Kiting
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Illegal practice in which a cash shortage is concealed by exploiting the time required for a check to clear. Assume XYZ Company has its home office on Long Island and a branch office in Chicago. The company has accounts with Long Island and Chicago banks. There is a shortage of $50,000 in the Long Island bank. The corporate bookkeeper covers this shortage by drawing a check on December 30, 2004, on the Chicago bank and depositing it to the account in the Long Island bank on the same day. The check is not entered as a cash disbursement in the current year. Rather, the transaction is recorded on January 2, 2005, and the check clears the Chicago bank on January 3, 2005. Unless the discrepancy is found, the Long Island bank balance and book balance reconcile on December 31, 2004, but do not reconcile on January 2, 2005. The auditor can uncover this irregularity by examining bank transfers prior to and after year-end to ascertain that the entry on the books is recorded in the same accounting period as the check is dated and the deposit in the Long Island bank is made. A schedule of interbank transfers should be made showing transfers of funds between bank accounts for several days before and after year-end. Included in the schedule are the dates of withdrawal and deposit per books and per bank. The CPA should trace transfer checks in transit at the balance sheet date to outstanding checks and deposits in transit in the respective bank reconciliations.
The accountant should verify the deposit date of all transfers by tracing the deposit to the cutoff bank statement for the receiving bank.
The accountant should verify the deposit date of all transfers by tracing the deposit to the cutoff bank statement for the receiving bank.
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This entry contains information applicable to United States law only.
The unlawful practice of drawing checks against a bank account containing insuf- ficient funds to cover them, with the expectation that the necessary funds will be deposited before such checks are presented for payment.
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1. The act of misrepresenting the value of a financial instrument for the purpose of extending credit obligations or increasing financial leverage.
2. A fraudulent act involving the alteration or issuance of a check or draft with insufficient funds.
Investopedia Says:
1. Kiting generally occurs when securities firms fail to deliver securities of buy and sell transactions in a timely manner (before the three-day settlement period). The firm failing to receive the securities is required to purchase the shortage on the open market and charge the delinquent firm any associated fees. The delinquent firm is practicing the fraudulent act of kiting if it fails to purchase the securities on the open market and maintains a short position, delays delivery or takes part in transactions contrary to SEC regulations regarding the proper settlement of trades.
2. In the past, clearing checks between banks took extended periods of time. Individuals used to take advantage of this delay and wrote "bad" checks to deposit funds before the checks were cashed. Banks have tried to cut down on kited checks by placing holds on deposited funds and charging for returned checks.
Both of these kiting practices are considered illegal.
Related Links:
Protecting yourself from unscrupulous practices means knowing how to spot them. 4 Dishonest Broker Tactics And How To Avoid Them
Wikipedia on Answers.com:
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Kiting
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Look up kiting in Wiktionary, the free dictionary. |
Kiting may refer to:
- Kiting on gossamer ("ballooning"), by which some spiders and mites disperse.
- Flying a kite
- Kiting (video gaming)
- Check kiting, a form of banking fraud
- Domain kiting
- Kitesurfing, a water sport
See also
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Copyrights:
Barron's Accounting Dictionary
Dictionary of Accounting Terms. Copyright © 2010 by Barron's Educational Series, Inc. All rights reserved.
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West's Encyclopedia of American Law
West's Encyclopedia of American Law. Copyright © 1998 by The Gale Group, Inc. All rights reserved.
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Investopedia Financial Dictionary
Copyright ©2010, Investopedia.com - Owned and Operated by Investopedia US, A Division of ValueClick, Inc. All rights reserved.
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