Safeguarding finances: 9 steps to prevent fraud and embezzlement in your HOA
Community associations fall victim to theft and embezzlement too frequently. Board members should know the warning signs and institute preventive measures before the community is left with a difficult recovery. Combining these safeguards should help to keep your association and homeowners from being victimized.
- Know the association’s Federal Tax Identification (FTI) number. Use it to obtain periodic listings of all bank accounts and account numbers, and make sure they are all under the association’s name and FTI number.
- Use a lock box system for deposits. A lock box allows owners’ payments to be mailed or transferred directly to the association’s bank accounts. This reduces the chance that the association’s money will be deposited into the wrong account.
- Safeguard your association’s reserves. Like checking accounts, the reserve account(s) should be under the control of at least two people. Do not give one board member total control over reserve accounts.
- Require duplicate operating and reserve accounts statements be sent every month. One statement should be sent to the management company (or, if self-managed, to the treasurer or bookkeeper) and the duplicate to a board member who does not have authority to sign the checks or make any type of transfer or withdrawal.
- Check invoices against checks paid and the original receipts for credit card accounts, if any. If the association has professional management or a bookkeeper, the board treasurer should conduct this review. If self-managed, a board member without access to the bank accounts or credit card privileges should check for any unauthorized use.
- Shop around for bank services. Unfortunately, some banks do not enforce dual-signature requirements or prohibit electronic transfers between accounts, despite being under different FTI numbers. If the bank wants your business, demand that it demonstrates the safeguards it has in place to minimize theft, especially through electronic transfers.
- Insure the association’s money. Obtain fidelity coverage on the board members and the management company or bookkeeper, if any, in an amount that equals or exceeds the association’s reserve fund and several months of operating funds. Even with coverage through the association’s insurance carrier, the board should require evidence that the management company carries its own fidelity coverage, which would provide the first line of recovery in the event of theft by one of its employees.
- Make sure the management agreement includes specific terms to require these safeguards. A professionally managed association should have its legal counsel review the original agreement and any renewal prior to execution, so the agreements are not riddled with lopsided terms that are detrimental to the association.
- Regularly have an independent certified public accountant conduct an audit. While it may be too costly to conduct an audit every year, the board should commit to having one performed every few years. In the interim, the association should have an annual review performed, with the stipulation that the bank balances be independently verified.
This article was originally published on HOAResources.com, which provides information and tools to community association members living in condominiums, homeowners associations, and housing cooperatives. Read the full version here.
Dawn Bauman, CAE Sr. Vice President, Government & Public Affairs
Dawn is CAI’s senior vice president of Government & Public Affairs. As CAI’s lead advocate for federal and state legislative and regulatory affairs, Bauman works with hundreds of volunteer leaders throughout the country service on CAI legislative action committees and CAI government affairs committees to advocate for strong and sensible public policy for America’s community associations.
Bauman has been with CAI since 1996 and has dedicated her career to the practice of non-profit management and advocacy.