Protecting Community Associations Against Money Loss

There are many ways in which to protect your association funds.

First, before you hire a property manager, and if you are in the District or Virginia, make sure the company is licensed there. In Maryland where I understand that property managers need not be licensed, I strongly recommend you join with other community associations and petition your state legislators to enact such a licensing law.

Second, check out the property manager carefully. Perhaps you should even obtain credit reports on the firm (and the property manager who will be servicing your project); this will, of course, require the permission of the manager, but they should not object if they want your business.

Third, keep control of your funds. Generally speaking, there are two pools of moneys in community associations: operating accounts and reserve accounts.

Regarding the operating account, set a dollar figure above which the property manager will need the co-signature of at least one board member on all checks going out of that account. This will, of course, create a burden on both the property manager and the board member who has to sign checks. But, in my opinion, if you want to serve on the board, you should be willing to assume those responsibilities which will protect the funds belonging to you as well as the unit owners who elected you.

Clearly, there are routine checks that have to be paid on a monthly basis -- such as water bills, insurance, and trash collection. If you set a dollar limit based on your monthly needs, the property manager can write checks up to that amount without a second signature. But any checks over that limit must be co-signed by at least one board member. Your bank will give you signature cards and these signature requirements should be spelled out in those documents. Then, the bank will have to honor your request.

Regarding the reserve accounts, they should only be in the name of the association and only board members should be authorized to sign checks (or transfer funds) from those accounts. Community associations do not transfer moneys often from reserve accounts; it should not be a hardship on anyone to require that only board members be authorized to have access to those funds.

Fourth, make sure that the property management company has adequate insurance covering your association in the event of embezzlement, fraud or other activities which may cause your association a loss. The insurance industry will write "third party coverage" bond insurance which will give you protection in the event of a loss. The amount of the policy will, of course, depend on the amount of the reserves you anticipate you will carry. Some associations have hundreds of thousands of dollars in reserve; clearly, third party coverage in the amount of $50,000, for example, is woefully inadequate for those associations.

Fifth, ask if the management company has a fidelity bond in place to cover any loss created by its employees. If they do, your association must be named as an additional insured. On all matters of insurance, discuss this at length - before you sign a management agreement - with your insurance agent.

Sixth, make sure that you (and not the property manager) hire an accounting firm to give you a full audit or review each and every year. Your association should give a letter of engagement to the accountant, and the accountant should report back to you -- and not the manager.

Seventh, make sure that your funds (operating and reserves) are in separate bank accounts in the name of the association. It is absolutely wrong for a property manager to comingle funds with other associations, or even with their own bank acconts.

Eighth, and perhaps most importantly, insist that the property manager give you and your board members a monthly financial status report, which will include copies of the actual bank statements received by the management company. But, your President or Treasurer should also receive a copy of the monthly (or quarterly) bank statement directly from the bank. In the past, those property managers who embezzled money were creating false bank statements on their computer. In one case, although the manager left the association with only two thousand dollars, every month he created a bank statement showing over $80,000.

Most property managers are honest and hard-working. However, one dishonest manager will - and have - unfortunately cast a broad brush of distrust on the entire industry. I do not believe that property managers will object to the various suggestions I have made, and indeed may have more recommendations of their own.

Community association board members have the power to control -- as best they can -- the financial security of association funds, and steps should be implemented immediately, while it is not too late.



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