The greatest challenge in protecting association assets is controlling the money. This means establishing adequate controls with what are generally a limited number of people that actually have access to Association funds. In the case of establishing accounting controls, having very few people involved in the accounting process is not a good thing; it’s a bad thing. The reason is that when only a very few people are involved in handling an Association’s funds, it means that each person is handling multiple, and conflicting, duties. That makes it much easier for any single person to bypass established procedures without risk of detection. The result? Money disappears.

The accounting profession responds by trying to create enough segregation of duties so that no one person has enough control to bypass established procedures. These procedures are referred to as “internal controls.” These procedures are implemented by the Board of Directors and management to help insure the proper recording, summarization and reporting of financial information, and the safeguarding of the Association assets. No system of internal control is absolutely fool-proof. Furthermore, the implementation of excessive internal controls, while perhaps desirable from a control standpoint, can simply cost too much. As with many things in life, a reasonable degree of compromise is often the best solution. Whether a management company is involved or not, the ultimate responsibility for safeguarding association assets still rests with the Board of Directors. The following list of suggested control procedures represents a sampling of some of the more common internal control techniques.

Financial Controls

• Prepare a realistic, well-planned operating budget based on analysis of actual prior-year expenditures and expectation of current year differences. For certain items which may fluctuate widely from year to year, such as insurance, obtain estimates from one or more local sources.
• Prepare a realistic replacement (reserve) budget based upon a physical inspection of all common area major components. Serious consideration should be given to having this function performed by experienced independent consultants. This study should be performed by the Board or other person(s), at least once every 3 years.
• Comparison of actual results to budget on a monthly basis. To better document such comparison for possible use by future Boards and/or management, significant variances should be briefly explained in writing - in the Board minutes or otherwise. A two part test as to significant variances requiring analysis might be a 10% or greater budget variance AND greater than a fixed dollar amount (example- $1,000).

Cash Controls

• Dual signatures on checks greater than a specified amount (example - $5,000). For expediency, the Board might allow a single signature on checks in payment of relatively small operating expenses, but larger amounts should have two signatures, at least one of which is a Board member. From a practical standpoint, be sure that designated check signers are readily accessible, and that bank signature cards are kept up-to-date. Many financial institutions require the submission of a Board resolution as well as appropriate signature cards before changing authorized account signers.
• Payments to vendors for goods or services received should be made based only on original invoices; NOT monthly statements or "duplicate" invoices - unless one verifies that the original invoice was not previously paid. Invoices should be inspected, checked the clerical accuracy, approved by the manager and a Board member before the payment is processed. The signed check should be mailed by the last check signer or any person other than the check preparer.
• Cash receipts should be restrictively endorsed (i.e. stamped "Pay to the order of ABC Homeowners Association, Account No. ##-####-####") upon receipt, and deposited promptly. Cash receipts should NOT be commingled with either (1) funds from other associations, or (2) with operations and replacement (reserve) funds being together in a single account.
• Bank account reconciliations should be performed for all bank accounts on a monthly basis. Such reconciliations would ideally be prepared by an individual who does not also handle cash receipts or cash disbursements. Bank reconciliations should be reviewed by the Board of Directors at least quarterly.
• Management should review all journal entries in the cash account. Since all transactions affecting the cash general ledger account should be automatically generated from either a cash disbursements journal or a cash receipts journal, there should rarely ever be adjusting entries affecting this account. Such adjusting entries area potential red flag that someone is “adjusting” the account to cover up fraudulent transactions.

Assessments Receivable

• Use of a third party banking deposit system, such as a lock box at the Association’s bank introduces a segregation of duties that limits possibilities of misappropriation.
• Uniform enforcement of the delinquency policy statement. The delinquency policy statement tells homeowners what actions the Board of Directors will take, and when, in the event that assessments are not paid in a timely manner.
• Monthly review of the delinquent assessments will help insure that owners do not fall seriously behind in the payment of assessments, late charges and interest. Use of an outside collection service for delinquent accounts reduces the possibility of misappropriation from diverting funds that the Association has already “written off.”
• Management should review all journal entries in the assessments receivable account. Since all transactions affecting the assessments receivable account should be automatically generated from either a billing journal or a cash receipts journal, there should rarely ever be adjusting entries affecting this account. Such adjusting entries area potential red flag that someone is “adjusting” the account to cover up fraudulent transactions.

Property and Equipment

• Inventory all personal property in order to establish accountability. Each item should be individually "tagged" with a pre-numbered self-adhesive label or engraved with an electric scribing tool. The property list should include date acquired, description/serial number, cost and physical location.
• Establish a capitalization policy whereby expenditures over a certain dollar amount (example - $1,000) for personal property items are recorded as assets (rather than expenses) and depreciated (written off) over their estimated useful lives.