Kiting, also called check kiting, is a fraudulent scheme that uses checks to embezzle money from a business. Kiting is usually committed by a bookkeeper or someone else with access to company checks and the ability to forge checks, but it can also be used by the company. The concept of kiting is quite simple. It uses the float or time it takes for checks to clear to buy time before the actual money withdrawn from the account. Kiting turns checks into more of a form of short-term credit than an actual check or order to pay.
Bookkeepers can perform check kiting if they have access to the checks, perform the bank reconciliations, and record the checks in the accounting system. This might sound like a complete violation of the segregation of duties concept. Well, it is. Many small companies can't hire extra people and the owner's don't want to bother doing bookkeeping work themselves.
It works like this. 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. 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.
The main two ways companies can stop fraudulent check kiting is segregation of duties and forced vacation time.
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