2021 ACH Audit: Rejected Prenotes, Exceptions and Returns

Amy Donaghue

By: Liz Cone, AAP, APRP, Manager, Audit Services

We have made it through 2020 and it’s hard to believe that it is already time to start thinking about your 2021 ACH Audit. With the start of the new year, there’s no time like the present to start thinking about the documentation needed to complete your annual ACH Rules Compliance Audit. I want to take the opportunity to offer a little clarification for some of the documentation items that are needed to verify compliance with the ACH Rules regarding the handling of rejected Prenotifications, Exceptions/Non-Post Items and Outgoing Return and NOC Entries. These pieces of documentation are all related and help satisfy AT LEAST three different Rules requirements that should be tested, so it’s important to make sure that all necessary documentation is gathered in order to complete your audit.

Rejected Prenote Entries
To verify that rejected Prenotes are processed correctly, a sample of transactions should be selected from a report that details rejected Prenote Entries. For those transactions, the appropriateness of the action taken in response to the rejected Prenotes should be verified. For example, were items returned or corrected, and were any NOCs sent? This will verify compliance with Section 3.5 Specific Provisions for Prenotifications within the ACH Rules, which states that the RDFI must Transmit either a Return Entry or a Notification of Change for Prenotes that are unable to post to the account. There is some confusion from time to time about whether this refers to Prenotes that your Originators send or Prenotes that you receive. Keep in mind this is the RDFI section of the audit, so this refers to Prenotes that are received by your institution and rejected for some reason (i.e., invalid account, closed account, etc.).

Exception Item Handling
When it comes to testing exception item processing, your auditor verifies two related but different audit objectives: timing requirements and appropriateness of usage.

  • Timing Requirements: Your audit should review the timing of the returns to verify for compliance with section 3.8 RDFI’s Right to Transmit Return Entries within the ACH Rules, which states that an RDFI must Transmit a Return Entry so that the Return Entry is made available to the ODFI no later than the opening of business on the second Banking Day following the Settlement Date of the original Entry. To accomplish this, a sample of daily exception items, including Non-Post, NSF items and Stop Payment suspects, should be selected. These transactions should then be traced to reports containing outgoing Returns and NOCs to verify timeliness. Note that depending on the configuration of the system-generated reports, the various types of exception items may be included on one report or separate reports. Regardless of how the system generates reports, it is still necessary to test for timely handling of all types of exception items, so it is imperative to ensure that all applicable reports are gathered.
  • Appropriateness of Usage: The audit should verify that all ACH Entries are accepted as required by Section 3.1.1 RDFI Must Accept Entries within the Nacha Operating Rules & Guidelines. To do this, trace Entries from the outgoing Returns and NOCs report to the exception items reports to verify appropriateness of the Return Reason Code utilized. It is acceptable to either use the same Entries that were tested for timeliness or select a different sample of Entries.

The most important thing to remember when gathering the documentation for your audit is that EPCOR is here to help you comply with the Rules. If you have questions or need some clarification about and audit Rules requirements, our team of auditors are available to answer any questions you may have. Don’t hesitate to reach out – there’s no such thing as a silly question. We’re here to help make your audit as smooth and pain-free as possible. If booking your audit is still on your to-do list, reach out to us at audit@epcor.org to get on our calendar today! And, if you have your service conducted in the first quarter of 2021, you’ll save up to 20%. Happy auditing!