I recently participated as a panelist in the white collar crime presentation. Each of the five panelists could relate several, if not numerous, cases in which they had been involved as a professional of some manner, in the aftermath of an embezzlement of association funds. What struck me is that none of them were the same cases, meaning our group of panelists had knowledge of dozens of separate embezzlement cases. While this doesn’t mean that embezzlement of association funds is a widespread problem, it is still too common a problem to ignore.

Protection of association assets is one of the primary responsibilities of the treasurer and board of directors of every association. As associations and the financial markets become more sophisticated, many more associations have now adopted investment policies to insure that association funds are protected from the risk of market losses. However, simply due to their size and nature of operations, many associations do not, or cannot, take adequate steps to protect association funds from physical theft.

There are three general categories into which associations fall which have an impact on the physical protection of assets.

First, many small associations use volunteer board members to actually run the association. There are no employees nor is there an outside management company. The entire burden of association fiscal matters resides with the volunteer officers. At that point, the safety of association funds depends almost entirely on the honesty and integrity of the individuals involved.

Second tend to be mid-size associations who hire professional management companies to oversee their operations and report on association financial transactions. This arrangement works very well for the vast majority of associations. But this often removes the board members from active participation, so they act more in the role of passive overseers of financial transactions. For associations in this category, the best actions that a board can take to assure the safety of associations funds is to sign all checks, carefully review all financial reports, bank reconciliations, and transactions that are processed by the management company.

Third, many larger scale associations hire their own employees to act as on-site managers and accounting staff. It is rare that there will be enough employees to allow for a complete segregation of financial duties. In other words, simply due to a limited number of people involved in the accounting function, there will be an inherent conflict of duties performed by certain of individuals within the accounting function. As an example, the association’s controller or bookkeeper may send out member assessment invoices, make deposits, prepare bank reconciliations, write checks, and file paid invoices. If that person also records all transactions in the association’s general ledger, then they effectively have total control over association funds. The only activity not under the direct control of that controller or bookkeeper then becomes the actual signing of checks. Since there are many conflicting duties being performed here, there are opportunities for that person to misappropriate funds. The board should, in this situation, carefully review all financial records and also design the accounting system so that opportunities for misappropriation of funds are reduced.

Tips that the association may consider for protecting association assets include:

1)         Conduct an annual audit, review.

2)         Make sure your accountant gives you a management letter, and ask if there were any immaterial items noted that were not included in the management letter.

3)         Make sure bank statements are reconciled monthly, and review both the bank reconciliations and bank statements.

a.         Compare bank statements to the bank reconciliations. The bank reconciliation should begin with cash per bank and reconcile down to cash per books. The reconciling items will generally consist of deposits in transit and outstanding checks. Investigate and question any large or old outstanding checks. Deposits in transit should not be outstanding for more than 30 days.

b.         Examine the bank reconciliations and see that they agree to the amounts reflected as cash on the balance sheet.

4)         Require monthly financial statements, and review them closely, particularly budget-to-actual and year-to-year comparisons. Demand explanations for any significant variances. It may help to develop a checklist to assure everything is reviewed.

a.         Review the bank statement to ascertain that all interest income has been recorded in the financial statements.

b.         Make sure that all bank accounts are recorded in the general ledger of the Association.

c.         Examine the aged receivable listing and compare it to the balance sheet. The total of assessments receivable should agree to the balance sheet.

d.         Thoroughly review the check register and any fund transfers to assure all expenditures and transfers are proper and authorized. Question any large amounts, assure proper approval and documentation.

5)         Make sure that the board signs all reserve checks and approves all reserve transfers. (This is where the big money is spent). Never sign a blank check.

6)         Establish an investment policy with an emphasis on safety of principle.

7)         Prepare written collection policies, and follow them without fail.

8)         Require a fidelity bond for manager and/or employees and purchase directors and officers (D&O) liability insurance.

9)         Require disclosure of conflicts of interests. This would apply to any significant relationship with any vendor or service provider, board members, or members of the association.

10)       Establish fiscal policies.

            a.         Do not receive cash, if possible.

b.         The person that opens the mail should stamp the payments (For Deposit Only). The person posting the payments to the computer system should not open the mail.

c.         At least one Board member should review all payables to assure proper invoicing and approval, and review costs for both reasonableness and propriety.

d.         The person who approves the invoices should not be the same person who writes the checks.

e.         Have the signor of the checks mail checks to vendors; don’t return them to the person who wrote the checks.

f.          Bank signature cards should be updated when any signor is changed.

g.         Bank statements should be opened by a person other than the person preparing the bank reconciliations. Canceled checks (or images thereof) should be reviewed for irregularities.

h.         Keep reserves in a separate bank account with Board control.

1.         Two board members should sign expenditures or transfers from reserves.

2.         Assure transfers to the reserve account are made timely.

3.         Any expenditure from the reserve account must be properly documented (in the minutes) and approved by the Board.

Implementation of the above checklist requires that the Board be more than simply passive observers. Directors should take an active part in protecting the assets of the association. This now comes back to the white collar crime panel discussion. One of the common threads that I noticed in talking with each of the other panelists is that the crime occurred when somebody wasn’t doing their job, meaning they weren’t performing some or all of the above suggested procedures. If they had, most of the white collar crimes that occurred would have been prevented completely or detected quickly because of the adequate safeguards and controls in place.