The theft of association funds is not something you hear about very often. However, if it happens to your association, once is too often.
The theft of association funds has become more prevalent over the past few years. Not only have board members been caught stealing the funds of the association, but I have represented a few associations where employees of the management company have stolen money.
There are a number of measures that can be taken by an association’s board of directors to protect the funds of the association and eliminate some of the risks involved:
1. Two Party Checks – Although two party checks are not required, it is a prudent business practice to require that all checks be signed by two persons. The board can alert the bank not to accept a check which is not signed by two signatories on the account. This will help prevent a board member from signing a check without another board member’s knowledge.
When you have a management company working for your association, it is sometimes inconvenient to have two party checks. If the management company is reluctant to have two party checks due to this inconvenience, it is wise to place a limit on the amount of funds the management company can expend without board approval.
2. Signature Cards – Although this seems like common sense, make certain that only current board members and the current managing agent are signatories on the account. You would be surprised as to how many associations we represent overlook making this very important change so that past board members no longer have check writing privileges.
3. Reserve Funds – Only board members should be signatories on the reserve account. Since reserve funds should only be spent with the prior consent of the board of directors, there is no reason for the management company to be a signatory on the reserve account. In one instance, a management company stole hundreds of thousands of dollars from the several associations that it represented because the manager was the only signatory on the association’s reserve account. Obviously, this is where the bulk of the association’s funds are and, as such, only board members should be signatories on the account.
4. Fidelity Bonds – If your association is a condominium with thirty or more units, the board must obtain fidelity insurance covering persons who control or disburse funds of the association for the maximum amount of coverage available to protect funds in custody or control the association. Even if your association does not have thirty units or is not a condominium association, it is a wise idea for the association to obtain a fidelity bond.
All management companies must furnish to a condominium association a fidelity bond for the maximum amount of coverage available to protect funds in the custody of the management company at any time. The cost of this bond may be assessed back to the association.
Several of the associations which we represent were able to recoup the funds that were stolen under the coverage of the fidelity bond. Please confirm that your association has a fidelity bond in place to protect the association from any type of theft.
5. Financial Statements – The board of Directors should review the financial statements, as well as bank statements, to make certain that there are no inaccuracies. It is also wise to have a year-end accounting of the books and records. It is not necessary to incur the expense of a complete audit unless you believe that there has been some type of theft. However, a year-end compilation may help detect inconsistencies before they become too great.
6. Research management companies prior to hiring one, check their references and consult with your attorney and other professionals in the industry to learn the reputation of the management company.
The above are several steps that an association can take to help prevent the theft of association funds. Obviously, there is no 100% protection against theft. However, if you have the right measures in place, if theft does occur, your association will be protected.
Originally published in the Pioneer Press (August 2001).
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