Homeowners association accounting and management company banking and accounting need to be COMPLETELY independent from each other. “Commingling” is a practice of some management companies and small operators where at some point, homeowner assessments or other association funds were maintained in the management company bank account. Fraud prevention is important. Experts agree that the only proper procedure is that association funds are held only in association accounts in the association name.
“Clean accounting” is the product of extremely careful attention to detail, segregation of duties, proper accounting controls and full transparency.
QuickBooks, while a great accounting tool, is not ideal for third-party accounting as default reports do not include the audit trail. In essence, payables fraud can be easily perpetrated without leaving a visible trail in the default reports and ledgers. Payees by check and EFT are easily edited and one would have to review the audit logs in detail to find this. We believe it is critical to ensure that account reclassifications and voided transactions “stand out”
While it may not be possible for small companies or those who outsource their accounting to a third-party, is is important that there is an internal crosscheck as a level of assurance and oversight that minimizes opportunities for fraud. It is important that processes be evaluated fully from accounts payable, to Accounts receivable and all points in between.
The best accounting systems have the best controls. Throughout an accounting period, it is important that accounting team members cross check each other’s work throughout the process, and that no single individual has ability to disburse Association funds. Best practices have it that it takes four people to write a check – that is not an effort to deliberately make this complicated but to prevent opportunities for fraud and malfeasance. One person inputs an invoice. The second person (typically the manager or a board member) reviews and approves payment, a third person prints a check and authorized signers sign the check. Other than signatories, the process can be exchanged randomly between team members and team leaders. As well as improving skills and accuracy among staff, valuable fraud controls are part of this process. Further enhancements could include two-signature checks and a “no cash accepted” policy.
There are many sound alternative payment options such as debit cards, auto draft, EFT etc. Experts find these tried-and-true methods to provide appropriate security. Best practices have reconciliations done daily in real time, while management companies with a “deep connection” with the bank lockbox allows the association to ensure one-to-one matching and the accounting team leaders to detect any anomaly, and eliminate skimming fraud risks. We consider it ideal that ALL property owner payments are mailed straight to the bank-direct lockbox. All CMG communities’ Assessment payments are sent straight to the Association’s bank.
Good accounting controls call for such things as obtaining original receipts for reimbursements, obtaining board member assurance and crosschecks that the work is completed before payment, visibility and verification of invoices for accuracy. The best companies also utilize software which attaches the original invoice and gives boards of directors the opportunity to review each prior to payment.
Most boards work with a CPA for tax preparation and some form of financial oversight and consultation. This is strongly encouraged as it balances the mandate of community Governing Documents with its fiduciary responsibilities to the membership. There are various levels of CPA involvement that are affordable to most Associations and add value to even the most involved Board’s oversight.
No discussion of safety of funds would be complete without a mention of Fidelity Insurance. Often called “crime coverage,” “employee dishonesty coverage,” or “fidelity bonding,” this type of insurance is basically designed to protect against theft or embezzlement by employees, directors, management personnel, or others who might have access to association funds. Community Management Group carries it, and it is an important purchase/budgeting consideration for any Association to carry their own. A licensed agent should be consulted about whether a fidelity bond would be sufficient to protect an individual association, as well as to identify and manage risks. Some lenders and underwriters now require a minimum threshold, sometimes based on deposits; Since this number changes throughout the year, an association Board should work with their agent to make certain that adequate coverage is in place, particularly in situations where large amounts of money may be at hand. Board members should consider minimums that may exist in the law and a careful reading of his or her Governing Documents to fulfill noted requirements.