Every board of directors of a property or community association has a lot of duties to perform – from ensuring guidelines are met and enforced to fielding casual concerns from neighbors.
But perhaps the most important responsibility you have as a board member is to protect the association’s funds.
Given that you have been entrusted by your community for such a task, it is essential for the board of directors – and a management company, if you are professionally managed – to fully understand how to keep money safe in the event of embezzlement or misappropriation of funds from a board member, officer, committee member or management company.
Self-managed associations and those that are professionally managed by companies may use similar, but not identical, internal controls and insurance coverages.
The bank statement should be sent to the management company (to the treasurer or bookkeeper if self-managed) and a duplicate should go to a board member without authority to sign checks or make bank transfers or withdrawals. Since many banks offer e-statements, sending copies to some or all board members in addition to those listed above is also an option.
To avoid the potential for deposits to the wrong bank account, consider a lockbox system, which allows owners' payments to be mailed or transferred directly to the association's account.
This may seem obvious but never sign a blank check. If your association is professionally managed, require a check register report showing check numbers, payees, and amounts. As proof, require the bank to return canceled checks or provide electronic images of the canceled checks, along with monthly statements. When reviewing the check register, always make sure the check numbers are in numerical sequence.
You should also keep your association’s reserves separated to ensure the funds are only used for their intended purpose: paying for deferred repairs or capital expenditures. Such projects typically come with a hefty price tag, so we recommend that any expenditures from the reserve fund be approved in a duly called board meeting, as the approval will be formally documented. Principle risk-free investments are recommended.
Never give one board member or bookkeeper total control over reserve accounts. It is important that self-managed associations update the bank account signature cards annually to ensure an active board member can access the funds, if necessary.
Internal controls are just one layer of protection. The second is putting fidelity and crime insurance in place.
Fidelity and crime insurance coverages differ for self-managed associations and those with a third-party bookkeeper or professional management company.
Self-managed associations should have fidelity coverage on the board members, officers, and other volunteers, such as the finance committee, in an amount that equals or exceeds the association's reserve and several months of operating funds. A portion of directors and officers (D&O) liability insurance provides a fidelity insurance bond on board members but it may not be sufficient.
If you are professionally managed, the company’s coverage should include fidelity and crime, as well as an endorsement for “employee theft of client property.”
Fidelity insurance is as important as property and liability insurance, so be sure to make it part of your association’s common expenses.
Similarly, a management company’s fidelity insurance is not usually included in the base policy and requires the purchase of a managing agent rider. 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.
If you are professionally managed and have board members that are also signatories on bank accounts, the association should have its own fidelity insurance to protect the board, while the management company also should have fidelity and crime insurance, as well as an endorsement for employee theft of client property.
And as a final proactive step in keeping your association’s funds safe, have an independent accountant review your books at the end of each year.
CAMS offers both full-service management as well as accounting-only services - learn more about each type of service here.