Internal Controls
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Internal controls" refer to a system of checks and balances designed to ensure reliable financial reporting and safeguard the association's assets against error, fraud, and embezzlement.
Segregate Duties
The most important control is segregating duties, i.e., preventing a single person from having access to all aspects of the association's finances. This makes fraud more difficult because it requires collusion of two or more persons, and it makes innocent errors easier to find. Different people should perform the following duties:
Approve Transactions. Approving purchases, writing off bad debt, authorizing salary increases, and selecting vendors (functions typically held by the board of directors).
- Boards need to establish a check-signing policy. Two directors should sign all checks, and no check should be signed unless it is fully completed. The check should not be signed if it has blank areas.
- Never make checks payable to "cash."
- Disbursements should be based on original invoices. Monthly statements and photocopied invoices open the door to fraud.
Separate Duties. Someone other than a check signer should:
- Prepare checks.
- Make bank deposits (in FDIC-insured accounts in the association's name).
- Control petty cash (Board members and managers should never use the association's debit card online. Debit card purchases do not enjoy the same level of fraud protection as credit cards. With a compromised credit card, you only lose $50 if you report the theft immediately; with a debit card, the money is withdrawn from the account tied to the card. It means the account can be completely drained, and the bank has no liability.
Record Transactions. Someone who does not sign checks or make deposits should post transactions to the general ledger, record payables and receivables, handle payroll, and reconcile bank accounts.
- Bank reconciliations should be performed monthly and reviewed by the board.
- Missing checks and gaps in check numbers must be accounted for.
- Conduct an independent year-end financial review.
Review Financial Records Monthly
Boards have a duty to review the association's finances. Boards should review all bank statements and check registers to see where the association’s money is being deposited, transferred, or used. Directors also have an obligation to provide written approval for large transfers of sums.
Additional Protections
Problem Financial Statements. Red flags should go up if the board starts receiving late and confusing financial statements from the person responsible for preparing them. Statements that are 2 to 3 months late and require verbal explanations for confusing or contradictory accounting entries are good signs of either mismanagement or embezzlement.
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