How susceptible are HOAs to embezzlement?
What are common safeguards and how effective they are?
Answer: Embezzlement in the past has not been common in HOAs because most had little money to embezzle. However, as more states enact mandatory reserve fund requirements, more HOAs are accumulating substantial funds for future repairs which will entice embezzlers.
1st: To safeguard these funds, deposit funds in a separate bank account apart from regular operating funds. They should only be accessible by a few designated parties, like the board president and treasurer, who have specific authority to sign checks. A property management company typically would not have authority to write checks for the reserve account. It’s a good policy to require two signatures on reserve account checks although the bank typically will not reject checks that carry only one authorized signature.
2nd: Consider providing all board members with monthly email copies of the bank statement. Embezzlement usually happens when only one person is getting this information. When others have regular access to it, the odds of embezzlement drop.
3rd: Another form of embezzlement involves reimbursements. A board officer could easily steal money by submitting bogus or inflated requests for reimbursements. The board should have strict policies on reimbursements which include type and amount. No board member should be paying for HOA expenses from their personal account. It’s just too easy to manipulate the invoice and embezzle. All invoices should be payable by the HOA and go through the normal payment system.
4th: Embezzlement typically doesn’t happen over night. The embezzler is one that usually is entrusted with substantial funds with no one else overseeing them. After a period of time, the temptation just gets too great. The theft often happens because of an urgent personal debt payment or a gambling, drug or alcohol addiction. The thief typically intends to repay but rarely does. Once stolen, the money is seldom recoverable. While two or more people could conspire to embezzle, it rarely happens. The key to avoiding embezzlement is to set up a system with unrelated parties watching the HOA’s cookie jar.