"Internal controls" refers 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., not allowing one person 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:
1. Approve Transactions. Approving purchases, writing off bad debt, authorizing salary increases, selecting vendors (functions typically held by the board of directors).
- Boards need to establish a check signing policy.
- Never makes checks payable to "cash."
- Disbursements should be based on original invoices. Monthly statements and photocopied invoices open the door to fraud.
2. 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 a debit card online. Debit card purchases do not enjoy the same fraud protections that credit cards do. With a compromised credit card, you only lose $50 if you report the theft immediately; with a debit card, the money leaves the account to which the card is tied. It means the account can be completely drained and the bank has no liability.
3. 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 make bank account reconciliations.
Signing Checks. Two directors should sign all checks, and no check should be signed that is not fully filled-out. The check should not be signed if there are blank areas on it.
Additional Protections. In addition, boards should:
Board Review. 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.
Problem Financial Statements. Red flags should go up if the board starts receiving late and confusing financial statements from the person in control of preparing those statements. 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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