According to recent reports, more than 1.2 million worthless checks enter the banking system every day in the United States. Check fraud losses account for more than 20 billion dollars per year and the number of cases is increasing by approximately 25% each year. I know from my own experience with community associations that fraud, theft and or embezzlement have become far more prevalent in the past few years, but I was astonished when I realized just how many associations in Florida have been victimized by unscrupulous board members, employees and service providers.
For example, just a few weeks ago the Pinellas County Sheriff’s Office charged the chief financial officer of a management company with grand theft for allegedly stealing $560,000 from 10 beach condo associations. Just a few short weeks prior to that the former controller for a management company was arrested for embezzling more than $950,000. He was allegedly able to manipulate the management company’s records to conceal his theft from his supervisors.
What is the problem and what can you do about it?
Internal Controls: Many small associations lack basic accounting internal controls. If one person reviews the invoices, writes the checks and balances the checkbook, who is watching to determine whether those invoices accurately reflect the services performed for the association or whether the vendors submitting those invoices actually exist? Having a “checks and balances” system in place is absolutely critical for associations.
Check Policy: Officers should never sign checks that are not fully completed. If it is inconvenient for officers to attend to accounts payable during the summer months when they are not in residence, the board of directors should consider appointing assistant officers as signatories on association accounts.
Online Banking: Online banking offer many conveniences but also provides additional opportunities for losses if not monitored carefully. Employ procedures to safeguard passwords and change them frequently. It may be advisable to have different passwords for different types of accounts, with the person responsible for accounts payable (whether employee, manager or officer) only having access to the password to an operating account with limited funds.
Hold Board Members Accountable: Board members (generally the treasurer) should review actual bank statements in addition to online records, reconciling each of the accounts on at least a monthly basis. Many associations have duplicate bank statement s furnished to different addresses each month to thwart efforts to modify those statements or “misplace” them.
Protect Yourself: Moreover, employee dishonesty insurance coverage (as well as fidelity coverage) must be obtained and renewed every single year in amounts sufficient to protect the association against improprieties. However, those policies are not a panacea. Many times there are exclusions if the association failed to require compliance with internal controls. In one recent case, the insurance carrier took the position that it was not required to cover a loss since its policy required each check or draw from an association account to contain two (2) signatures. The association did adopt that policy and notified its financial institutions of the dual signature policy. Nonetheless, the bank issued finds to payees based upon draws or checks containing only one (1) signature. We were ultimately able to overcome the carrier’s objection and recover full reimbursement for the association (which included the attorney’s fees and costs incurred in that dispute), but the experience reminds us that carriers will not hesitate to rely on policy exclusions to deny coverage or at least in an attempt to deny coverage for legitimate claims.
Association members (in Florida) must realize that they are entitled to access to financial records of the association, as well. A review by that extra set of eyes every once in a while could make a significant difference.