off can come in the form of a customer discount in which a credit is applied rather than issuing a refund. Write-offs can also be used with bad or old accounts that are closed out. In both cases, the thief takes advantage of loose tracking of funds.

This buys the bookkeeper a few more days until the second check can clear. By that time, more deposits will come in and the funds can be replaced, no overdraft fees will occur, and the bookkeeper can embezzle another deposit. Lapping occurs when cash is stolen upon receipt from one customer’s account.

There are quite a number of categories of check kiting, all of which are performed at different levels and at different magnitudes. The categories include retail based kiting, circular kiting and corporate kiting. The most common out of these is retail based kiting which involves the use of a separate entity other than the bank in order to provide lacking funds in an account which will thereafter enable a check to clear. This is usually done unknowingly to the separate entity whose funds are being used to con the bank. Circular kiting and corporate kiting are usually executed at a much higher level and involve the use of millions as the players as sometimes inside men. It is not only involved in banking financial instruments but can also be done on securities. When any securities firm does not honor the settlement of the buying-selling transaction or floats with timelines issued by regulatory authorities i.e. three days settlement period.

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