By nature, homeowners associations are particularly vulnerable to being financially damaged by errors that are made by the volunteer members and property managers who perform various functions for the association, and by deliberate acts of fraud and embezzlement. To protect against and minimize the risk of suffering financial losses due to fraud and embezzlement, an Association should have adequate HOA internal controls for finances that mandate the manner in which business involving the association’s finances is conducted. HOA internal controls that are very easy to implement include: (i) segregations of duties; (ii) controls over the handling of funds (iii) regular director reviews; anind (iv) proper financial statements.
Segregation of Duties
No one person should ever have access to all of the different aspects of the associations finances, and no one person should be vested with the responsibilities of the differing financial duties or the responsibilities of the board of directors acting collectively. Segregating financial responsibilities will facilitate detecting innocent errors and will make it more difficult for one person to commit fraud or embezzle funds from the association. Typical financial responsibilities within a homeowners association that should be segregated and/or performed by the board collectively include: (i) the approval of transactions such as the selection of vendors, entering into contracts, and authorizing payments and credits; (ii) the depositing and withdrawing of association funds and the posting of association financial transactions; (iii) the approval of payments to employees and vendors and the writing of checks for the approved payments; (iv) and the review of bank and financial statements.
HOA Intenal Controls re Funds
It is critical that associations have established policies that protect their funds. Such policies include: (i) a check signing policy that ensures that no one person is vested with the sole responsibility for signing checks on behalf of the associationand if one person is allowed such authority the account should be structured with a maximum amount that can be withdrawn (i.e. $500.00); (ii) funds should always be deposited into accounts that are in the name of the association and not individual members or property managers; (iii) property managers should not sign on association bank accounts; (iv) association funds should always be deposited into federally insured bank accounts and not investment accounts that have a risk of loss; (v) two signatures required for account withdrawals or transfers; (vi) checks should be prepared by one person and signed by another; (vii) bills should be paid based on original invoices received from vendors that are known and/or verified; (viii) the source of petty cash on hand and disbursements of petty cash is properly documented; (ix) all deposits and disbursements of association funds are posted to the associations general ledger- preferably by someone other than the person who makes the deposits or signs the checks; (x) all accounts receivable and accounts payable are posted; (xi) payroll and vendor checks are verified; and (x) bank statements are regularly reviewed (monthly) and reconciled.
Financial Reviews
Association directors are responsible for the associations finances and they should regularly review all bank statements and check registers to verify deposits, transfers of funds into different accounts, withdrawals and disbursements of the associations funds. All account statements should be reconciled monthly and the directors should make certain that year-end financial reviews are conducted by independent accountants who provide the association with proper financial statements.
Proper Financial Statements
A proper financial statement accurately reflects the financial activities of a homeowners association by reporting on such things as assets, liabilities, litigation, and all association income and expenses for a specific period of time (typically a month, a quarter, or a year). At the end of an associations fiscal year, the association should have a certified public accountant prepare the associations financial statement for the preceding year. The statement is generally based on the information provided by the associations management personnel, but if required by state laws and/or the associations governing documents, the information provided for preparation of the financial statement may have to be audited or reviewed by the account to verify accuracy. State laws and/or association governing documents typically mandate that the financial statements be distributed to the associations members within a certain period of time (i.e. 120 days) after the close of the associations fiscal year. Upon receipt, the associations financial statements should be carefully reviewed by the associations directors and the members and items that are confusing or questionable should be investigated to confirm they were appropriate.
Associations that establish and enforce adequate HOA internal controls will operate more efficiently and with far less conflicts among directors, management personnel and association members.