How to Review Bank Statements and Monitor Your HOA’s Money

One of the most timely and efficient ways to keep track of association financial accounts is to properly review and reconcile bank statements. This includes implementing safeguards against fraud, monitoring operating and reserve fund accounts, and examining the activity in your homeowners association’s funds

Financial report reviewNo great period of time passes without news of a fresh scandal involving an association whose cash assets have been mishandled by someone in a position of authority. Like automobile accidents, these statistics remind us that theft and fraud can happen at any time to any association. What is most distressing is that these situations could usually have been prevented had the association’s directors followed a few simple rules about reviewing their HOA’s bank statements.

Reviewing Bank Statements

One of the simplest means of watching the money is to review reconciled bank statements for each of the association’s bank accounts. In California, the board is required by law to review reconciled bank statements for both the operating and reserve bank accounts at least quarterly. Prudence dictates that this should be done monthly.

Why is a bank statement so important? An association’s assets are managed by only a few individuals—typically the manager, the treasurer, or a combination of these two. An accounting of this management is given monthly in the association’s financial statements: payments received, checks written, etc. However, the association’s cash assets are stored in a bank. The bank account statement represents a separate and independent declaration of the association’s funds. Put another way, bank statements allow you to compare what your banker is telling you about your money with what the money managers are telling you in the financial statements. Bank statements allow you to verify bank balances, check payees and amounts, and deposits. Even in long-term certificates of deposit, a statement will verify that the cash is indeed, where it’s supposed to be. While this does not seem to be a strong deterrent, consider that fraud is often accomplished by altering the payee on a signed check. Likewise, in the absence of a bank statement, sums of money can be “borrowed” from long-term savings and “repaid” later without the loss even being noticed. Merely the knowledge that account balances and cash transactions are being responsibly reviewed every 30 days significantly inhibits fraudulent activity.

At a time when watching the association’s money is foremost among the board’s fiduciary responsibilities, banks are reducing statement services to cut their operating costs. Ironically, it is for an association’s largest accounts (especially long-term certificates of deposit accounts) that monthly statements are often not provided. If a board receives statements only upon the maturity of large replacement reserve CDs, as much as a year can pass without verification of those account balances. This is both unlawful and unwise. And, if you’re a director, it should be unacceptable.

Some banks, recognizing the special needs of homeowner associations, have developed special programs tailored to those needs. These banks typically provide monthly statements for virtually all types of accounts. However, many banks do not. When deciding on where to deposit the association’s cash assets, boards must take into consideration more than just the interest rate. Monthly bank statements represent a form of insurance for association’s assets and must be considered together with the interest those assets might earn.

Reviewing Bank Statements: What to Watch For

Bank statements should not be sent directly to nor reconciled by the same person who writes the checks. Statements and, especially, canceled checks ideally should be reviewed first by someone other than the check handlers.

Reconciling the bank statement means accounting for all the activity reported by both the bank and the financial statements. Checks that are reported in the financial statements may not have cleared the bank by the end of the statement period and may still be outstanding. Likewise, deposits may have been recorded in the financial reports that do not show on the bank statement. These are called “deposits in transit” and should be accounted for carefully. The reconciliation explains the differences between the bank statement and the financial reports. Adjustments stemming from those differences should bring the reconciled bank statements into “balance” with the financial statements.

Reconciliation adjustments and their explanations may not be clear or easy to understand but, as a director, it is your job to understand them. Ask questions until you are satisfied that all differences have been reconciled. Don’t worry about appearing uninformed or hurting the manager’s or bookkeeper’s feelings. A great deal of effort goes into keeping a good set of books, and those responsible are usually pleased to have directors take an interest in their work. And remember, reviewing bank reconciliations may not be the most glamorous job a director has but it is one of the most important. All directors should be involved, not just the treasurer!

Electronic Windows for Watching the Money

Most banks have used rapidly changing technology to provide homeowner associations with additional tools to help them watch the money. Among these are phone and computer-based inquiry systems by which a director may check account balances 24 hours a day, seven days a week. While these services are most commonly available for demand-deposit accounts, the ability to verify all the association’s bank account balances on demand is a valuable service. Consider this when selecting a bank in which to deposit your association’s funds.

Other Measures for Safeguarding the HOA’s Money

In addition to reviewing reconciled bank statements, a number of other simple rules can help you watch your association’s money. Among these are:

  • Require two signatures on all checks, not solely on replacement reserve account checks.
  • Periodically check the signature cards for the association’s accounts to ensure that they are current and correct. By altering or resubmitting modified signature cards, an unauthorized person can easily gain access to your association’s money.
  • Verify that the association’s checkbooks are in a secure place and subject to restricted access. Checkbooks readily available to a large office staff invite abuse, especially if canceled checks for those same accounts are lying about to provide sample signatures.
  • Mail checks to the recipients immediately upon signing rather than sending them back to an office for further processing. Remember that, once signed, the payee’s name can be altered.

The majority of agents who assist associations in handling their money are trustworthy. But by attending to the steps outlined above and incorporating them into the duties of your association’s future directors, you gain the additional assurance that your cash assets will be safeguarded. Like seat belts they provide the extra margin of safety that can prevent your association from become another dismal statistic.

Steve O’Brien was a principal in a community association financial and bookkeeping service in Sonoma prior to his retirement. He was a member of the ECHO board of directors and the North Bay Resource Panel.

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