Preventing Fraud and Embezzlement in Your HOA

Associations fall victim to theft and embezzlement too frequently. Know the warning signs and institute preventive measures before your community is left with a difficult recovery. HOA boards should consider implementing the following practices and procedures to safeguard association funds.

1. 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. It’s needed to verify the existence of accounts and open new ones. For example, only the treasurer of a self-managed association knows the bank names and account numbers, and if something happens to the treasurer, it becomes nearly impossible for other board members to know where the association’s money is located.

2. Use a lock box system for deposits. While it may seem obvious, never sign blank checks. If your association is professionally managed, require dual signatures on all checks or a monthly report showing check numbers, payees, and amounts. A lock box system 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.

3. Safeguard your association’s reserves. As the association builds its reserve funds, make sure you are segregating and safeguarding them. Similar to 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.

4. Require duplicate operating and reserve accounts statements be sent 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. While this recommendation requires boards to update the information—and, if necessary, change passwords—whenever a change on the board occurs, it is a small chore considering that this step alone could prevent someone from falsifying bank statements.

5. 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.

6. Shop around for bank services. Several of these steps require the cooperation of the bank to be effective. Unfortunately, some banks do not enforce dual-signature requirements or prohibit electronic transfers among accounts, despite their 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.

7. Know the association’s insurance company and consult with the agent. Every board member should keep copies of the association’s insurance policies or, at a minimum, the declaration(s) page. At least once a year, the board should have the agent attend a board meeting to discuss the association’s policies and whether additional coverage is recommended.

 8. 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 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 a theft by one of its employees.

9. Make sure the management agreement includes specific terms to require these safeguards. If your association is professionally managed, the 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.

10. 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.

While no single suggestion is fail-proof, these safeguards used in combination should help to create a system of checks and balances to keep your association and homeowners from being victimized.

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