Is Your HOA Protected?

Avoiding Losses From Fraud - Embezzlement

Improving Financial Security and Controls

Separation of Duties - Responsibilities

Written by Attorney Michael T. Chulak

Every year we receive reports of fraud, embezzlement, and misuse of funds by management companies, management company employees, and directors of homeowner associations. Sometimes the funds can be recovered, but not always. Millions of dollars have been lost by associations resulting in extreme financial hardships. While such acts are not common, they do occur, and homeowner association boards can and should take precautions to avoid them. Most of the people who embezzle money don’t look like criminals and there is always a first time for each person who crosses the line into criminal activity.

Some of the things your HOA board should know:

An accounting system that requires a conspiracy of two or more people to embezzle funds minimizes the chance of theft. Most people inclined toward theft are afraid to approach another person to discuss the theft of funds knowing that it could lead to the discovery of their plan. While this principle works very well with unrelated people, it does not work well when the people in control of HOA funds are related to each other such as a husband and wife or father and daughter, etc. When HOA funds are controlled by two close relatives, the danger of embezzlement is much higher than if two unrelated people were involved in handling funds.
The person who is given responsibility for issuing checks should not be the same person responsible for reconciling the bank statements. When the same person does both without constant and careful oversight, fraud can easily go undetected.
Bank statements should be reconciled promptly in order to ensure that the check signers are not the same people who reconcile the account.
The person assigned to be contacted by the bank (if required) should be someone other than a check signer or person assigned to bank account reconciliations.
Any working supplies of checks should be maintained in a secured location, accessible only to authorized personnel. Any reserve supplies of checks should be in a separate secured location, accessible only to authorized personnel.
Any employee authorized to verify the issuance of a check, should ask for the amount on the check, the date issued, check number, and the name of the payee.
All canceled checks and bank statements should be in a locked location accessible only to authorized personnel.
Never use a "rubber stamp" to sign checks and make certain that all check signers clearly sign their name. Illegible signatures and / or initials should not be permitted. The signer must be able to absolutely determine whether a signature is his or hers if required to do so at a future date.
Immediately review check orders when they arrive to verify the accuracy of account numbers and to make certain that all checks are in consecutive order.
Immediately notify the bank when an employee who is authorized to transact business with the bank leaves.
Make certain that all cash is kept in a safe location under dual control by unrelated personnel until it is transferred to the bank.
Facsimile signature machines should not be used.
Require that all accounting personnel take vacations, during which time, their responsibilities are assigned to another person.
All mail should be opened and distributed by someone other than the accounting personnel.
All disbursements should be made by prenumbered, printed checks.
All letters to the bank authorizing a person to receive information, authorize transactions, cash checks, or discuss over-drafts should be as specific and limiting as possible. Blanket letters of authorization should be avoided.
Unless the board has excellent accounting skills, avoid accrual accounting reports. Accept cash accounting or modified cash accounting only where revenue is reported on a cash basis.
Make certain that the math is checked on every invoice to be paid and that any balance forward numbers are accurate.
All checks received should be deposited daily.
All correspondence addressed to the accounting department should be reviewed by an authorized person before it is distributed.

Every accounting system should have a system of checks and balances which requires a clear separation of duties between people who are not related to each other. Separation of duties is one of the key concepts to internal control. It has as its objective not only the prevention of fraud, but the elimination of errors.

Board members can protect their association's funds by making certain that their management company complies with the basic principals outlined above.


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