Preventing Fraud in Community Associations: The Board's Crucial Role

Trust is fundamental for homeowners living in community associations, especially when it comes to financial management. Discovering that someone has misused funds can be deeply unsettling. Sadly, such incidents are more common than often realized:

In a New York condo, over $300,000 was misappropriated by a former board president over three years. In Minnesota, a significant fraud case surfaced, involving millions taken from over 30 associations by a former management firm executive. Out in Santa Paula, California, a couple fraudulently took $22,000 before disappearing. Meanwhile, in Florida, a board treasurer faced allegations of embezzling nearly $58,000.

Outlined below are crucial strategies your board should adopt to safeguard your association against fraud.

Safeguard your association’s bank accounts

Ensure all association bank accounts are FDIC insured and are solely in the association's name. Funds must remain separate from personal finances, with no individual permitted to use them for personal expenses. Your financial reserves and operational funds require separate accounts. Opt for accounts that not only secure your money but also offer good returns.

Require dual signatures for reserving fund transfers

In certain regions, transferring reserve funds necessitates authorization from two individuals. This is a legal requirement in places like California and Nevada. Even without such laws, associations should always mandate dual signatures for transferring reserves or making substantial purchases.

Avoid debit cards linked to your operating account

Though convenient, debit cards can pose risks by making unauthorized transactions easy. To prevent unauthorized access to operational funds, it is advisable not to use debit cards.

Implement internal controls

To prevent financial misrepresentation, the person issuing checks should not handle bank statement reconciliations. Separating responsibilities enhances oversight and ensures accountability. It's crucial for all board members, not just the treasurer, to be involved in financial management. Regularly rotating financial duties can also prevent any single person from maintaining control over finances for too long.

Reconcile transactions promptly

A critical step in fraud prevention includes regularly reconciling your balance sheet and bank statement. Delays in this task could allow fraudulent activities to continue unchecked. Even with a property management company handling financial statements, boards must review them diligently each month.

Know your vendors

Identification of all vendors is essential. Fraud often involves making payments to non-existent vendors. Some associations unknowingly make payments to fake vendors, such as a fictitious landscaping company. Without familiarity, fraudulent transactions can go unnoticed.

Utilize electronic payments when feasible

Electronic payments significantly reduce the risk of theft by eliminating physical handling of funds. Where permitted, secure online platforms can facilitate payments easily and safely, providing homeowners with convenience while ensuring transaction integrity.

Keep financial authorizations current

With board members changing regularly, it's important to update bank signatures and financial authorizations promptly to reflect any changes in leadership.

Conduct annual audits

Annual audits, conducted by certified public accountants, offer a thorough examination of your financial records. Though some opt for less extensive reviews, annual audits are essential in detecting fraud. Management companies can recommend reputable CPAs for these audits.

Secure adequate fidelity insurance

Fidelity insurance protects against financial misdeeds by board members or designated individuals. Consult with your management company about obtaining this specialized insurance for your association.

Recognize and respond to red flags

Frequent issues like bookkeepers reluctant to take vacations or late vendor payments can indicate fraudulent activity. Board members should be educated on recognizing these warning signs to act swiftly when necessary. Such red flags include missing documents, frequent vendor payment errors, and delays in deposit processing.

Invest in training

As board roles are typically filled by volunteers lacking financial expertise, training is invaluable. Professional management companies may offer programs to enhance board members’ understanding of financial management.

While preventing fraud requires additional vigilance, these efforts are critical in safeguarding the association's finances. By adopting proactive measures, communities can maintain integrity and trust, protecting the well-being of all homeowners involved.