This is our four part discussion of what ALL board members and officers of community associations in America should read: the 35-point bulletproof list of financial procedures detailed in “Escaping Condo Jail“, and consider it a survival manual.
It is divided into four segments:
- Inheriting Old Books
- Guarding and Vigilance
- Cyberbanking Procedures
- Efficiency Maximization and Return
Previously, we discussed The Takeover: Inheriting Old Books.
In this post, we will discuss the second segment, Avoiding the Sting: Guarding and Vigilance. 
- All board officers should provide copies of their deed and their state identification or drivers license to be kept on permanent file.
- Always screen employees in advance with a credit and background check. Collusion between association employees and contractors is not uncommon. Be sure to run background checks on all board applicants as well — not just the employees. Associations should amend their governing documents to prevent someone with a prior conviction from serving on a board. Banning felons from handling large sums of money is a good idea.
- Always, always, always have at least two sets of unrelated eyes on the monthly bank statements. Regardless of size, informal operations almost always set the stage for fraud. Choose a bank that agrees to issue duplicate monthly statements. For self-managed associations, have bank statements sent not only to the treasurer, but also to another board member who does not have access to the account. If using a management company and another to a designated member of the board- preferably the treasurer.
- Require that anyone with access to the association’s funds be bonded and have adequate fidelity insurance. Minimum fidelity coverage should be at least three months of assessments plus everything in reserves as the policy limit. Unlike directors’ and officers’ insurance, fidelity insurance typically acts of malfeasance and fraud. Double-check annually that the management company has a fidelity bond for your association.
- Do not allow the person who issues the checks to be the same individual who reconciles the bank statements.
- Require board members to review monthly financial statements within 10 days of receiving them from the bank, and require checkbooks to be balanced within 10 days of receiving statements from the bank. Examine the bank statements and look at copies of any suspicious check to make sure it was deposited by the person or firm to whom the check is made payable.
- Never allow the management company to have access to reserve accounts.
- Never accept a computer-generated spreadsheet of financial report in lieu of an actual bank statement. Always insist on receiving the actual bank statements directly from the bank.
- Require that all budgets, without exception, conform to generally accepted accounting principles (GAAP). Budgets should clearly show a beginning and ending balance of the previous year’s bank balances, an income and expense statement of the previous year’s bank balances, and projections for the upcoming year’s income and expenses.
- Require computerized financial software be used to keep the books. Financial software such as Quicken can generate reports and spreadsheets that conform to GAAP. Although the reports can be altered, it is easier to compare them to the actual check register. Remember that homemade spreadsheets are the easiest to manipulate.
- A minimum of two signatures should be required on every check– perhaps even three signatures for amounts over a certain dollar amount, say $2,500. Signatories must never sign blank checks, even “in case of emergency.” No exceptions!
- Never allow association credit or debit cards to be issued or used since they only require one signature.
- Require invoices and receipts before paying bills. Never allow payments to be made without an invoice and a receipt.
- Use “safety check” stock with watermarks and “warning bands.” Keep in mind that it is now so easy to Photoshop, alter, or duplicate checks to change dollar amounts or the payee’s name that even an 8-year-old can do it.
- Consider using bank products such as Positive Pay – an automated fraud-detection tool offered by most banks that matches the account number, check number, and dollar amount of check check presented for payment against a list of checks previously authorized and issued by the association. All three components of the check must match exactly or the bank will not pay it. When Positive Pay is used together with a highly secure check, Positive Pay can dramatically cut fraud losses.
- Hire an accountant to conduct periodic audits– not just a “financial review” – of the association’s accounts. Require that the audit be performed at least every five years, or more often as required by state statute, and that an annual statement from a licensed certified public accountant (CPA) be prepared. If anyone is thinking of stealing, he or she will know that a review or audit is being done on a consistent basis. So, he or she will think twice about it.
- Keep an eye on the amount in the reserve account. Should money in the reserve account exceed FDIC limits, require that an additional account be opened at a different, unaffiliated financial institution.
Next up, Banking on the Cloud: Cyberbanking Safeguards. Until then, feel free to live chat with our staff about your association!