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.
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.