Fraud, while rare, can be devastating to homeowners and communities. At a time when community associations must watch every penny, the Community Association Institute Central - Arizona Chapter (CAI-CAC) offers the following tips to prevent HOA fraud.
1. Use strong internal controls. In accounting, internal controls are the “checks and balances” that ensure no single individual has sole financial control. In HOAs, recommended internal controls include the segregation of duties, where one person pays bills, another reconciles financial statements, and a third prepares financial balances. Likewise, HOAs can institute spending limits on HOA manager ATM cards.
2. Require two signatures on every check.
3. Reconcile bank statements every month. Just like balancing a checkbook every month, the HOA treasurer should perform monthly bank reconciliations.
4. Inspect invoices. A board member separate from the treasurer should read through invoices to make sure they match work performed for any service.
5. Conduct an annual audit. An outside CPA should look through your books and highlight any fraud prevention procedures that could be strengthened.
‘Running a homeowners association is like running a business and it is vital that HOAs have checks and balances in place to protect community assets,’ said CAI-CAC president Mary Jo Edel.
According to Edel while many Arizona HOAs are self-managed, the majority use the services of a professional community association manager.
‘Not all HOA managers are created equal. If a HOA is looking to hire or replace it’s manager, look for one who is a member of a professional trade association like CAI,’ said Edel. ‘Organizations like CAI hold their members to a high standard and offer accreditation to HOA managers wanting to excel and achieve the highest levels of competency in their profession.’
Do the right thing
Although it’s rare, a board member may ask a manager to falsify financial documents by recording expenses in the wrong month or by otherwise moving money around. The board member might also ask you to reduce the association’s bad debt allowance to make the books look better, a step that should never be taken without board approval.
When in doubt, an association manager should turn to generally accepted accounting principles or call the association’s accountant. ‘Don’t be afraid to stand up for what’s right; it will pay off down the road,’ added Edel.
Working with vendors
While it’s okay to accept tickets to a ball game, it’s not okay to accept an all-expenses-paid trip to Las Vegas, plus gambling money.
‘There’s no hard line on vendor relations,’ Edel said. ‘It’s more of the smell test. Remember, neither the HOA board or manager should have any dealings that either are or appear to be a conflict of interest.’