Implications of the Check Clearing for the 21st Century Act.

• Position: Accounting & auditing news

For quite some time, electronic delivery has been affecting almost every industry. With passage of the Check Clearing for the 21st Century Act which became effective on Oct. 28, banks will be joining the movement in force. The check truncation concept had been around for many years, and many drawer banks truncated checks in their monthly statements to customers. Now, any entity in the clearing check process may truncate checks and forward an electronic copy of the check instead of the original check. When this occurs, the electronic image of the check must be capable of being transformed into a "substitute check" or a printed, electronic image of the original that will now be recognized as the legal equivalent of the original check.

Passage of the Check Clearing for the 21st Century Act, or Check 21 Act, was helped by the terrorist attacks of 9/11. Because planes were grounded by the attack, it was impossible to send checks through the clearing process. This delay cost the banking industry billions of dollars as check processing was halted. Electronic delivery means banks will no longer have to fly checks all over the country, and consumers may receive copies of their checks instead of cancelled paper checks. While the Act is voluntary, most banks are expected to take advantage of potentially significant cost savings, with the larger institutions leading the pack. It is expected that the process will take a number of years before it becomes ubiquitous.

The intent of the Act is to cost-effectively and efficiently streamline check processing by enabling the electronic processing of checks. The ability to process checks electronically will decrease processing time, transportation costs and the possibility of items lost or destroyed in transit. Checks will clear in hours instead of days because the electronic image of the check moves instantly. And although the process is voluntary for all banks in the clearing process, once one bank decides to create a substitute check, all other downstream banks involved in the clearing process must use the substitute check.

Any bank in the check-clearing chain can initiate "truncation" and create a substitute check. Whether the check is transmitted electronically or a substitute check is then forwarded physically will be determined by the agreements between banks in the clearing system. Banks and institutions that truncate the original check will also make their own policies on how long to keep the original...