About CAMS

Protecting Community Association Funds

protecting community association fundsEveryone understands the importance of keeping personal assets in order.

It’s no surprise, then, that managing a community association’s finances is a critical function of any association’s board of directors. And, as part of that management, it’s crucial to ensure an association is protected in the unfortunate event of embezzlement or misappropriation of funds from a board member, officer, committee member or management company.

There are certain internal controls and insurance plans community associations can put in place to protect funds. Such controls and coverage may vary slightly depending upon whether the association is self-managed or overseen by a professional management company.

Internal Controls

To help ensure proper handling of money, it’s good practice to designate one person to deposit assessments and other revenue and another to approve invoices and write checks. Ideally, a third person would receive and reconcile the monthly bank statements and prepare financial reports to the board of directors.

Monthly financial reports should include the following:

  • Balance sheet
  • Income and expense statement
  • General ledger
  • Check register
  • Accounts payable report
  • Aging assessment (delinquency) report
  • Copies of monthly statements for each bank and investment account

One bank statement should be sent to the management company or, if self-managed, to the treasurer or bookkeeper. A duplicate should be sent to a board member who does not have authority to sign checks or make any transfers or withdrawals. Many banks now offer statements via e-mail, which makes it easy to send them to additional board members – if not the full board – as well as the bookkeeper and management company.

Use a lock-box system, which allows owners' payments to be mailed or transferred directly to the association's bank accounts. This means less risk that association money will wind up in the wrong account.

And while it may seem obvious, never sign blank checks. If your association is professionally managed, require a check register report that shows check numbers, payees and amounts. As proof, require the bank to return canceled checks or provide electronic images of the canceled checks, along with the monthly statements. When reviewing the check register, you want to make sure the check numbers are in numerical sequence.

When it comes to spending from your association’s reserve fund, segregate that money so it can only be used for its intended purpose – deferred repairs or capital needs. As a further step, call a meeting of the full board to approve any and all reserve expenditures, so that approval is officially documented. In general, principle risk-free investments are recommended.

No one board member or bookkeeper should have total control over your association’s reserves, and self-managed associations should annually update bank account signature cards, so any active board member can access the funds, if needed.

Insurance Coverage

Having the proper coverage in place is another important aspect of keeping your community association funds secure. Fidelity and crime insurance plans differ for self-managed associations and those with a third-party bookkeeper or professional management company.

Self-managed associations should have fidelity coverage on the board members, officers and other volunteers - such as the finance committee - in an amount that equals or exceeds the association's reserve and several months of operating funds. When you purchase directors and officers (D&O) liability insurance, a portion provides a fidelity insurance bond on the board members, but it may not be sufficient.

If you are professionally managed, the company’s coverage should include fidelity and crime, as well as an endorsement for “employee theft of client property.”

Remember - fidelity insurance is as important as adequate property and liability insurance and therefore should be part of every association's common expenses. But fidelity coverage for the management company is not usually included in the base policy and requires the purchase of a managing agent rider.

Even with coverage through the association's insurance carrier, the board should require evidence that the management company carries its own fidelity coverage, which would provide the first line of recovery in the event of a theft by one of its employees.

Professionally managed associations with board members that are also signatories on bank accounts should have their own fidelity insurance to protect the board, while the management company also should have fidelity and crime insurance, as well as an endorsement for employee theft of client property.

And it never hurts to get a professional opinion. Have an independent accountant review your association’s books at the end of each year.

A little bit of caution – and consistent oversight – will assure you that your association’s assets are as well-managed as your own.

There is current legislation in NC, which if passed, will require some community and condo associations to carry fidelity coverage and perform annual audits (House Bill 625: HOA/Condo Crime & Fidelity Insurance Policies) (“An Act to Require Homeowners Associations, Condominium, and Their Management Companies to Acquire Crime and Fidelity Insurance Policies to Protect the Associations’ Membership from Loss Due to the Illegal Conduct of the Association, the Executive Board and Its Employees, or a Management Company and to Require Annual Financial Audits to Be Performed by Homeowners Associations and Condominium Associations. HB 625 has passed the House and was forwarded to the Senate, where it is now in the Committee on Rules and Operations of the Senate.

If you'd like to learn more about community association finances, please visit your Board Toolbox for examples of financial reports and much more!