Article on Embezzlement, misappropriation of funds, fraud…

Embezzlement, misappropriation of funds, fraud…not in my community association! It is every board and homeowners worse nightmare and unfortunately does happen in communities like yours every day. It is very much a whodunit tale and uncovering details, information and money trails, doesn’t happen overnight.

It is for that very reason that it is so important for homeowners and board members to take a hard look at how assessments are collected and accounted for. The following recaps what a board should consider in assessment collection, accounting and financial processes.

A good start is with how the money is collected, where the money is kept, who is approving or authorizing expenditures and how transactions are handled and reported. Every community association should have a bank lockbox established in their name. This follows the industry standards of the Community Associations Institute but even more importantly this provides for safety, security and accuracy in assessment payments and follows AICPA banking guidelines. In this manner, the assessments are paid to the association and not to a management company, a collection service or an individual. They are not mixed in with hundreds of other associations payments – they are deposited directly into the association bank account. No one except the bank personnel where the payments are mailed is handling fees or funds on behalf of the association.

Electronic banking and reporting are also offering some real positives in sound controls for community association boards and management companies. Direct debit is serving and saving many associations in the way of bank fees, and banking services through a variety of options is affording safeguards in the approval and authorization process to many board members. It may be a process as simple as reviewing checks online, accessing a bank statement, authorizing invoices for payments or review or receipt of financials online. All of these contribute successfully to lessening an incidence of misappropriation or fraud and provide boards and homeowners with a true comfort level in how the association conducts business.

Transparency in all financial transactions must be the standard not the exception in association management. Most management companies are providing monthly financials, but it is still the board’s responsibility to read, review and even question amounts or expenditures. In self-managed communities it is imperative that homeowners are asking the right questions as well and if self-managed boards are not providing financials – they need to. All association homeowners have the right to know how funds are spent.       

Check signing is another important element in checks and balances. In self-managed communities there should also always be two signatures required on any checks written over a certain amount. One person should not be capable of writing checks, transferring funds or setting up the association accounts – this is very definitely full board fiduciary responsibility. A management company should also be attentive to board majority, board authority and afford flexibility in this regard – some are and some are not. 

All associations are dependent upon collection of the annual or monthly assessments, particularly since the assessments represent the revenue or the income of the association. The revenue provides for payment of any association expenses. And when homeowners don’t pay - the board has a fiduciary responsibility to collect outstanding assessments. The governing documents identify this under assessments and under power and duties of the Trustees/Directors.

In self-managed associations this may be handled and addressed in several ways. There may be notices sent, liens filed, collection coordinated with an Association Attorney. If the Trustee/Director is knocking on neighbors doors to collect, they may wish to seek legal a legal opinion on potential liability and risk.

In professional management there is normally a policy and procedure set in place to follow a collection process. It may give the management company the ability to add late charges and late fees (normally called out in the Management Agreement). Some management companies are exacting and diligent in collections, some collect a percentage on what’s collected and some just let collections amass.  Take a good look at collections, what’s outstanding and how it’s being addressed and handled in the community by the board and by the management company.    

 All boards must be conscientious in remembering association money is not theirs – it has been entrusted to them to care for, grow and invest.  The understood objective is to keep assessments low, meet association needs, and maintenance responsibilities, spend wisely and reserve for any unplanned circumstances.   

 In choosing self-management, cost may be the only factor for some associations – but the reality is additional costs can be incurred if the trustee/director does not have the time, interest or commitment to really devote to the association.  While the board normally consists of anywhere from three to five individuals, many times decision making and association responsibility is falling on the shoulders of one. This person may be functioning and serving as President, Secretary and Treasurer – collecting the assessments, keeping the books, hiring contractors or vendors, paying the bills, holding files, enforcing and policing the neighborhood or subdivision.  This person may have a love/hate relationship with control and power; or they may short circuit and burn out because there is so much to do and never enough time to do it.  This is very often when and where a decision to employ a management company is made - it lessens the burdens – it removes the personal and neighborly considerations and it offers real instant relief for a board.

A professional management company has a lot to offer, but it will come with a cost.  A good, quality, professional, management company will cost money, but it will also bring added value in protecting and preserving the financial and physical assets, which in turn boosts home sales and personal property values.   

So, whether you are a self managed board or an association under professional management, being attentive to fees, collection of funds, financials and future funding is imperative for the community association. The fact is  embezzlement, misappropriation and fraud in community associations happens right here in our back yards, or subdivisions down the road – the reality is no community is  immune, but it can be prevented with strong internal accounting controls and a good checks and balance system.       

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