Every community should have strict HOA internal controls to safeguard association funds. These controls keep directors in check, ensuring utmost accountability and transparency. Beyond that, they allow board members to catch possible misdeeds early and take corrective measures to get the association back on track.
What are HOA Internal Controls?
Simply put, HOA internal controls are the checks and balances the board implements to protect community funds and prevent financial crimes.
Homeowners associations and condominiums handle large sums of money regularly. They collect dues and special assessments, levy fines, and manage reserves. They also disburse cash and checks to pay for various expenses.
As money flows in and out, it is easy for a few dollars to slip through the cracks. The goal of HOA internal controls is to protect funds by minimizing instances of misconduct, identifying potential misconduct, and catching gaps in financial management.
The Importance of HOA Internal Financial Controls
Internal controls essentially act as an HOA check and balance. They help prevent theft and fraud, detect errors early, protect assets, and build transparency and trust within the community.
1. Prevents Theft and Fraud
There is a lot of room for financial misconduct in an HOA. These communities, particularly large ones, deal with heavy cash flow day in and day out. Volunteer board members, committee members, employees, and managers can fall prey to temptation. With HOA internal controls, associations can prevent misuse of funds or potential embezzlement.
2. Detects Errors Early
Discrepancies are not always the product of bad faith. Sometimes, it all comes down to simple math or recording mistakes. With internal controls, an association can quickly detect and rectify these errors.
3. Protects Assets
Money is a highly liquid asset, which means it is easy to move around. By implementing HOA internal controls, the board can keep both operating and reserve funds safe.
4. Builds Transparency and Trust
Homeowners trust in the HOA board to protect funds and do right by the community. Additionally, board members have a duty to maintain transparency by sharing financial records and updates (Section 55.1-1815 in Virginia and Section 11B-112 in Maryland). Internal controls promote both.
Practicing checks and balances builds confidence in the board’s judgment and capabilities. Homeowners are more ready to accept board decisions, while lenders are more likely to favor these communities.
What are the Key HOA Financial Controls?
While every HOA is different, recommended internal controls include the segregation of duties, dual signatures and approvals, independent bank reconciliations, invoice verification and documentation, restricted account access, lockbox or direct deposit, regular financial reviews, and annual independent audits. Let’s discuss these below.
1. Segregation of Duties
To ensure no single person controls an entire financial transaction, it is important to segregate duties.
For example, the person who records incoming dues or writes checks should not be the same person who reconciles bank statements. Giving both tasks to a single person makes it easy for them to doctor the records or lie about their accuracy.
Boards can even take it one step further by dividing parts of a task among three individuals or groups. One person or committee can review vendor invoices, another person or manager can issue checks, and a third person, who isn’t involved in the first two steps, can reconcile bank statements.
2. Dual Signatures and Approvals
Many associations adopt a two-signature rule. This means that checks, large expenditures, or transfers above a certain threshold must be authorized by two board members. Dual signatures prevent one person from having unilateral control over financial transactions.
3. Independent Bank Reconciliations
Reconciling bank statements allows associations to match their internal records with the official bank balances. If there’s a discrepancy, the HOA board can investigate further.
That said, the person responsible for these reconciliations must not be involved in daily accounting or bookkeeping tasks. This prevents them from tampering with internal records to ostensibly match the bank statement.
Additionally, bank statements must arrive unopened. For online statements, the board member responsible for reconciliations must have view-only access directly from the bank before anyone else can review them.
4. Invoice Verification and Documentation
Associations must avoid disbursing funds without first confirming that vendor services have been completed. A designated board member or HOA manager can take point on this, reviewing work performance before authorizing payment.
Moreover, associations must practice proper documentation. Keep all records of vendor invoices, itemized receipts, and written approvals. These must typically be attached to every reimbursement or disbursement request.
5. Restricted Account Access
Another common internal control for HOA communities is to limit online banking permissions. Nowadays, accessibility is a major selling point when choosing a bank, but unrestricted control can breed financial mismanagement.
Board members must strictly regulate who can transfer funds between operating and reserve accounts. Admin access should also be confined to select directors.
6. Lockbox or Direct Deposit
Dues and assessments must not be paid to a board member or delivered to a personal address. Instead, associations should set up lockbox or direct deposit methods with their financial institution. This way, payments can go straight to the bank or a bank-managed online portal.
7. Regular Financial Reviews
Board members shouldn’t adopt a “set it and forget it” mindset. To protect association funds, boards must regularly review financial reports, including balance sheets, income statements, and bank reconciliations.
The budget-vs-actual report is particularly important, too. This report shows the variances between actual spending and the approved budget. Large variations warrant further investigation.
Additionally, reviews must be conducted by the entire board. It is unwise to entrust this task to the management company or to a single board member, even if that member is the treasurer.
8. Annual Independent Audits
Associations should not rely solely on the HOA board. As part of HOA internal controls, the board should hire an independent Certified Public Accountant (CPA) to perform an annual audit or financial review. The CPA can test the association’s controls, verify the accuracy of records, and catch discrepancies early.
Neither Virginia nor Maryland requires audits by law, but boards must check their governing documents for guidance. Some CC&Rs and bylaws do require independent audits every year. Even without such a requirement, audits are a valuable tool for ensuring sound financial practices.
A Helping Hand
HOA internal controls keep leaders accountable, protect association funds, and build trust within the community. While self-managed boards can implement these controls, associations generally have more success when partnered with an HOA management company.
Keymont Community Management offers expert financial management services to associations in Virginia, Maryland, and Washington, DC. Call us today at 703.752.8300 or request a proposal to start your journey!
RELATED ARTICLES:
- HOA Records Inspection In Virginia: What Can Homeowners Legally Request?
- HOA Board Abuse Of Power: How Boards Can Prevent Overreach
- Is Your HOA Going Broke? Here’s The Truth About HOA Bankruptcy
