Protecting The HOA’s Funds From Embezzlement

By Realty Times Published May 11, 2021 10:41 am

An excerpt from a recent news story read: “Bridgett Freeman of Sheboygan stole more than $11,000 from the Westridge Homeowner’s Association in West Bend. Thursday, she was sentenced to six months in jail and three years probation, and was ordered to pay back $11,617.41. She said she was sorry.”

From time to time, these stories hit the local rag with the really big ones making national news. While embezzlers can be found in virtually every type of business, homeowner associations are not immune. In fact, because of the volunteer nature of HOAs, business practices tend to be somewhat lax and HOAs are even more vulnerable than traditional businesses.

In the past, big time embezzlement was less likely because most HOAs had little money to steal. It was like mugging a panhandler. What was more likely to happen, is something, like board members buying themselves dinner or other perks on the HOA’s dime. Those so engaged, view it as a legitimate expense for a volunteer position. Trouble is, since directors usually serve for no compensation (see your governing documents) and there is rarely a budget line item called “Board Perks,” this is just another form of petty embezzlement. Like Enron, this kind takes collusion of the board members to keep the practice alive.

With reserve planning for homeowners on the rise (thankfully) comes increased amounts of cash which can add up to hundreds of thousands of dollars. With larger amounts of cash comes the unfortunate temptation to dip into the HOA’s cookie jar. Embezzlement can happen by either a board member or management company that has access to the funds. Usually, managers are restricted (or should be) from reserve accounts where most of the HOA’s money is. This leaves the HOA cookie jar under the control of the Board President and Treasurer.

When it comes to protecting against embezzlement and other forms of fraud, it’s best to have a number of controls in place that are designed to preempt the act. In other words, if there is a good chance an embezzler is going to get caught, the temptation is much less than if stealing is a piece of cake. Some of the basic controls include:

Two Signatures Required Checks. Get checks that require two signatures. Of course, a forger would simply sign both lines and, frankly, the banks rarely check signatures for authenticity unless a substantial cash withdrawal is being requested, so no guarantee here.
Duplicate Bank Statements. Getting two sets of bank statements, each mailed to a different party, reduces the likelihood of embezzlement. Of course, the two recipients could collude to embezzle, but the odds are greater against collusion.
Rotate Check Authority. Don’t always have the same person write, sign and issue checks. Rotate that authority so that several sets of eyes are looking at the checkbook.
Bank Account Reconciliation. Having an outside entity that has no check writing authority, like a bookkeeping service, balance the checkbook each month places the check function at arms length.
Secure Check Storage. All blank and canceled checks should be stored in a locked and secure location. A favorite ploy is to steal blank checks from the back of the stack so the theft won’t be immediately apparent. Canceled checks can be used to assist in forgery.
Fidelity or Employee Dishonesty Insurance. While it won’t prevent theft, this kind of coverage will reimburse the HOA up to its limit for theft.

Getting caught with a hand in a cookie jar is no big thing if you’re five years old and the goal is a macaroon. But when the prize is the HOA’s cash, the Board needs to place aggressive measures in place to help keep those “certain someones” from helping themselves.