Review system protects funds
As associations grow in size and sophistication, their funds become more
vulnerable to market loss and theft. Though many associations are adopting policies to
protect their investments from market loss, not all adequately protect their funds from
theft--an oversight that could cost thousands of dollars.
What's Your Size?
An association's size often affects the manner in which board members and
managers protect its funds.
For example, small associations often use volunteer board members to run the
association. They do not hire staff members or an outside management company. Therefore,
volunteer officers are responsible for all of the association's fiscal matters. These
associations depend on the honesty and integrity of the volunteers to protect funds.
Mid-size associations often hire professional management companies to oversee
their financial operations. Though this arrangement works well for many community
associations, it removes the board of directors from active participation in association
affairs. Many times, board members react by taking on a passive role in the association's
financial management. These community associations should carefully review all financial
reports, bank reconciliations, and transactions that are processed by their management
company.
Many large-scale associations hire their own employees to act as on-site
managers and accounting staff. Employees that handle several different functions often
have the opportunity to misappropriate funds. A community association can easily watch for
fraud by requiring a board member or manager to review employees' work--especially before
signing a check. Also, carefully review all financial records.
Limit Loss Exposure
Associations of every size can limit their exposure to loss by implementing
sound accounting procedures. Las Vegas CPA, Gary Lein, developed a checklist that helps
associations protect their assets. Following are a few highlights from his list:
1. Thoroughly review monthly financial statements. Develop a checklist to review
important points.
If possible, ask at least two board members to check the financials.
* Compare bank statements to bank reconciliations. The bank reconciliation
should begin with cash per bank and reconcile down to cash per books. The reconciling
items generally consist of deposits-in-transit and outstanding checks. Investigate any
large or old outstanding checks. Do not allow deposits-in-transit to be outstanding for
more than 30 days.
* Examine the bank reconciliations. Ensure they accurately reflect the cash
shown on the balance sheet.
* Review the bank statement to ascertain whether all interest income has been
recorded in the financial statements.
* Record all bank accounts in the association's general ledger.
* Examine the aged receivable list and compare it to the balance sheet. The
total assessments receivable should agree with the balance sheet.
* Review the income statement's comparison of budgeted to actual activity for
the current month and the year-to-date. Question any significant variations.
* Trace the account to the general ledger for questionable income or expense
items. Review details for that account.
* Review the check register and fund transfers to ensure all expenditures and
transfers are proper. Question any large amounts. Require approval and documentation for
all transfers.
2. Ensure the association's accounting records are kept up-to-date.
3. Never sign a blank check.
4. Monitor the petty cash fund. Do not accept hand-written receipts on paper
scraps.
5. Require a financial statement at the end of the fiscal year. This statement
should be prepared by an independent accountant.
6. Review the association's fidelity insurance on a regular basis. Ensure the
association's funds are covered properly and that the association's fidelity insurance
covers anyone who handles community funds--including volunteers.
7. If possible, use the accrual or modified cash basis method of accounting.
8. Adopt the following policies, if possible:
* Do not accept cash.
* Require the individual who opens the mail to stamp payments "for deposit
only." The individual who deposits the payments should not open the mail.
* Require at least one board member to review all payables to ensure proper
invoicing and review costs.
* Require different individuals to review association invoices and to write the
checks.
* Require the person who signs checks to mail them directly to the vendors. Do
not allow checks to be returned to the individual who wrote them.
* Update bank signature cards when any signor is changed.
* Each month, require two different individuals to review the bank
reconciliations and the bank statements. Review canceled checks for irregularities.
* Keep reserves in a separate bank account with board control.
* Require two board members to sign expenditures or transfers from reserves.
* Ensure that transfers to the reserve account are made in a timely fashion.
* Properly document expenditures from the reserve account in the minutes.
Require board approval for these expenditures.
To prevent fraud, the board must actively protect association assets. No
association can afford the costs of negligence.
15 Ways to Protect Association Assets
1. Conduct an annual audit, review, or compilation.
2. Ask an accountant for a management letter.
3. Reconcile bank statements on a quarterly basis.
4. Request monthly or quarterly financial statements.
5. Ensure the board controls reserve transactions.
6. Establish an investment policy that ensures the safety of principle.
7. Do not commingle association funds.
8. Prepare written collection policies.
9. Determine policy for bank account signatory control.
10. Insist on fidelity bond for manager and/or employees.
11. Prohibit kickbacks.
12. Require the disclosure of conflicts of interest.
13. Purchase directors and officers liability insurance.
14. Control association documents at all times.
15. Establish good financial procedures.
