Theft of community association funds is unfortunately a reality, and in times of economic distress, the likelihood of such theft tends to increase. Community association funds can be stolen in any number of ways, by any number of people with access to the funds or bank accounts of a community association. While the following list is by no means exhaustive, some red-flags that Board members and community association managers should watch for include: outright taking of cash; not receiving regular and timely monthly statements; discrepancies between monthly statements and ledgers; lack of receipts for purchases; payments to family members; clubs having access to an association’s bank accounts; illegitimate credit card receipts and charges; and difficulty in explaining expenses by the person(s) handling the funds.

The Board of Directors, whether self-managed or professionally managed, is ultimately responsible for reviewing all of the financial activity of a community association. To help protect an association’s funds from theft, it is important the Board implement, and consistently use, various internal and external controls and an effective checks and balances system. One fundamental control is to have different people responsible for invoice approval, check writing, collection of funds and depositing of funds. For example, the person who records receipts should not make deposits, and the person who approves invoices should not write checks. Additionally, the person who reconciles the accounts should not do any of the other tasks. The Board should also consider requiring two signatures on all operating, reserve, and investment transactions. In fact, Civil Code section 5510(a) requires two signatures for withdrawals from reserve accounts.

The signatures of at least two persons, who shall be directors, or one officer who is not a director and one who is a director, shall be required for the withdrawal of moneys from the association’s reserve accounts. (Civil Code section 5510(a))

In addition, the Board should implement an effective checks and balances system, such as requiring duplicate monthly statements for every account and having two parties without access to the bank accounts regularly reconcile each monthly statement to the general ledger. When reconciling statements, verify the accuracy and necessity of expenditures and make sure expenditures are properly authorized. The Board should also insure its association’s money by obtaining a fidelity bond that extends to cover the management company, all of the board members, and all other persons having access to association funds.

Furthermore, every Board of Directors should set aside sufficient time each month for a full discussion of all of its association’s financial matters, while maintaining a level of healthy skepticism. Consistent communication between the Board, management company, legal counsel and accountant is also important to reducing the chances of theft. The Board should consider consulting with an auditor experienced in community association finances and implementing any suggestions made by the auditor to improve the association’s financial controls. One such control includes conducting an annual audit.

Finally, the Treasurer should be educated on how to effectively perform his or her job and interpret the association’s financial records for the rest of the Board. This can be done by retaining advisors and/or a management company to educate or assist the Treasurer in regular reviews of the financial documents. The more the Board regularly and thoroughly discusses and reviews its financial documents for accuracy, the less likely it is that it will miss a discrepancy in the financial documents.

While there is no guaranteed way to protect a community association’s funds from theft, the more controls the Board implements, the more it will help to minimize the risk of financial loss due to theft.

The above general information is for educational purposes only. If the Board needs further guidance or has specific questions on this issue, please contact your legal counsel.