It's a very brief scene that happens after George Baily leaves and Billy puts his head down on his desk to cry. The squirrel climbs up on his right arm as if to comfort him in his misery. It's so brief that probably thousands of people who have watched the movie over the years missed it too.
I would be interested to hear how many of you missed it also!? I'll bet that in the future all who read this will be watching for this squirrel cameo! Just thought I would share this bit of Squirrel trivia.