One of the most important responsibilities of a property or condominium association board of directors is protecting the association’s funds.  In doing so, it is important for the board of directors and management company (if you are professionally managed) to understand the necessary internal controls and available insurance coverages to properly protect the association in the event of embezzlement or misappropriation of funds from a board member, officer, committee member or management company.

Self-managed associations and those that utilize a professional management company may use similar, but not identical, internal controls and insurance coverages. Internal controls may include - but are not limited to - one person depositing the assessments and other revenue while someone else approves invoices and writes the checks.  Ideally, a third person would receive and reconcile the monthly bank statements and prepare financial reports for the board of directors.

The monthly financial reports should include a balance sheet, income and expense statement, general ledger, check register, accounts payable report, aging assessment (delinquency) report, and copies of the monthly statements for each bank and investment account.

One bank statement should be sent to the management company (or, if self-managed, to the treasurer or bookkeeper) and the duplicate to a board member who does not have the authority to sign the checks or make any type of transfer or withdrawal. Many banks now offer statements by e-mail, which could be sent to more, if not all, board members, as well as the bookkeeper and management company.

A lockbox system allows owners' payments to be mailed or transferred directly to the association's bank accounts. This reduces the chance that the association's money will be deposited into the wrong account. While it may seem obvious, never sign blank checks. If your association is professionally managed, require a check register report showing check numbers, payees, and amounts. As proof, require the bank to return canceled checks or provide electronic images of the canceled checks along with the monthly statements. When reviewing the check register, you want to make sure the check numbers are in numerical sequence.
 
Segregate your association's reserves to ensure those funds are used only for their intended purpose of deferred repairs or capital expenditures. It is good practice for the board of directors to approve all reserve expenditures in a duly called board meeting. This will document the approval of these usually large expenditures. Principle risk-free investments are recommended.
 
Do not give one board member or bookkeeper total control over reserve accounts. Self-managed associations should update the bank account signature cards annually to ensure an active board member can access the funds if necessary.
 
Another important part of protecting your association’s funds is making sure proper insurance coverage is in place. Fidelity and crime insurance coverage differs for self-managed associations and those with a third-party bookkeeper or professional management company.
 
For self-managed associations, obtain fidelity coverage on the board members, officers, and other volunteers, such as the finance committee, in an amount that equals or exceeds the association's reserve and several months of operating funds. When you purchase directors and officers (D&O) liability insurance, a portion provides a fidelity insurance bond on the board members, but it may not be sufficient.
If you are professionally managed, the company’s coverage should include fidelity and crime, as well as an endorsement for “employee theft of client property.”
 
Fidelity insurance is just as important as carrying adequate property and liability insurance and should be part of every association's common expenses. Similarly, fidelity coverage for the management company is not usually included in the base policy and requires the purchase of a managing agent rider. Even with coverage through the association's insurance carrier, the board should require evidence that the management company carries its own fidelity coverage, which would provide the first line of recovery in the event of a theft by one of its employees.
 
If you are professionally managed and have board members who are also signatories on bank accounts, the association should have its own fidelity insurance to protect the board, while the management company should also have fidelity and crime insurance, as well as an endorsement for employee theft of client property.
 
A final recommendation to protect the association’s funds is to make it a policy to have an independent accountant review the books at the end of each year.