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Protect Your Association from Fraud and Embezzlement

Posted by Jane F. Bolin, Esq. | Feb 19, 2014 | 0 Comments

Anyone can be at risk for fraud, so it's important that you take steps to safeguard your association funds. While no safeguard is foolproof, using a combination of different techniques could help you protect your association from being victimized.

We recently read a CAI article about preventing fraud and embezzlement and have summarized the major points for you below.

  1. Know the association's federal tax ID number (FTI) and keep separate accounts: Use the FTI to obtain periodic listings of all bank accounts and account numbers and make sure they are under the association's name and FTI number. Each board member should know the FTI number because it is needed to verify the existence of accounts and open new accounts, but it should not be spread to general membership.
  2. Use a lock box system for deposits and require dual signatures for all withdrawals: Do not EVER sign a blank check. Require dual signatures on all checks or a monthly report which shows payees, check numbers and amounts. A lock box system allows owners' payments to be mailed or transferred directly to association bank accounts, which reduces the chance that the money will be deposited into the wrong account.
  3. Segregate and safeguard your association's reserves: The reserve account(s) should be under the control of at least two people who have the ability to make withdrawals and transfers. For associations which use professional management or an office manager to handle the finances, any withdrawals and transfers should require the name and signature of a board member. Never give just one board member total control over reserve accounts, and try to lock long-term savings into non-liquid accounts.
  4. Require that duplicate monthly statements of operating and reserve accounts be sent every month: One statement should be sent to the treasurer or management company and the other should be sent to a board member who does not have the authority to sign checks or make any transfers or withdrawals. Many banks offer statements by e-mail, so these statements could be sent to more, if not all, of the board members. Alternatively, board members could have read-only access to online accounts. While this does require boards to update the information, it could prevent someone from falsifying bank statements.
  5. Check invoices against checks paid and the original receipts for credit card accounts: For associations with professional management or a bookkeeper, the board treasurer should check for any unauthorized use. For self-managed associations, a board member without access to bank accounts or credit card privileges should conduct the review.
  6. Shop around for bank services: Many banks don't enforce dual-signature requirements or prohibit electronic transfers among accounts, even though they are under different FTI numbers. Choose a bank that will demonstrate the safeguards it has in place to minimize theft threats, especially in electronic transfers.
  7. Know the association's insurance company and consult with the agent: Each board member should have copies of the association's insurance policy and the board should have the agent attend a board meeting once a year 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 in an amount that equals or exceeds the association's reserve and several months of operating funds. This should be a part of every association's common expenses.
  9. If your association is professionally managed, make sure that the management agreement includes specific terms to require these safeguards: The association should have its legal counsel review the original agreement and any renewal before execution so that the agreements are not filled with terms that are detrimental to the association.
  10. Regularly engage an independent Certified Public Accountant to conduct an audit: The board should perform an audit at least every few years, if not more. In between audits, the association should have an annual review performed with the stipulation that the bank balances be verified independently.

Used in conjunction with each other, these tips will help you create a system of checks and balances that will safeguard your association from fraud and embezzlement. The last thing you want to find out is that your funds aren't being used the way they should be, so it's up to you to take the steps necessary to protect your association. For more information on how to protect your community association, call us today at 954-316-1339.

About the Author

Jane F. Bolin, Esq.

Founding Member, Managing Partner


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