Tips To Proactively Avoid Fraud and Embezzlement in a HOA

Fraud and embezzlement are words that can really cause an Association a lot of wasted time, money and energy.  So how can the Board of Directors get out in front of any potential fraud or embezzlement?  This is really simple and easy, but is almost always overlooked.  The Board needs to understand their role in fraud prevention and the top two components to fraud: motivation and opportunity.  In almost all cases, it will take both of these factors for fraud to occur.  Motivation is a factor completely outside of the Board’s control, but that cannot be said about the opportunity factor.

To reduce or eliminate the opportunity factor, establishing simple monitoring tasks by the Board are critical, extremely simple and highly effective.  First, review and control those key individuals that have banking authority.  When there are transitions on the board or with a management company then the individuals with banking authority need to be reviewed immediately and updated. Ensure this is reviewed and monitored by the Board Treasurer and then approved by the entire board. Next, establish an approved vendor list.  Payments made to vendors that don’t exist or consultants with no credentials are very common with Associations.  The Board should periodically review the disbursements ledger (check register) and look for payments to vendors that are not on the approved vendor list.

In addition, there are a number of control measures the board should do on a regular basis to reduce the risk of fraud or embezzlement.  These can include the following:

  • Review and approve the bank statements and bank reconciliations. Establish a due date to ensure the bank reconciliations are completed timely and reviewed timely.  Typically 15 days from the close of the previous month is a best practice.
  • Review actual results versus budgeted amounts and inquire of all variances.  Avoid only focusing on variances where the actual amounts exceed the approved budgeted amounts.  Variances significantly below approved budgeted amounts can be a myriad of issues.  Remember, the devil is the details. 
  • Discuss with your management company the safeguards they have over cash receipts.  The board should have a very good understanding of how much cash is received and what activities are leading to the generation of members paying in cash. 
  • Make sure your management company is utilizing a lockbox system for assessment collections.  Encourage all of your members to pay directly to the lockbox.  This will cut down on cash receipts. 
  • Review, review, review and review the monthly financial package.  This information is key and the boards timely review is critical to the identification of any potential issues that could be caused by fraud or embezzlement.  Make sure the financial package is completed timely as well.  Establish a due date with your management company.  This should be a date that is reasonable and agreed upon.

These steps, or suggestions, tailored to fit your association can help reduce or even possibly eliminate the opportunity for fraud and/embezzlement.  Fraud will happen at the most unexpected time, make sure your Board is taking the necessary precautions to protect the financial health and stability of your Association.  To learn more click the button below to speak with a Certified Public Accountant at LBA Haynes Strand.