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Subject: Protection from Fraud
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RobertW31
(New York)

Posts:20


12/14/2018 8:45 AM  
Hi, So I am president of a townhouse HOA. We have a property management firm that keeps all the financial records and does our budget and manages our reserves, collects HOA fees from homeowners and takes care of all our accounts. When a check needs to be issued the HOA Treasurer (board member) receives the checks as well as a statement of what they are for. Two signatures on the checks are required. When the payment is to the property management company no signature is required but the documentation and the check are reviewed by the board members. When bids for services are required we have either let the property management company handle it or the board has done it on their own. We of course have a property manager for our association that we interface with who handles details such as how landscapers are performing, routine maintenance issues, homeowner complaints etc.

It is clear that we place a lot of faith in our property management company and take a lot of what they show us in fiscal reports on faith. We really don't know if these reports reflect the actual situation.

So my question is what safeguards do we need? Is there supposed to be insurance in place in the case of fraud by the property management company? Can we ask for our own independent audit of the property management company? I know I was told an external audit is done of the company every 3 years but that is done through the property management company who manages some 50 plus developments. They hire an outside company to do the audits.

Any suggestions or experiences are helpful. Color me "Still learning."!

CathyA3
(Ohio)

Posts:243


12/14/2018 9:49 AM  
Here is what we do:

* Our Declaration requires us to carry fidelity insurance that covers anyone who handles association funds. Check your own governing documents to see if you have similar requirements. If not, as a board member I would insist on having it, both to protect myself and as part of my fiduciary duty to the association.

* We have a full audit of our books every five years with annual reviews of the books in between, performed by an independent third party. The property management company often works with a group of accountants and CPAs whom they can vouch for, but boards can request bids and select the auditor themselves. It can't hurt to look for any connection between the auditor and the management company - when it comes to large amounts of money, it pays to be suspicious.

* We review our monthly statements and we ask questions if we don't understand something (all board members do this, not just the treasurer).

* Choose your management company wisely, and don't hesitate to look around for other companies even if you're happy with your current provider. You don't want to let anyone get complacent.

* Having alert and responsible board members goes a long way toward discouraging bad behavior! It's hard to embezzle funds if you have a bunch of people looking over your shoulder all the time. And that includes the homeowners - we post our budget and monthly financials on our web site, and we also post a copy of the most recent audit results. Transparency tends to produce ethical behavior.

I hope this is helpful.
RobertW31
(New York)

Posts:20


12/14/2018 10:26 AM  
Thanks and yes it is helpful. Does the insurance do anything to protect the funds in the accounts or does it just protect the board members?
RoyalP
(South Carolina)

Posts:732


12/14/2018 11:18 AM  
A Fidelity Bond covers fraud/embezzlement losses.

A D & O Liability policy covers 'liability' from errors in business judgement by directors.
CathyA3
(Ohio)

Posts:243


12/14/2018 11:19 AM  
Posted By RobertW31 on 12/14/2018 10:26 AM
Thanks and yes it is helpful. Does the insurance do anything to protect the funds in the accounts or does it just protect the board members?




It protects the funds. The Association is named as "the insured", and our Declaration spells out the dollar amount to be protected (not the actual amount but something like "not less than the greater of: annual operating budget plus reserves; funds currently in custody; or 3 months worth of assessments plus reserves".) The reason I said that it would protect me as a board member is that homeowners would be less likely to sue the board for not catching embezzlement, for example, if the association doesn't actually lose the money.

We also have Directors and Officers insurance so that, if somebody decides to sue the board anyway, we would be defended in court as long as we were acting responsibly and in good faith (ie, we weren't the ones doing the embezzling). But D&O insurance is separate from fidelity insurance. You should have both.
DouglasK1
(Florida)

Posts:1394


12/14/2018 12:45 PM  
Posted By CathyA3 on 12/14/2018 9:49 AM

* We review our monthly statements and we ask questions if we don't understand something (all board members do this, not just the treasurer).

* Having alert and responsible board members goes a long way toward discouraging bad behavior! It's hard to embezzle funds if you have a bunch of people looking over your shoulder all the time. And that includes the homeowners - we post our budget and monthly financials on our web site, and we also post a copy of the most recent audit results. Transparency tends to produce ethical behavior.


I agree with all that Cathy said and will add that the board should see and review bank statements mailed directly from the bank or from the bank web site to compare against what the property management reports claim is in the accounts.

Escaped former treasurer and director of a self managed association.
GenoS
(Florida)

Posts:2906


12/14/2018 11:47 PM  
Cathy's advice is very, very good.
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