Intrinsic Threat: Who's Minding the HOA "Store?"

I recently came across an article in a national community association magazine that was germane to a current client matter that I'm dealing with -- regarding board members misbehaving in their roles as fiduciary to the association under which they serve. I felt that the message was an important one that all of the readership would appreciate and use as a reminder that, even though people may have the best intentions, they are still fallible, and so we must guard against that weakness when protecting the association's coffers.

There has been a rash of recent cases where homeowner associations have been victimized by embezzlement schemes, financial scamming by trusted fiduciaries, and even outright theft by vendors and/or board members. What can an association do to protect itself from these dangers? Remembering the 10-item checklist below may keep your association from becoming a target of these ne'er-do-wells.

1. Know the association's federal tax ID. Use the tax ID to periodically verify the existence of all listed bank/financial accounts held by the association. Make sure that this number is distributed to all members of the board so that no one member can exercise complete control over those accounts. Accountability by each board member to all other board members ensures a checks-and-balance approach to "minding the store" when nobody's looking.

In one particularly messy embezzlement case, the treasurer of the board was the only person to have knowledge of the bank accounts and amounts deposited to them, so the board could not independently verify what deposits and payments were or were not occurring until it was too late and the past-due notices were piling up from various vendors.

2. DON'T SIGN BLANK CHECKS. Common sense and practicality not only demand this, but also, a person is not acting as a fiduciary to the membership if it signs a check without knowing what its purpose is. Require dual signatures for all checks issued by the association and demand a monthly statement of accounts from your financial institutions and/or management company. Also consider using a lockbox so that homeowner payments are transferred directly to the association's bank accounts while reducing the risk of wrongful deposit of these payments elsewhere.

3. Safeguard the association's reserves. As an association builds up reserve funds in its accounts, ensure that these reserves are tied up in longer-term "non-liquid" instruments such as certificates of deposit. This measure will help deter any temptation by a wayward member or manager from converting these assets to cash for personal benefit. Reserves should be under the control of one or more board members (or have access if managed by a third-party) so that no one person can control the purse strings for these funds.

4. Sign up for duplicate monthly bank statements and/or online/email statements. Get more "eyes on the board" viewing these monthly statements and you reduce the chance that any one member tries to procure any monies for personal benefit. Again, nobody is accusing anybody else here, but what you are doing is eliminating the temptation and reducing risk.

5. Reconcile accounts payable with invoices and credit card receipts. This one is self-explanatory. Be sure and review credit card statements and vendor invoices to ensure that outgoing association payments match them. Question any unfamiliar payments and/or vendors (we had one instance where a client found out that a board member was fabricating vendors to make payments to, but magically, these funds ended up in the hands of the board member!) and be vigilant for any "funny accounting." Math is math and incoming demands for payment should match outgoing monies for payment.

Well, that's all for now. Stay tuned for Part 2 of this article which concludes next week as we review items 6-10 of the anti-scammers checklist.

*Special Thanks to Darcy Mehling Good, Esq., "Whodunit?", Common Grounds, July/August 2007 from which excerpts of this article are attributed to.