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Protect the Association’s Funds from Fraud or Theft

Lisa A. Magill, Florida Lawyer, Real Estate AttorneyCommunity Association Boards of Directors Must Safeguard Association Funds.

Recent Arrests and Reported Losses Demonstrate Lack of Financial Oversight.

Community Associations simply cannot function without adequate cash flow.  Community leaders have a fiduciary obligation to monitor and protect the Association’s funds.  Handling the finances of the Association can be a daunting task, especially if the volunteer leaders do not have any background in accounting or finance.  There are many state and federal laws governing budgeting, financial reporting, taxation and the like and a lack of sufficient oversight exposes the Association to loss from theft.

Community leaders cannot abrogate their responsibilities solely by hiring management or contracting with a bookkeeping service. Recently it appears there has been an increase in Associations that have been victimized by these professionals.  The Sun-Sentinel reported some Associations lost hundreds of thousands of dollars as a result of alleged theft by an employee of the management company.  One Association found out there were problems with its account when checks bounced.  The management company had the authority to write checks, balance the books and make deposits.  The directors of each of the Associations involved apparently did not review all the source documents to verify that payments were made and the balances on each of the accounts.

A similar situation occurred in Collier County, Florida.  Authorities arrested a bookkeeper working for a management company for 21 counts of grand theft.  The Naples Daily News reported that the bookkeeper made fraudulent bank transfers from the Associations’ accounts into her personal accounts.

Communities comprised of older residents are especially susceptible to fraud schemes.  The Charlotte Square condominiums in Port Charlotte, Florida reported over $1 million in losses.

Community leaders are encouraged to:

  • Store blank and canceled checks in a secure location;
  • Notify the bank/financial institution when officers change immediately and keep control of bank signature cards;
  • Create precautions for Internet banking and bill paying;
  • Review source documents (invoices, bank statements, deposit slips) with management reports and consider having the bank send duplicate statements;
  • Avoid master vendor accounts and place low limits on credit and/or store charge cards; and
  • Obtain adequate fidelity bonding and employee dishonesty coverage for all persons authorized to sign checks or drafts.

Always be alert to new or different spending patterns.  While the volunteer leaders are not expected to become experts, they must have a basic understanding of the Association’s finances, its expenditures and obligations, as well as seek out the relevant information to make informed decisions.

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3 Comments
  • Avatar
    Linda Leopard
    July 21, 2009

    Don’t these two examples point to why management companies were recently required to be licensed by DBR?
    When negotiating management contracts and/or outside accounting services, directors can always insist to remain one of two signatories, or deny outside services the right to sign at all – on all financial transactions. While directors should of course take fiduciary interest and participation in check writing, financial reports and the like, Management companies should practice more stringently, and be held just as accountable in this regard – and not even offer the option of the management company being a signatory.

  • Avatar
    Lisa Magill
    July 27, 2009

    Agreed. While in some cases it is appropriate to include the management company as a signatory, fidelity bonding MUST be in place and the directors needs to review every single transaction – just as if the funds were their own personal funds. In fact, a day or two after I posted this information two new cases were announced in the newspaper – one of them in Broward County reporting a loss in excess of $500,000.00! Directors need to be involved in the association’s finances.

  • Avatar
    Kim Canavan
    July 31, 2009

    How wonderful that you have a blog. I think it is important to post how difficult it can be for neighbors to work together. This website documents vandalism and theft disquised as confiscation.
    http://lovedelray.com/?p=142
    While it was disclosed that the association is over budget by $8,000 (adjusted for bad debt) so far this year, the last meeting was cancelled and there seems no interest in rescheduling.
    These fights can be long, long, long.
    Is there anything that can be done to shorten the process?