Imagine, for a moment, if your Association’s funds were embezzled by a Board member, your Property Manager, or an outside third party. Frightening, isn’t it? Now ask yourself, “would our Association still be able to pay our monthly bills on time?” Perhaps not.
Let’s face it… your Association’s bills won’t stop, even if your Association funds disappear.
It happens every day. Internal and third-party fraud is on the rise, with an estimated $400 billion in fraud in fraud a year. Perhaps the thief is a Board member, an employee, bookkeeper, vendor or volunteer who forges or steals the Association’s money, securities, or other property.
Here’s a common scenario: Instead of hiring a Property manager, the Association decides to hire someone within the community to manage their business. “It’ll save us money”, you say. “We trust our volunteer accountant”, someone encourages. Unfortunately, what the Board doesn’t realize is that often, the individual has already started to misappropriate funds. They use the Association’s credit cards, take out cash withdrawals, and write fraudulent checks, taking a little out at a time, but eventually embezzling thousands of dollars. Not until your Association has a full audit do you discover this crime has been happening for several years. The Association may well be missing over $400,000 and have serious cash-flow issues by the time it’s discovered. Now the Board must turn to the homeowners and implement a special assessment fee.
But it doesn’t have to be that way.
How to prevent fraud? Fraudis rampant. From forgeries, credit card theft, wire transfers, and computer fraud, the Board should take every step to insure that funds are protected. Review how many people are authorized to access the Associations funds. While too many people with access can be a problem, having very few people with access presents a whole other problem. It is recommended that…
- annual comprehensive audits be performed by an outside party
- two or more signatures are required on checks
- reconciling bank statements and depositing funds are done by two different people
- “positive pay” or a similar online banking control tool is used
- the Association’s bank has documentation identifying which members are authorize to initiate wire transfers and withdrawls
- request your Association’s bank verify, by phone, any transfers that aren’t prearranged
- require your Association’s bank confirm, in writing, any completed wire transfers
Crime coverage. Often called ‘Employee Dishonesty’ or ‘Fidelity’ coverage, Crime coverage is becoming increasingly important for an Association. As part of a large Association, you must be aware of the exposure to theft you are in. Protecting the assets of your Association, the homeowners, and the Board should be your top priority.
The formula is simple. The minimum amount your Association should calculate to determine your coverage limit is 3 months of the total monthly dues, plus the total amount in the reserve(s). This is also the standard requirement of Fannie Mae and lenders in the industry when unit owners purchase new homes. It is also important for your Association to understand that the Crime coverage costs are a moving target. As funds are taken out or put into reserves, either due to a project or an assessment, the Association will need to adjust their coverage limit or give themselves enough cushion so not to be underinsured. Your Association should also make sure that, if you’re using a Management company, the policy should extend to them as well. Understanding who is defined as an “employee” is key for your Association to insure that the correct people are covered under the crime policy.
At ABI Insurance, Vern and Sara are experts in the needs of HOA coverage. Let us help your Association navigate your insurance issues. Give us a call today!