IMPORTANT ALERT:

New Check Processing Procedures
Effective October 28, 2004

(Welcome to the 21st century)

If you haven’t already heard, banks changed the way they process checks effective October 28, 2004. This change is called Check 21, an abbreviation of Checking for the 21st Century from the name of the Act passed by Congress. Essentially, Check 21 allows banks to present checks electronically for settlement through the Federal Reserve and other check clearinghouses and to destroy the original check. This expedites the time required to settle a check, thereby reducing the “float.” Float is the time between negotiating a check and when the check clears your bank account. Check writers need to be aware of this change to avoid any potential overdrafts on their bank accounts.

Historically, checks have been physically transported to the regional Federal Reserve branch, which cleared the check with the check writer’s bank by verifying funds availability and then sent that check on to the check writer’s bank. The check writer’s bank had the right to inspect the physical check before paying under the Uniform Commercial Code. This physical process takes time allowing a check writer some “float.” Check writers have often utilized the float as part of their cash management tools.

Check 21 allows a bank to provide an electronic substitute check in place of the original for inspection by the check writer’s bank. This substitute check will be marked with language identifying it as a legal substitute to the original check. This new process will allow the settling of checks between banks to be completed in less than a day, virtually eliminating float.

Currently, there is to be no change in the availability of funds deposited to your bank. Banks still maintain their rights to place holds on deposits or to delay the availability of the funds. It is anticipated that deposits will clear faster; however, the speed at which deposits are credited to your account will depend on your bank.

Be aware of your bank account balances and your bank’s funds availability policy to avoid any potential overdrafts on your account.

Consumers do get some additional protections as a result of the Check 21 Act. Currently, the law does not require banks to credit disputed amounts until proven. Under Check 21, a consumer who receives an official substitute check and finds that the check was paid twice or otherwise in error is entitled to a recredit to their account within 10 business days after the consumer notifies the bank, up to $2,500. This does not apply unless an official substitute check is provided to the consumer. Read your bank’s fine print for more details.

Creating substitute checks under the Check 21 Act is voluntary for each bank though all banks are required to honor substitute checks. Banks are using this opportunity to make other changes. Specifically, many will change how they provide cancelled checks. We have added a listing of bank procedures and contact information to our website to assist you in your research ( www.bpcpa.com).

We recommend our clients request that their banks continue to send their canceled checks and official substitute checks when the originals are not available. We understand that these two forms of checks will be the only acceptable legal proof of payment (especially if you have any concerns about payments to the Internal Revenue Service). Note that forgery will be more difficult to prove with substitute checks because it cannot be used to determine pen pressure, and it is less useful for handwriting analysis.

The Berntson Porter Accounting and Auditing Department will continue to use their judgment in determining sufficient documentation in their audits and reviews. We do not foresee any complications to audits and reviews as a result of the Check 21 Act.

Don’t expect float to be a useful cash management tool anymore. Protect yourself and your company by being aware of your bank’s procedures as a result of the Check 21 Act.

Other helpful resources are:

Federal Reserve: http://www.federalreserve.gov/paymentsystems/truncation/default.htm
Consumer’s Union: http://www.consumersunion.org/finance/ckclear1002.htm
USA Today: http://www.usatoday.com/money/perfi/columnist/block/2004-10-25-check_x.htm
Berntson Porter & Company, PLLC : http://www.bpcpa.com/check21.pdf

Patrick DeLangis
Director of Litigation and Forensic Accounting Services