Community Association Crime – Internal Controls Mitigate Risk
Community Associations (“Associations”) are not immune to crime and theft. In fact, Associations may be more susceptible because of their culture of trust, where it is often assumed that the property manager and/or volunteer board members are solely motivated by their desire to protect and maintain the community. However, the same temptations exist among Associations as exist among for-profit enterprises.
A common type of crime committed against community associations is embezzlement, which occurs when someone has been entrusted with funds and/or property misuses them for their own personal gain.1 There are many ways in which embezzlement may happen, including:
- Forging checks made out to cash or oneself.
- Submitting false invoices from phony or legitimate vendors or contractors.
- Misusing an Association credit card account by making purchases for the individual’s benefit, not the Association’s.
- Electronically transferring Association funds to personal accounts or vendors for personal purchases.
- Stealing Association equipment, inventory or supplies.
Scenario
A treasurer of a homeowner association (HOA) was dismissed after board members discovered that he had failed to pay the community’s security company for a number of months, owing them approximately $33,000. Upon investigation, the board found that the treasurer had falsified documents indicating payments to many vendors, including the security company, which were not in fact paid. The board also found that there was almost no money left in the HOA’s account, contrary to what the financial records indicated. Further investigation revealed that the treasurer also used the HOA’s debit card for many personal expenses, such a food, clothing, vehicles and travel. In the end, it was determined that the treasurer had stolen more than $120,000 over a ten-year period. Although the HOA was able to provide the insurance carrier with evidence supporting that the amount of $120,000 was stolen, the HOA’s crime policy had a limit of $100,000. Thus, the carrier paid $100,000 and closed the claim.
General Risk Control Tips for All Associations
The scenario illustrated above underscores Associations’ need to develop and implement sound financial
controls to prevent theft and fraudulent activity. Often, because the individuals who commit these crimes serve in positions of trust, they may be considered “above reproach.” For this reason, a watchful eye should be kept on all financial activities, and policies and controls should be applied impartially throughout the Association, without exception.
Below are some general suggestions designed to help Associations enhance internal controls and minimize exposure to crime:
Encourage ethical behavior. Clearly written conflict of interest policies, with disclosure requirements, can assist in preventing theft and should be supported by training and reminders of Association rules and expectations.
Consider sealed bids when hiring contractors or vendors for large capital projects to reduce the chance of influence from either a contractor, board member, or property manager. Have multiple individuals witness bid openings.
2
Maintain good hiring practices for employees. Use background checks and verify references to screen prospective employees who will have control of Association funds. Consider using background checks for board members as well. When hiring property managers, in addition to background checks, consider contacting their former employers for references.
3
Financial Controls for All Associations
Some internal embezzlement schemes involve creating fictitious employees or vendor accounts and “paying” them with Association funds. Other embezzlement schemes may involve forged checks or fraudulent use of Association credit cards. By separating and monitoring certain functions, Associations make it considerably more difficult for individuals to cover up embezzlement. Consider the following financial safeguards, applicable to all Associations, regardless of whether they use a property manager:
- Obtain a financial statement audit which examines financial statements and evaluates internal control systems to ensure the organization complies with accounting standards and guidelines.4 Audits can identify weaknesses and other issues and address them. Audits are performed by Certified Public Accountants (CPAs). In addition, periodically perform unscheduled inspections of financial records and inventory in order to prevent attempts to destroy, alter, or conceal potentially incriminating documents.
- Ensure that Association bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC). Association accounts should be in the name of the Association only, not any individual. No one should be permitted to write checks to themselves or use the Association funds for personal expenses.5
- Have separate accounts for reserves and operating funds. Consider requiring the approval of multiple board members to transfer funds from reserves.6
- Consider requiring multiple signatures for opening or making changes to bank accounts, vendor contracts and insurance policies.7
- Consider requiring written approval of multiple board members, or the entire board, for expenditures and transfers of funds, as well as changes to vendor contracts or insurance policies, over a certain amount.8
- Avoid issuing debit cards in the name of the Association.9 While credit cards are better than debit cards, misuse may still occur. Ensure that the Association’s credit card invoices are periodically reviewed to check for misuse.
Financial Controls for Associations with Property Managers
- Monitor bank activity. Have an independent bookkeeper, with no check writing authority, reconcile bank accounts each month. Review and evaluate all deposits and payments made, including payee names, payment amounts and authorizing signatures. Although property managers often provide financial reports, obtain bank statements from the bank periodically or review online accounts to ensure that the financial statements that are provided by the property manager are accurate.10 Monitoring serves to both detect and deter fraud by sending a message that the organization is vigilant about its financial practices.
- Consider requiring board approval for checks over a certain amount of money.
Financial Controls for Associations without Property Managers
- Consider requiring multiple signatures on every check, withdrawal or transfer of funds above a certain amount to reduce the risk of forgery. Eliminating endorsement stamps and prohibiting the signing of blank checks also reduces this risk. Blank and unused checks should be kept in a secure location.
- Consider using electronic payments when possible to limit opportunities for theft.11
- Separate cash receiving and processing functions. Assign the task of receiving and reviewing unopened checks and preparing bank deposits to an individual who is not involved in recording payments in the accounts receivable ledger, authorizing adjustments to owner accounts, or regularly reconciling all bank statements. Any observed irregularities should be immediately reported to the bank.
- Credit card activity should be reviewed by someone without an Association credit card.
- Segregate vendor order and approval functions. Assign the task of vendor set-up and vendor master file maintenance to an individual who is not involved in generating and authorizing cash disbursements to vendors.
- Check vendor addresses and invoices to mitigate the risk of fictitious vendors. Regularly examine invoices to ensure that billed products and services have been received.
- Segregate payroll records and payroll processing functions. All changes made to employee payroll records should be approved and recorded by an individual other than the one who processes the payroll. Individuals who maintain payroll records should not be involved in approving, generating or distributing paychecks.
Additional Considerations for Small Associations Without Property Managers
- Segregation of duties becomes much more difficult when there are only a small number of board members. To the extent possible, small Associations without property managers should try to separate duties.
- Monitoring bank activity is also more difficult when there are only a few board members. Ideally the board member who reconciles the bank accounts should not be one who is responsible for writing checks and depositing money.
Thought Corner
Internal theft can result in significant harm to an Association’s image and balance sheet. It is imperative that Associations implement sound policies and practices to prevent theft and to respond swiftly and effectively to any sign of questionable financial activities. In addition to strong financial controls and practices, Associations need adequate insurance coverage and appropriate limits of insurance based upon their financial exposure.
Disclaimer: The purpose of this article is to provide information, rather than advice or opinion. The information it contains is accurate to the best of the author’s knowledge as of the date it was written, but it does not constitute and cannot substitute for the advice of a retained legal professional. Only your own attorney can provide you with assurances that the information contained in this article is applicable or appropriate to your particular situation. Accordingly, you should not rely upon (or act upon, or refrain from acting upon) this article without first seeking legal advice from a lawyer admitted to practice in the relevant jurisdiction.
The examples described in this article are for illustrative purposes only. They are not intended to constitute a contract, to establish any duties or standards of care, or to acknowledge or imply that any given factual situation would be covered under any CNA insurance policy. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All CNA products and services may not be available in all states and may be subject to change without notice.
“CNA” is a registered trademark of CNA Financial Corporation. Certain CNA Financial Corporation subsidiaries use the “CNA” trademark in connection with insurance underwriting and claims activities. Copyright © 2025 CNA. All rights reserved.