In light of recent reports regarding embezzlement in Washington condominium and homeowners associations, I recently decided to consult with a local professional who provides financial management and accounting services and discuss strategies to protect association funds. Andrew Cohen is a seasoned Seattle accountant and the co-owner of CoHo Accounting. Andrew and his company focus on providing personalized concierge-level accounting services, and he generously submitted the insights that follow regarding how to prevent embezzlement in community associations.
Embezzlement is similar to being pick-pocketed. You know it happens all the time, but to other people. UNTIL it happens to you! Like being pick-pocketed, embezzlement can be prevented or minimized with just a few basic safeguards.
The consequences of embezzlement can be significant for your association. It often starts when a volunteer gets into some sort of financial trouble or feels undervalued. The person might record their association dues as having been paid when they haven’t. The person might start paying a fake vendor a few hundred dollars a month and charge that expense to maintenance. Such fraudulent transactions are typically buried in the association’s most active expense line, both in terms of dollars and transactions. The person might even write themselves checks from the association’s account.
Boards should implement a system to prevent embezzlement:
1. Diligently review the association’s financial records.
2. Put internal controls in place to make theft more difficult.
3. Pay attention to the behavior of board members.
Diligence
• Review bank statements on a monthly basis.
• Evaluate who is receiving association funds – are any of them odd or unknown?
• Instruct accountant to examine books for discrepancies each quarter.
Internal Controls
• Set limits on the length of board service in the same position.
• Sign checks by hand. Do not use a signature stamp.
• Establish separate banking duties:
o The person who writes checks shouldn’t sign them or reconcile accounts.
o The person who deposits checks should not be able to cash them or open mail.
Here is one way to separate duties on an association board:
1. Secretary – Opens mail; records checks received; sends checks and check register to Treasurer; sends a copy of check register to President; sends bills to Treasurer; and sends bank statements to President.
2. Treasurer – Deposits checks; enters accounts payable and prepares checks for payment; coordinates with the board on insurance and liabilities; ensures that taxes are paid; brings prepared checks to President for signature; generates financial records like profit and loss statements and balance sheets.
3. President – Reviews and signs checks; reviews bank statements to ensure that:
o Deposits coincide with receipt record of HOA dues or assessments paid;
o The cash balance on the bank statement and the balance sheet agree; and
o There are no unusual expenditures. If clear explanations of such expenditures are not forthcoming, this is a red flag. It may simply be lax bookkeeping, but laxity is an opportunity for theft.
Behavior
Boards should stay alert for indications of an elevated risk of embezzlement. For example, does a person with access to association funds:
• Rarely take a vacation? If someone is always there, they can cover their tracks.
• Rarely delegate tasks, yet complain of being too busy? Control includes the power to conceal.
• Have personal financial problems? This increases the motivation to steal.
• Have a very close relationship with or control over a particular vendor? This can provide a way to obtain association funds secretly.
• Use drugs or alcohol to excess? This clouds judgment and lowers inhibitions.
If you are interested in learning more about how to protect your association from embezzlement, CoHo Accounting can help with innovative financial services designed to provide clients with peace of mind.
Embezzlement is similar to being pick-pocketed. You know it happens all the time, but to other people. UNTIL it happens to you! Like being pick-pocketed, embezzlement can be prevented or minimized with just a few basic safeguards.
The consequences of embezzlement can be significant for your association. It often starts when a volunteer gets into some sort of financial trouble or feels undervalued. The person might record their association dues as having been paid when they haven’t. The person might start paying a fake vendor a few hundred dollars a month and charge that expense to maintenance. Such fraudulent transactions are typically buried in the association’s most active expense line, both in terms of dollars and transactions. The person might even write themselves checks from the association’s account.
Boards should implement a system to prevent embezzlement:
1. Diligently review the association’s financial records.
2. Put internal controls in place to make theft more difficult.
3. Pay attention to the behavior of board members.
Diligence
• Review bank statements on a monthly basis.
• Evaluate who is receiving association funds – are any of them odd or unknown?
• Instruct accountant to examine books for discrepancies each quarter.
Internal Controls
• Set limits on the length of board service in the same position.
• Sign checks by hand. Do not use a signature stamp.
• Establish separate banking duties:
o The person who writes checks shouldn’t sign them or reconcile accounts.
o The person who deposits checks should not be able to cash them or open mail.
Here is one way to separate duties on an association board:
1. Secretary – Opens mail; records checks received; sends checks and check register to Treasurer; sends a copy of check register to President; sends bills to Treasurer; and sends bank statements to President.
2. Treasurer – Deposits checks; enters accounts payable and prepares checks for payment; coordinates with the board on insurance and liabilities; ensures that taxes are paid; brings prepared checks to President for signature; generates financial records like profit and loss statements and balance sheets.
3. President – Reviews and signs checks; reviews bank statements to ensure that:
o Deposits coincide with receipt record of HOA dues or assessments paid;
o The cash balance on the bank statement and the balance sheet agree; and
o There are no unusual expenditures. If clear explanations of such expenditures are not forthcoming, this is a red flag. It may simply be lax bookkeeping, but laxity is an opportunity for theft.
Behavior
Boards should stay alert for indications of an elevated risk of embezzlement. For example, does a person with access to association funds:
• Rarely take a vacation? If someone is always there, they can cover their tracks.
• Rarely delegate tasks, yet complain of being too busy? Control includes the power to conceal.
• Have personal financial problems? This increases the motivation to steal.
• Have a very close relationship with or control over a particular vendor? This can provide a way to obtain association funds secretly.
• Use drugs or alcohol to excess? This clouds judgment and lowers inhibitions.
If you are interested in learning more about how to protect your association from embezzlement, CoHo Accounting can help with innovative financial services designed to provide clients with peace of mind.
