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February 25, 2007

Time to check the money trail

In the last two weeks we've seen three management companies being investigated for their mishandling of association funds. In at least two of the cases, the firms have closed, with embezzlement charges looming over the principals. In two other situations, long-time board members, with apparently unchecked access to association funds, are also now accused of mishandling them. The hundreds of associations involved are now going to go through a miserable time, with accusations flying back and forth, and litigation that will probably go on for years, not to mention the costs that will be involved. The ultimate responsibility will lie with the board members,current and past, who failed to make sure the association's funds were being handled properly.

There are a few simple things a board can do to reduce the risk in the handling of association funds. Start with where the money is kept and how the transactions are reported. With electronic banking becoming more readily available to associations, it gives associations the ability to have more than one person review the transactions. Some banks, that cater to community associations, can allow the entire board to view (not create or change) all banking transactions, including the viewing of both sides of any check written, so you can also see who cashed it. You can also set up electronic approvals, so that when a check is authorized, another party has to log in to the account and approve the transaction before the money is sent. In most of the cases, the perpetrators would not have been able to get away with their actions for so long a time if the board had required the electronic approval, or had just looked at who was cashing the checks.

In the past, requiring second signatures, or separate approval (by a board member), was time consuming and costly. That is disappearing. If your management company, or bank, can't provide these simple measures now, you might want to start giving them a jab in the ribs, to help move them into the 21st centrury. Transparency in financial transactions should be the standard, not the exception.

Second, especially if you're self-managed, always require two signatures on any check over a certain amount, say $500. No one person should be able to write checks, or transfer association operating or reserve funds.

Third, I am still amazed at the number of associations who fail to have an annual, independent review of their financial records. Even when required in the CC&R's or Bylaws, associations resist spending the money to have a qualified accountant look at the books. First, IT'S NOT YOUR MONEY!!! It's care was entrusted to you to either handle directly, or to retain someone to do it for you. In any event, you should want ot be able to show the owners that you handled that job carefully, and you do that by having someone examine the books and records and provide a report. That person(s) should be an independent, qualified Certified Public Accountant, preferrably with knowledge of community association finances, not the bookkeeper down the street, nor the Treasurer's brother-in-law, who promise to do it a little cost. The board should obtain at least 3 proposals from qualified CPA's, and include the requirement that the CPA or firm has no ties to the association board, officers, or management firm.

There are three different formats the examination of the books can take: Audit, Review or Compilation

A financial audit, (sometimes called a certified audit) or more accurately, an audit of financial statements, is the examination by an independent third party of the financial statements of an association, resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented. The books and records are tested according to Generally Accepted Accounting Principles (GAAP).

A "Review" is performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with GAAP.

A "Compilation" is presented in the form of financial statements that is the representation of management without the accountant undertaking to express any assurance on the statements.

Obviously, only the full audit can give a board any reasonable assurances as to the accuracy of the financial reports. But since its also the most time-consuming and therefore most expensive, its often not done. Here's some "rules of thumb" to help you in making your decision:

You should have the full audit if:

Your documents or state law require it
You change management companies
You just assumed control of the association through transition from developer control
Your Treasurer can sign checks and you change Treasurers

You may have a review if:

If your documents or state law allow it
Your association has had a full audit within the last two years
You have very little in the way of association income and expenses

You may have a compilation if:
I really don't see any reason why you would have a compilation. There are no tests or checks of any substance to see if the reports are accurate.

You may have noticed that I didn't make any differentiation between large and small associations or between condo's and HOA/POA's. That's because there is no hard and fast rule as to the dollar amount that would require an audit as opposed to a review. Baiscally, if you're a small association, there's probably no harm in having an audit every three years and reviews during the intervening years, as long as one of the other audit criteria doesn't come into play. However, if you're a large association, handling large sums of money, then the annual audit is the only way to go.

Last, but not least, is the issue of Fidelity Bonds. Often an association will rely on a management company's bond, but what they may not be aware of is that this often only protects the owner of the management company from theft by an employee. It might not protect the association if it is the owner who is, in fact, stealing the funds, as it appears to be in some of the above cases. An association should always have its own Fidelity Bond on everyone who has access to the funds.

Remember:

Its not your money
It's only been entrusted to you, not given
Better safe than sorry
It's not your job to keep assessments low, but to spend the money wisely!

Posted by joewest at February 25, 2007 10:14 PM