Checking out Check 21: its impact on individuals, businesses and CPAs.

• Author: Paul, Kenneth C.

As the country struggled to comprehend the events of Sept. 11, 2002, the nation's check clearing system ground to a halt in the days immediately following the terrorist attacks. U.S. financial institutions lost billions of dollars. Planes that normally flew checks between banks, clearinghouses, and the Federal Reserve were grounded. The Federal Bank's check float was pushed to $47 billion, more than 100 times the normal level. As a result, bank regulators went to Congress and pitched the idea of clearing checks using electronic images rather than paper checks. In response, the Check Clearing for the 21st Century Act was passed.

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The use of electronic images and "substitute checks" is revolutionizing nearly every facet of the banking industry. In turn, these changes will impact individuals, businesses and CPAs, primarily for the better, according to most experts. However, consumers, especially business professionals, should be aware of the changes the new law will bring. Additionally, CPAs need to understand the implications where fraud and audits are concerned.

What is Check 21?

Check 21 is an abbreviated reference to the Check Clearing for the 21st Century Act, which took effect Oct. 28, 2004. The new law allows for paper checks to be transformed into electronic images which, when necessary, can be printed as "substitute checks." These images are now recognized as the legal equivalent of a paper check.

Substitute checks are required to:

* Contain an image of the front and back of the original check, including all necessary endorsements and signatures

* Bear the MICR (Magnetic Ink Character Recognition) line of the original check except where industry standards dictate otherwise

* Include the legend: "This is a substitute check. You may use it the same as you would the original check"

* Conform to industry standards for paper stock and dimensions and be suitable for automated processing.

While many financial institutions already exchange electronic images of checks internally and with other banks, Check 21 does not mandate that banks be able to turn paper checks into images. Rather, all banks must be able to accept electronic images, and if they cannot process the image itself, they must be able to print a substitute check and process it accordingly. However, those in the banking industry predict that as more banks begin to use electronic images the advantages may become increasingly apparent. It is expected that printing...