Cheque kiting? I have an idea!!

The paper aims to explore the present cheque clearance system in the USA and its possible misuses in the practical sense. Cheque kiting has been a way of creating fictitious cash balances on the balance sheet, which is a fraud. This practice can be prevented by a different accounting treatment.

The paper compares the cheque clearance system in the USA with the author’s own experiences from Turkey. It purports the riskiness of the present cheque clearance system on the financial statements and suggests a practical accounting application to prevent possible financial statement misrepresentations.

The paper explores that if the present accounting treatment is changed both for the banks and the businesses, the possibility of cheque kiting and misrepresentation of cash balances on the balance sheet will end. Basically, cash is the amount that can be used by the customer, the rest is not cash, it is “cheques in collection” and it should be treated as an account receivable until it is collected.

Financial statements are vital for the business world. Based on these statements, banks lend money, governments collect taxes and people buy and sell stocks. They need to be presented fairly. The present accounting application on cheque clearance is not transparent enough in the USA, and this might lead to misrepresentation of financial statements. The paper suggests a practical solution to this problem. By changing the accounting treatment, the companies will only show cash in their cash accounts and not the cheques in the collection process.

Fair treatment is the motto for any situation we face in our daily lives. One may be a poor or rich person but the treatment should be fair unless he/she is a fraudster. A rich person’s cheque is deposited in his/her bank account the next business day, and a poor person’s cheque might take days to be credited. This is not a fair treatment. The paper suggests that there must be a one-way accounting treatment, regardless of the depositor’s financial situation.

This paper has been prepared based on the author’s past business experience in Turkey and his study of the US cheque clearance system, comparing the two. It reflects the real-world examples of cheque kiting and its negative consequences in the USA and proposes a solution.