October 19, 2023

Businesses Should Be Cautious About Accepting or Using Checks

Check fraud costs individuals, businesses and financial institutions billions annually. And, yes, this continues to hold true in today’s high-tech world of e-commerce. Forged checks have always been a problem, but with inexpensive laser printers and easily accessible paper, check fraud is hanging around because many companies still accept checks as a form of payment.

A significant amount of check fraud is because of counterfeiting through computer-aided means of creating or duplicating the distinctive rectangular document in question. In some cases, fraudsters use chemical alteration to remove some or all of the security-related information on a check and then change it for their criminal purposes.

Victims include financial institutions, businesses that accept and issue checks, and everyday consumers. In most cases, these crimes begin with the theft of a financial document. The crime can start as simply as stealing a blank check from your business, home or vehicle during a burglary; searching for a canceled or old check in the trash (also known as dumpster diving); or removing a check from your mailbox. If your company still accepts checks, a little knowledge of the payment system and a good eye can help you distinguish legitimate “drafts” from forgeries.

Look for Alterations

Checks contain a nine-digit routing number in the bottom left-hand corner. The first two digits indicate the Federal Reserve Bank that will handle the check. A favorite trick of forgers is to change the routing number.

By knowing the routing number of your closest Federal Reserve Bank, you can quickly tell whether there’s a problem with the number on a “local” check.

If the routing number appears to be altered, there’s a good chance the check is bad. A quick scan can also tell whether there’s discoloration, which is an indication of check alteration.

Another sign of a potentially fraudulent check: No perforated edge on one side. The perforation allows users to rip drafts out of their checkbooks. A check forged on a printer doesn’t have a perforated edge. There are people who legitimately print checks themselves, but even those usually have one or more perforations.

Sometimes the checks themselves are legitimate, but the person trying to use them isn’t. Payroll and other checks are routinely stolen. That’s one reason why the federal government started electronically depositing Social Security checks.

Other forgers pilfer check stock directly from companies that write the drafts. 

Inspect Signatures

Your business should have a policy of looking at the signatures on checks, preferably matching them against the signatures on check writers’ driver’s licenses or other forms of identification.

Train staff not to get caught up in a customer’s appearance. Doing so can lead to lawsuits. Employees should focus on the appearance of the check itself.

Consider “Checks and Balances”

Companies issuing checks are at risk, as well. Business owners or a rotation of trusted executives (or managers) should regularly examine check stock and account balances to look for discrepancies. Such a system of checks and balances, forgive the pun, can also help deter internal fraud. For example, don’t allow the same person to write company checks and reconcile business bank accounts. Limiting the number of people authorized to write corporate checks reduces the chances of fraud as well.

When a Check Bounces

If you receive a bad check, most states have a means to collect or a court action to force payment. The preferred course of action is to try to collect on the check first.
Ordinarily, to force payment, you must do two things:

1. Show the check was dishonored.

 Show the provider that you gave notice of the dishonor to the check writer. (All states require that the person who wrote the check first be notified that it was rejected.)

Some states require further action, so look into whether your state has a special collection statute and whether courts have set out criteria for collecting on bad checks.

Other Tips

  • Place a notice at the receptionist’s desk, the cashier’s window, on invoices, or in any other conspicuous place stating your policy on bad checks.
  • State that you’ll charge a fee for returned checks and that the customer will be held responsible for all reasonable costs and expenses. (Reasonable costs vary from state to state.)
  • Send the customer a notice outlining the penalty to be assessed and the charges to be brought if payment or arrangement for payment isn’t made within a reasonable time frame. (Ten to 21 days is generally considered reasonable.) You don’t have to send the notice by certified or registered mail, but you should include an affidavit of mailing to prove that the notice was sent to the person’s last known address.

Remember: The laws for collecting checks vary from state to state, so check with your attorney and/or CPA for guidance.

Get professional help: An accounting firm with experience in this area can perform an internal control study and recommend ways to minimize employee fraud and theft. Your financial institution probably offers fraud deterrent programs that include check stock with water marks and other security features. Payroll cards, on which the company loads electronic payments, are also gaining in popularity for businesses that don’t use direct deposit. Remember that the best defense against the danger of check fraud is a proactive approach that prevents — rather than detects — the crime.

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