Suspicion of MC Embezzlement

We are concerned about financial issues with our MC.

1)Our bank statements are off from prepared financials.

2) The MC has admitted having problems with both book keeping personel as well as software (TOPS). He indicated that TOPS was transfering money into incorrect accounts.

3) They have indicated that they are trying to sort out the details but "dont be surprised if some accounts have balance changes".

Please - If anyone has any knowledge or experience on the order of steps to take to investigate, I would appreciate hearing your advise. This is sadly frequenly experienced so I was hope for a checklist. For instance -

1) Do we lock up the bank accounts.
2) Do we take control of our records, hard and soft?
3) Is there a special name for this type of audit?
4) Do we let the MC know that they are being investigated?
5) Do we contact other HOA's in MC portfolio?
6) At we point if at all do we contact the Authorities or State Boards?
7) When do we contact the homeowners?

We need some counsel on this

I am the Treasurer of our HOA. We instituted SOP a few years ago for this reason.
First, we use TOPS. The program does not make transfers by itself. You need someone to input the transfers. This leads to who authorized them. Our BOD has complete control of the HOA money. Our MC provides us with office personnel and a bookkeeper. They check each invoice then I have to sign off. No check goes out unless it has 2 signatures from BOD members. No transfer is made without my knowledge. These SOP were put in place after we had a similar problem years ago.
I would request a forensic audit, to be paid by the MC. The BOD ultimately has a fiduciary duty to the HOA. Do you review your financials on a monthly basis? Our MC sends in a head bookkeeper on a monthly basis, she reviews the financials, then I sign off. If I have any questions they are taken care of then.
I agree with Jadedone4, that you should proceed with all correspondence in written form. This will protect the BOD from any finger pointing and to show the HOA that you have taken action to protect their assets.
The MC works for the HOA, you do not have to provide excuses. They admitted that there are mistakes. Keep in mind that the HOA members will hold the BOD responsible for any improprieties. You have to take a pro-active roll to prevent this from happening in the future.

William,
Comments on your concerns:
1) Bank statements and prepared financials do not necessarily agree. What type accounting is being used - cash, accural, or modified accural? Cash accounting should agree.
2) Their explanation of problems with accounting software is not acceptable. IMO, TOPS is probably not the problem; it is probably the bookkeeper or else what you fear. The MC should be accepting responsibility for this problem and not trying to blame the software or their bookkeeper.
3) Require the MC 2 weeks to resolve their problems after which you require them to sit down face to face with the Board's appointed representative(s)and explain each discrepency. If necessary hire an accountant to help with this financial review.

If they can not provide satisfactory answers to your questions at that time then they should be terminated ASAP. Assume everything will turn out okay but prepare for your worst fear.

WilliamS1:
Re point 2): we wonder if PM has transfered funds out of our accounts into some of their accounts?

If the 2 Board members sign outgoing checks, and they are the 2 signatures on the "bank card", the PM has no authority to do any bank transactions against the associations account/s.

Roger - I believe we are using a cash system because for instance, regime fees are shown as what was received and then on a seperate line, it shows accounts recievable (this period). Also our pool guy waits to send in a bill every three or four months and it does not show on our I/E statement until the month that the bill is received and paid. So does that sould like cash system?

Next - Here's the issue---
The PM gives us a monthly Balance Sheet which shows the bank accounts. This should represent month end bank statements I would imagin. As listed:

ASSETS
Cash in Bank - Operating
Cash in Bank - Reserves
Investments -
Accounts Receivable -Units
Accounts Receivable - Other

We got copies of the bank statements from him as well as the bank, those are the same but it does not come to the balances shown on the balance sheet for the month end. Way off XX,XXX off.

Please Advise

William, it does appear that you are on cash basis accounting. That is what we recommend for HOAs because everyone understands it - similar to a personal checking account. The bank statements should be the same as the cash in bank operating and the same as cash in bank reserves on the balance sheet!! So either the bookkeeping is wrong or else the MC may have lots of explaining to do.

My first impression was the bookkeeper simply entered payments into the wrong accounts. The discrepency between bank statements and balance sheet is the key method to verify accounting cash. This could be the case if an accounts receivable was erroneously, or failed to be, entered.

SOP recommended by us is:
1) MC is not a signee on any financial account;
2) All financial accounts reconciled every month (this is SOP in bookkeeping and accounting and would immediately illustrate the discrepency you found);
3) Finacial reports prepared at the end of each month - balance sheet, income statement, aging accounts receivable, general ledger accounts (as desired), and my favorite cash flow/budget chart by month;
4) All bank statements issued be received and compared to financial statements on a monthly basis; and
5) If desired, copies of all invoices sent to Treasurer.

With regard to two signatures on checks, does anyone know why their association requires this? Prehaps it makes the Treasurer feel more comfortable when another Board member also sign checks. The banks I work with require only one signature. So a Board policy of requiring two signatures does not prevent one signee from stealing funds. If that is your concern I recommend having fidelity (theft) insurance instead; it is inexpensive.

RogerB,

We have an internal policy that there be two signatures on each check. The bank does not require it but it is a HOA safeguard. The feeling is, if there are two signers there is less chance for embezzlement. If only one signer there is no check on him. For two people to steal it is a lot harder. We do have fidelity insurance but if the HOA members feel safer with 2 signers, it does not hurt. I also feel more comfortable as a Treasurer that there is a person double checking me if a mistake is made.

Nothing is fool proof, as evidenced by one of our neighboring communities in Boca Raton. There were 2 signers and they were both stealing. They have both been charged with theft.

William, take the MC's name off of this account NOW! The bank statements themselves should be in the HOA office at any given time. If the MC wants a copy, provide it. The BOD should not have to ask the MC for anything relating to financials.

We have a Budget & Finance Committee. They also review the financials after I have approved them for releasing a monthly basis and they ask many questions. They sometimes make suggestions, but the BOD only has to review these suggestions. They are not the final say. This may be a help in your HOA.

Also do you have on your Balance sheet a previous month, yearly budget, and actual expense comparison. This, to me, is one of the simplest ways to find mistakes. If there is a mistake, it will usually jump out from the comparisons.

Do you have a contract with the MC? We pay one fee per month. If there are any other invoices from the MC, they are minimal. Such as additional postage for mass mailing or over-time billing for maintenance personnel. This happens once in a while, but normally there is only one check per month to the MC. I would review why the HOA sends the MC a lot of checks.

Dane, thank you for correcting my erroneous statement. The checking account usually is not the same because of the examples you stated. The Treasurer can get a copy of reconciliation form to clarify these.

With regard to bank statements, when we do the bookkeeping/accounting we receive all bank statements. The Treasurer is sent a copy and the original is filed with the association documents.

Thank you all so much for you very good advise. I wish that I had asked this question six months ago.

We do have monthly comps for most all items on I/E statement as well as the balance sheet. We do review this every month, however we have not been comparing it with the actual bank statements.

I hope things clear up with an explanation, but right now it would seem our MC has transfered some funds out of the bank some time ago and has been keeping the bookwork representative of what we would expect. I hope I am wrong.

Thanks Again
This is good advise for anyone.