8 Steps HOA Boards Can Take to Minimize the Risk of Fraud & Embezzlement

Because they rely heavily on volunteer homeowners with varying background experience and limited time that is devoted to providing services as a director, Homeowners Associations are extremely vulnerable to financial damage as a result of criminal conduct on the part of wrongdoers who take advantage of their position. By following some basic procedures, HOA boards can greatly reduce the chances of being damaged by insider embezzlement of funds and/or other fraudulent conduct by those who have access to HOA funds.

1. All HOA Funds Should be Deposited into HOA Accounts.

Funds belonging to the HOA should always be deposited into a bank account that is in the name of the HOA and established under the HOA tax identification number. Never comingle HOA funds into a property manager’s bank account.

2. Always Maintain a Separate Operating Account and a Reserve Account.

Reserve funds should always be maintained in an account that is separate and distinct from an the operating account that is used to pay bills. All disbursements from the reserve account should require the signatures of at least two board members (not the property manager).

3. Withdrawals of HOA Funds Should Require Two Signatures.

All HOA bank accounts should be set up so that withdrawals require the signatures of two authorized signors on the account.

4. Processed Checks or Copies of Front & Back Should be Provided with Statements.

Monthly statements received from banks should include either the checks that have been processed or copies of the front and back sides of each check.

5. Statements and Checks Should be Reviewed Monthly.

HOA’s need to have someone other than the person who signs on an account review the monthly bank statement of the account and the front and back sides of each check that was written during the period covered by the statement.

6. Change Account Passwords When there are Personnel Changes.

When there has been a change in the composition of the board or management personnel, make appropriate changes to account passwords so that only current authorized board members have access to the account information.

7. Reconcile Paid Invoices and Receipts with Checks.

An authorized person that does not sign on the account should reconcile the account transactions upon receipt of a new statement. All checks that have cleared should be reconciled against invoices and/or receipts to confirm proper payments were made.

8. Invest in Periodic Audits and/or Reviews by a CPA.

State laws and/or governing documents generally require periodic audits by licensed CPAs. Make sure these audits and accountant’s reviews are conducted.