Fraud is a criminal deception. Embezzlement is the act of diverting money fraudulently for one's own use. Does this happen in community associations? You bet it does! And when it does, large sums are usually involved.

Embezzlement is a violation of trust by people often regarded as friends and confidants. When it happens, it's often swept under the carpet due to embarrassment by those that should have been watching more closely.

Most states have laws that impose significant responsibility on the association account holder or property manager for preventing and detecting fraud. By not acting prudently and quickly, legal options may be limited.

Separate Responsibility

Maintaining adequate checks and balances is essential in protecting your association from embezzlers. There are several ways to do this: Involve more people in the process to reduce the chances of it happening; Separate responsibility for issuing checks from that of reconciling the bank statement; Reconcile your bank statement within two or three days after receipt, and; Make sure you adequate supervision for office employees.

Account Information Security

Safeguarding key information is critical:

• Always store blank and canceled checks and bank statements in a secure location.

• Always verify the check number, date, amount and payee.

• Never use a rubber signature stamp or a signature that is illegible or easily forged.

• Notify the bank immediately when financial officers (President and Treasurer) or employees change.

• Periodically review bank signature cards and access codes.

Prudent Personnel Practices

Make sure that directors or employees handling association funds are trustworthy and have no criminal record. Always verify references and the last place of employment of any new employee. And be alert to major changes in spending patterns or financial circumstances.

Fraud Prevention Checklist

• Are bank account statements reconciled in a timely manner?

• Are bank statements reviewed by someone other then the person who issues checks?

• Are employees or directors involved in positions of trust bonded?

• Are all financial employees or directors required to take annual vacations to break the cover-up cycle?

• Is there adequate supervision of employees at all times?

• Is the mail opened by someone other then the bookkeeper?

• Is the list of checks received prepared by someone other than the bookkeeper?

• Are cash receipts deposited daily?

• Is the bookkeeper prohibited from signing checks?

• Is the supply of unused checks secured?

• Is signing blank checks prohibited?

• Are signed checks mailed out without being returned to the preparer?

• Do you issue checks in numbered order? A check way out of sequence could have been stolen.

• Are all invoices approved for payment and, when paid, canceled or noted as having been paid? This prevents the same bill being paid over and over.

• Are invoices checked for unexplained past-due notices?

• Is the integrity of bank PINs - Personal Identification Numbers, passwords and access codes maintained?

• Has the association considered using a "lockbox" service that allows assessments to be deposited directly to the bank?

Part of the Board's fiduciary duty is good stewardship of association funds. Protecting them from crooks is a basic. Following these procedures will reduce your losses. Additional suggestions from your accountant may be helpful. Remember, an ounce of prevention...

Thanks to Alan Crandall, Union Bank of California HOA Banking Services in Seattle for this information.

For more information on this subject, see www.Regenesis.net.

Published: April 18, 2001

Use of this article without permission is a violation of federal copyright laws.

Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .