By Mark Stelter, Itasca Bank & Trust Co.

Whether you consider your community association to be on the continent of Westeros or Essos, you have a duty to “defend the wall”. In this case, the “wall” represents the dollars, both operating and reserve, that your association spends and accumulates. There are many threats that that can compromise your “wall” and there are many different strategies that can be employed to build a better, stronger “wall”. The threats include a lack of proper controls as well as a lack of proper planning and oversight for how funds are used. Strategies for building a better, stronger “wall” include increasing your reserve fund, creating an operating reserve fund, and properly executing your well thought out plan. This all involves making tough decisions, even in the face of criticism.

1. Proper Control of Funds

One of the easiest ways to lose the hard- earned funds of an association is to have a lack of proper controls in place. This can be particularly true in small to mid-size associations where professional management may not be in place. The phrase “trust but verify” holds great value when it comes to proper control of money. It is critical for the board of directors to work together as well as with management (if a manager is involved) to have control over who is writing checks and who is authorized to approve payments. As has been highlighted in numerous news stories over the years, fraud can be committed in any business, both from the inside as well as from the outside.

Every association has regular financial obligations, whether they are insurance, utilities, repairs, landscaping, pool, etc. It is easy to fall into a “normal” routine of how

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these obligations get paid. Perhaps it is the responsibility of the treasurer to pay the bills as is quite normal within the industry. However, the question that should be asked is whether or not a proper check-and- balance system is in place to ensure that only legitimate and approved bills are getting paid. Is there a check reconciliation process in place that matches up the paid checks with an actual invoice? Even if bills are paid electronically, there should still be a reconciliation process in place that allows for verification.

Internal fraud can occur when the monthly report shows payments being made to a particular vendor when in reality the funds are being transferred elsewhere. For an extreme example of what can happen without proper controls, read the reports about the city of Dixon, Illinois and how $54 million dollars disappeared simply because there was a lack of proper check and balance; a lack of “trust but verify”.

External fraud can occur when a rogue organization sends fraudulent invoices for what appear to be normal and customary services; items that would not normally raise any suspicions. This type of fraud can be more prevalent in a larger association that has an expansive budget with many payments being made each month. Without having an effective approval procedure in place, the possibility of incorrect or fraudulent payments being made increases. Hiring a licensed professional managing agent to provide support can greatly reduce this type of risk exposure. However, a clear line of communication between the board and the manager will be necessary in order to ensure payments are being made accurately and on a timely basis.

A Publication of CAI-Illinois Chapter