As a new auditor, my supervisor directed me to review general ledger "suspense accounts" in one company division. I dutifully followed the instructions on the audit program but in my naiveté I had no idea that fraud could be occurring through the crafty use of accounting oddities in these accounts.
In completing my review, I first obtained both the division's list of suspense accounts and the details of the open items in the accounts. (Those open items were the original entries that hadn't cleared out of the suspense accounts to a final general ledger account.)
Then, I judgmentally selected (an audit euphemism for picking and choosing by whim) those accounts I wanted to research. Finally, I diligently tried to determine how the items were cleared. What was the worth of my labors? Sadly, my work had little value.
I'll never know if someone was committing fraud under my nose because I didn't know what to look for and how someone could commit the crime. Years later, I'm still examining this type of account but now I know the fraudster's methods and I have little trouble gathering the evidence.
Suspense Accounts Defined
Suspense accounts are places in which entries are held temporarily until they reach their final resting place. Sometimes only the debit side is known at the initial entry and the credit side needs to be booked into suspense until the final account is determined. Other times the credit side is known and the debit goes into suspense.
For example, when a company receives cash via wire transfer but the customer's instructions are incomplete then the wire room operator doesn't know which customer's account to credit. After the debit is booked to cash, the credit is sent to a suspense account. When the customer sends the rest of the instructions and the customer's information is determined to be accurate, then the customer's account is credited and the suspense account is debited and cleared of the credit.
These general ledger suspense accounts, as used above, are often listed in the general ledger chart of accounts as many things including: undistributed debits, undistributed credits, interoffice, and miscellaneous accounts receivable.
These suspense accounts are an unfortunate but necessary part of any general ledger system. Even though they should be the exception, suspense accounts in many organizations are quite common. Because internal controls governing the accounts are often flimsy, a fraudster knows that they are perfect places to hide the trail of his thefts.
In one case, a company had $40 billion of stale or uncleared items in suspense accounts because of a faulty tracking system. Though your organization probably doesn't have that much in stale accounts on the books, you need to complete the necessary research to establish the validity of the stale items that you do have in those accounts. You may just discover that open debits in your suspense accounts could actually point to internal fraud.