May 24, 2010

Embezzlement Prevention Strategies from Accountant Andrew Cohen

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.


• 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.


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.

May 18, 2010

Dog Waste Problem May Cause Board to Implement Drastic Measures

The Scarlett Place Condominium in Baltimore is in the midst of a pooch poop predicament. According to a recent story in The Baltimore Sun, one board member believes that the amount of dog waste that is regularly left in the common areas has gotten out of hand, and he has proposed a novel way to identify the culprits – DNA testing. All dog owners would be assessed $50 per animal to cover testing costs and $10 per month to cover removal costs. A Tennessee-based company would create a database representing all pets at the Condominium and match offending samples to a particular dog. The dog’s owner would then pay a $500 fine.

Boards of Washington condominium and homeowners associations should be cautious when contemplating new regular assessments on a specific group of owners. Assessments must generally be charged on the basis of the percentages or values found in the association’s declaration or covenants. The Washington Condominium Act does permit all condominium associations in the state to charge common expenses benefiting fewer than all of the units exclusively to the units that are benefited, but only if such authority is explicitly provided for in their declarations. If an association’s declaration does not provide for the authority to charge certain common expenses to benefited owners, the declaration can be amended to give the association that power.

There are other possible ways to deal with dog waste that do not involve new assessments on dog owners or fines for noncompliance with removal rules. For example, dog owners could be persuaded to periodically assign one of their number to pick up the poop. The association could also include a line item in the annual budget to pay an owner to perform this task.

May 10, 2010

Contracts - Review Them, Revise Them, and (Sometimes) Reject Them

Many community associations periodically execute contracts with vendors to obtain essential services. If you are on the board of a condominium or homeowners association, you should resist the temptation to sign contracts without thoroughly reviewing them. Important legal rights are at stake.

The board needs to make sure that the contract accurately describes the agreement. It should be clear how the price will be calculated and what variables will affect it. The contract should specifically describe what goods or services the association is buying and all applicable performance standards.

The contract should also protect the association if something goes wrong during performance. Requiring the vendor to carry insurance that covers the association is one way to do this. Obtaining a release from liability for claims arising out of the work is another. Dispute resolution procedures should be established, and the causes that allow a party to terminate the contract should be described in detail.

Proper review and editing of proposed contracts can help associations get the best value for their money and avoid costly disputes with vendors. The board should attempt to envision how the contract will be performed under a variety of circumstances and the problems that could be encountered along the way. If the board has trouble identifying areas of concern, experienced attorneys and property managers can facilitate this process.

May 3, 2010

Washington Supreme Court Resolves Dispute Over Addition to Bellevue Condominium

The Washington Supreme Court issued an important decision last month regarding the Horizontal Property Regimes Act (the state law that governs condominiums created on or before July 1, 1990). This decision is significant for two reasons. First, the first few pages of the Court’s opinion provide an excellent overview of the Act. Second, the Court’s opinion clarifies that an owner in an older condominium can expand his apartment into the common area with board approval if the association’s declaration permits it.

An owner at the Woodcreek Condominium in Bellevue, Washington built a second story addition to his townhouse-style condominium apartment with the approval of the Woodcreek Condominium Association. This new addition blocked light to and views from another apartment, and the owner of that apartment sued the first owner and the association, arguing that the common areas either could not be divided or could not be combined with an apartment without a unanimous vote of the owners. The Court rejected those arguments and ruled in favor of the owner who built the addition and the condominium association.

The Court first held that the Act and the association’s declaration do not bar the division of a condominium’s common areas. It next held that the Act and the declaration do not require the unanimous consent of the owners to combine a portion of the common area with an apartment. The Court explained that the unanimous consent provision in the Act only applies to changes in the percentage ownership rates assigned to each apartment. It also noted that the association’s targeted increase in the assessments charged to the owner that completed the addition was invalid.

This case serves as a reminder to condominium boards and owners to determine whether Washington law and the governing documents allow them to pursue courses of action that affect others. Older condominiums face many challenges as they evolve, and owners' interests will sometimes clash. A thorough understanding of Washington law and the declaration is essential to resolving these conflicts without costly litigation.