Conducting Financial Checkups on Your HOA

Financial misdeeds frequently start as crimes of opportunity. That is, tales of dishonesty often begin when the temptation of easy pickings overcomes people handling HOA funds. From our decades of experience as Condo Association Insurance specialists, we’ve seen HOA embezzlement and fraud cases occurring from incidents of initially innocent to criminal intent from the outset.

This report on conducting a financial checkup on your HOA offers guidelines to assist you in the process. If you suspect fraud, your task is urgent compared to instituting prudent procedures without suspicions that seek to protect your HOA finances. Besides keeping the board and community informed, routine financial checkups are a strong deterrent against embezzlement and other fraudulent activities.

What Are HOA Audits and Who Conducts Them?

All HOA board members must accept the fiduciary responsibilities of the position. As such, they must be vigilant in keeping aware of the association’s actual financial health.

Annual audits are a comprehensive study of an HOA’s financial statements and are usually conducted by an independent CPA firm. In addition, accepted business practice and some state regulations require an HOA to conduct an annual audit of its finances to comply with various requirements, including tax laws.

Internal financial audits with the board of directors reviewing and approving them strengthen an HOA’s financial management practices. However, to obtain a thorough, objective analysis, it is advisable to perform external audits by hiring an independent CPA who will use an auditing system other than the HOA’s internal auditing methods. Such inspections help the HOA comply with state and local laws and association bylaws.

The Benefit of Annual Audits.

Internal audits are helpful but are not a deterrent to an insider’s fraudulent activity. For example, in states that do not require an annual independent audit, the board can and sometimes does vote them down for convenience or financial reasons. Mandated or not, having a scheduled external audit encourages good behavior because they incentivize those who handle the HOA finances to stay transparent and legal.

Even in situations where an external audit is optional, a smartly run HOA will avoid the temptation to skip the practice regardless of savings and inconvenience. That’s because an external audit does more than provide deterrence; it also makes discovering irregularities happen sooner.

Schedule Monthly and Random Reviews.

There is wisdom in the saying, “What gets watched gets done,” and it applies to reviewing financial reports regularly with a slight twist. That is, “What gets watched gets done legally.” Most CCRs give the right to request a monthly report of the HOA’s revenue and expenses, including its current balance sheet.

If monthly reviews are a standard procedure, it seems that adding random reviews might be asking too much of associations run primarily by volunteers. Nevertheless, unscheduled, random reviews are a tool that will persuade those with access to association funds not to take improper or illegal actions. Sometimes the simple threat of a potential random review is enough to keep honest people honest.

Financial Misdeeds Hide in Plain Sight.

It takes more than regular reviews to discourage crafty embezzlers. For example, someone focused on funneling association money to themselves will find devious ways to prepare for random and routine financial examinations. Digging into financial basics when requesting the information is an added method to keep association finances clean and above board.

Going beyond the bank’s monthly reconciliation statements is an excellent way to uncover unusual movements in operating cash levels. For example, do the available cash levels stay consistent with the board’s intent to keep the typical three months of operating cash on hand? Are there unusual numbers of cash transactions occurring? Does the bank balance mirror the association’s balance sheet? Have payments to new or existing vendors increased in amount or volume? Are there checks written to cash in the account? The wrong answer to these and similar questions is a red flag that signals the need for further and immediate investigation. 

Avoid the Lone Wolf Syndrome.

Sometimes individuals are put in a position of controlling everything out of convenience or circumstances. Other times, they have ill intent to exploit the opportunity to work in solitude. More than one originally trustworthy person has fallen to the lures of shuffling funds when they believe no one is watching. No one should manage the books, payments, and reports without accountability and review. Instead, hire collaborative people and take away the opportunity for those with financial responsibility to operate with impunity and without accountability. 

Stay Out of the Self-Management Trap.

Much like the Lone Wolf Syndrome, the Self-Management Trap creates a void in sharing responsibility that makes embezzling funds or committing other kinds of fraud remarkably easy to manipulate. The best way to avoid such situations is to contract a professional HOA management firm with proper accreditation, insurance, and experience. Checks and balances are essential. It’s a good practice to segregate the duties to initiate, approve, and review transactions and contracts to spread responsibility. Having a professional third-party management partner is a sensible business practice that eases separating tasks.

Encourage Clarity, Transparency, and Accountability.

Ask as many questions as necessary to understand how and why HOA funds are used. Insist on open access to financials. Follow up on processes and payments that are new or unusual. Institute safeguard measures that reduce opportunities, for example, require double-signatures from the board and management for expenditures over a certain amount.

An HOA audit is a handy tool for the board. It helps them to know how much money they have, how much they owe, what expenses are coming up, and what needs to be done about those expenses. It’s a great way to ensure everything goes smoothly and funds are used wisely and legally.

Regardless of whether a crime or a mistake, audits discover problems such as questionable use of petty cash, incorrect budget allotments for current and expired contracts, insufficient insurance limits and coverages, actual embezzlement or fraud, or other cases of criminal activity.

Lean on Your Professional Advisers

When you hire a CPA firm or contract with your Condo Association Insurance experts, it’s an opportunity to tap their broad experiences to assist with managing your HOA financials and more. At the Dickstein Associates Agency, we are eager to help you fill your unique condominium association insurance needs with comprehensive, competitively priced coverages.

Besides property damage and liability protection, apropos from this post, we recommend including Crime & Fidelity insurance for our HOA clients. We also advise on the applicability and need for Directors & Officers (D&O) Liability insurance that protects the board against management liability-related lawsuits and a Commercial Umbrella policy that will extend your primary Liability limits in the event of a catastrophic incident. Getting your insurance done right is why we’re here for you and welcome the chance to be of service.

About Dickstein Associates Agency

Dickstein Associates Agency has distinguished itself as a leading provider of personal and business insurance in the tri-state area since 1965. We pride ourselves on being advocates for our clients and providing them with quality and affordable coverages. As Trusted Choice™ independent insurance agency, we partner with various national and regional carriers, allowing for flexible coverage for each client’s unique circumstances. For more information on how you can leverage all your insurance to work best for you, and how we can secure the best insurance in the marketplace suited to your specific needs and business objectives, contact us today at (800) 862-6662 or www.dicksteininsurance.com.