Fiscal Irresponsibility In Your Association? Embezzlement and What You Can Do to Help Prevent It

We have all heard from time to time about an association manager or officer who gets caught with his hand (or more) in the association’s cookie jar. The most recent account making headlines has to do with a manager in Virginia who has been convicted of stealing $3 million from over 350 different homeowners associations. We shake our heads and are thankful that our association isn’t the victim of such a potentially disastrous crime. But sometimes, it is just a matter of luck that our association hasn’t suffered such a loss, or we are lucky that everybody providing services to the association is trustworthy.

Fortunately, other than luck and trustworthiness, there are a number of relatively simple measures that can be taken to protect the association. Some of these measures are protections that the association’s accountant can help put in place to provide for proper oversight of, and accounting for, the association’s funds. These steps include: (1) requiring more than one signature on association checks that exceed a relatively nominal amount – such as $500; (2) making sure that two different people serve the offices of president and treasurer; (3) requiring somebody other than the person primarily responsible for paying the association’s bills (whether the manager or the treasurer) to reconcile the monthly bank statements or to review the reconciled statements that were prepared by the manager or the treasurer; (4) establishing the association’s bank accounts at a bank that permits all designated persons (such as all members of the board) to have online access to view the account activity (note, this is not permitting all members of the board to be able to access the accounts to conduct activity in the accounts); (5) maintaining separate operating accounts and reserve accounts; (6) requiring the association’s manager to maintain the association’s accounts separate from the accounts of other associations managed by the manager; (7) do not allow checks to be made out payable to cash, or signed in blank; (8) thoroughly review invoices and supporting documentation before signing payment checks; (9) keep association records up to date and require regular financial reports at each board meeting; and (10) keep a minimum of petty cash and have board members count it periodically on an unannounced basis.

In addition to financial protections, the association should diligently protect against board members who have conflicts of interest (i.e., they have a financial or personal interest in the matter in front of the board) from participating in the decision making. The board should obtain multiple bids for all major contracts and check references. Make it a policy to avoid conflicts of interest by not soliciting or accepting bids from board members, their friends or relatives.

 

Finally, the Colorado Common Interest Ownership Act (“CCIOA”)(which in this case does not apply to all associations, only those formed after July 1, 1992) requires that if an association with thirty or more units delegates powers of collection, deposit, transfer, or disbursement of association funds to other persons or to a managing agent, the bylaws of the association must require, in addition to the separation of accounts as noted above, that the other persons or managing agent maintain fidelity insurance coverage or a bond in an amount not less than fifty thousand dollars or such higher amount as the executive board may require. Generally, the higher amount should represent the amount of funds that are in the association’s accounts (both operating and reserve) together with two or three months’ worth of budgeted assessments. Even if your association is not subject to CCIOA, requiring fidelity insurance coverage on those persons who handle the association’s funds is a good idea.

 

Even with these steps, there is no guarantee that the association will be protected. However, following these basic steps will significantly reduce the risk of theft, and minimizes the association’s reliance on luck and the trustworthiness of its directors, officers and managers.

 

If you have other questions about protecting against theft or embezzlement, please feel free to contact us.