Keeping HOA Money Where It Belongs

Some associations suffer damage from financial abuse, which can be every bit as devastating as a fire, except that this financial damage might not be covered by insurance. Other associations struggle in a toxic atmosphere of mistrust, where unfounded accusations of financial abuse abound. However, healthy and reasonable financial practices can help managers and volunteer directors keep the association finances not simply upstanding, but obviously so. Associations poisoned by distrust or financial defalcations will find healing takes time.

As any guidelines, these tips should be considered in the context of each association’s circumstances.

1. Hire professional management. If your association cannot afford full management, many companies offer “financial management” at a lower cost. Some accountants also manage association finances. Managers have very specific restrictions as to their handling of association funds, under Civil Code 5380. Also make sure the manager holds a credential from a recognized organization. A credential is no guarantee of honesty, but it does indicate the manager is dedicated to their profession.
2. Deposit association funds only in federally insured financial institutions. If the reserve account balance is quite large, it may be beyond Federal Deposit Insurance Corporation (“FDIC”) limits and the association may need its bank to help move funds to other banks to keep it all within FDIC insurance limits, which in 2015 is $250,000.
3. Separate check preparing from check signing. While it is more convenient to allow a single director or manager to sign checks, it is safer to have a different person sign them. This makes it harder to scam the association, but also protects both the check preparer and the directors from accusations of financial misdeeds. Don’t let the manager or bookkeeper sign checks.
4. Require all checks be signed by two directors. Two signatures must be required for any reserve account withdrawals (Civil Code 5510), and operating accounts should be handled likewise. The slight inconvenience protects the individual director, since nobody by themselves can “take” HOA money.
5. Don’t sign a check unless the “back up” for that expense is attached. A common fraud technique presenting false requests for checks, or creating phony vendors. Insist the invoice or bill is attached before you sign the check to pay that bill.
6. Use the protections built into the Davis-Stirling Act. Civil Code 5500 requires that boards, at least quarterly, review current reconciliations and income/expense statements for accounts, compare current reserve account activity with the budget; and review the latest bank statements for all association accounts. If the board meets monthly, review this information monthly.
7. Ask questions. There should be no financial information which the record keeper cannot readily provide. A pattern of secrecy and exclusive control of financial information by one person is unhealthy.
8. Regularly review bank statements. Does income and expense information in the statements match what is in the board’s financial report?
9. Adopt a policy that directors are only reimbursed for authorized and documented out of pocket expenditures.
10. Avoid petty cash accounts if possible.
11. Have fidelity insurance, and also insist your manager have it. Fidelity insurance is a special type of coverage which specifically insures from dishonesty loss. Insurance brokers often recommend fidelity insurance coverage equal to the reserve account balance plus three months operating income.

Exercise fiscal safety.

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.