I want to spend some time discussing checks and electronic payments and how fraudsters use them to steal money from you and your business.  I will risk saying that in our personal lives, checks are quickly disappearing.  In business, however, they are still an integral part of conducting business.

I know you are wondering, what is a check?

Basically:  A check is a piece of paper that you give to someone, on which you have written an amount of money that you authorize the bank to pay that person.  It is as simple as that.

Let’s dive into it more! 
Checks defined:  Checks are spelled out in Article 3 of the Uniform Commercial Code (UCC) which was published in 1952 (https://www.law.cornell.edu/ucc/3).  Checks are one of 4 types of what they call commercial paper.

Boring stuff:
Commercial paper is an…:
1. …unsecured promissory note…:
  you don’t have to secure it, i.e. you need not attach anything of value to it to back it up, like your bass oboe, or your Heckelphone, “Back up” means that you give the piece of paper something of value to show the amount is worth something

In comparison, the loan for your villa by the Seed Vault in Svalbard, Norway had to be secured so that if you became a deadbeat and didn’t pay your mortgage, they would take your fleet of 1962 Citroën DS cars and the 47 M26 Pershing tanks for payment which you used as collateral on the property.  It secured payment to your lender.  A check doesn’t need to do that.

2. …having a fixed maturity of not more than 270 days. (read: you can’t cash them after that time) Now, if you didn’t realize it, you have 270 days to cash all your checks, as per the UCC!
Then again, if you are holding checks longer than that…why???

Uniform Commercial Code (UCC)(https://www.law.cornell.edu/ucc)
The UCC was first published in 1952 to harmonize laws of sales and commercial transactions across all 50 states, the District of Columbia and the US Territories.  This begs musical analogies, so I will….  Before 1952, the laws were different, and if you tried to pay for something across state borders, you could run into trouble because everyone had different laws.  Different laws = not in harmony.

This is like Florence Foster Jenkins in a church choir trying to out sing the rest of the choir (check out https://en.wikipedia.org/wiki/Florence_Foster_Jenkins).  The UCC is the choir director that established rules for blending in and held Florence to them (watch the movie “Florence Foster Jenkins” and you will understand).

Basically, it is a payment backed by nothing that will be worthless in 270 days!  Go figure….

Now you are wondering, what gives it value?
Originally, there were only three parts of a check that made them legally binding (~a contract):
1. “Pay to the Order of”: This tells the bank to whom to pay the funds.
2. Amount (written out, i.e. “Fifteen,” not “15”):  It tells the bank how much to pay out.
Writing out the numbers reduces fraud risk because written out numbers are not easily altered.
3. Signature:  This is your authorization giving the bank permission to give out the money.  Fact is, a check is a type of a contract, and your signature executes that contract!

Did you know that…:
1. …the DATE is not legally binding?
  If you post-date a check, that check can be cashed before the date and you cannot stop it from happening!
[yikes, don’t try post-dating!  Date people, they’re more fun!]

2. …the amount, written in numbers, is not legally binding?  Numbers can be altered very easily and so are not considered legally binding, only the numbers written in words.  The written word supersedes digits.  They are not trying to see if you can spell numbers in English….

3. Memo – It just provides fun information. [i.e. “memo: _prot. shakes for pet aardvarks_”].

So where can fraud come into play with checks??

Everywhere!  Here are fraud issues I want you to consider:
1. Who stores the blank checks?
Q: Who has custody [who holds] of the check stock?
A: The fewer the better.  In a “Main Street Business” it should be 1 person, max 2.

2. Who has access to the checks?
Q: Can anyone get a blank check if they want one?
A: Again, the fewer the better.  In a “Main Street Business” it should be 1 person, max 2.

3. Who can write checks?
Q: Can anyone get a blank check and fill it out?
A: Again, the fewer the better.  In a “Main Street Business” it should be 1 person, max 2.

4. Where are all the checks?  Those used, not used, voided, stolen, forged, manipulated, etc.?
Q: How do you account for the checks you used?  Does the bank return them?
A1: If the bank returns them, all used checks should be locked away and a register of each one and how it was used (cleared, voided, stolen, forged, manipulated, etc.)
A2. If the bank does not return them, you should have a register of each one and how it was used (cleared, voided, stolen, forged, manipulated, etc.).

5. Who can sign checks?
Q: Who in the company has the right, power, ability, etc. to sign a check and spend the company’s money?
A: Again, the fewer the better.  In a “Main Street Business” it should be 1 person, max 2.

6. Is the check altered in any way?
Q: In the returned copy of the check, or the copy of the check on the statement, did you look to see if it was altered in any way?
A: If yes, contact the bank immediately;  if no, not to worry!

IMPORTANT NOTE:  This is why you should look at your bank statement and reconcile your accounts each month.

7. What did my favorite gal felon Diana do with checks???
a. She was the only one who had access to the checks (“…she had sole custody of them.”) – could do what she wanted with them
b. She (and the owner) could sign them and make electronic payments too – her company’s money was in her hands
c. She received the bank statements and could both hide returned checks that were returned, and hide statements, where the checks were copied on them
d. She had sole access to QuickBooks and was the only one who could and the only one who knew how to reconcile statements… but never did.
e. She kept the owner as much in the dark as possible so she could get away with all her embezzling
f. She did much more too!

Do you need help accounting for all your corporate checks?  Click here: (info@rmohc.com) to schedule a free initial consultation.


R. M. O’Hanlan Consulting (RMOHC) is an accounting consulting firm based in the Washington, DC area.  Michael O’Hanlan is a Certified Fraud Examiner and an Operational Accountant.  RMOHC specializes in accounting cleanup and organization for commercial and government contract clients, fraud prevention, and training services and to keep clients profitable, legal, and compliant.