Homeowner's Associations

MADOFF'S PONZI SCHEME-A LESSON IN SEGREGATION OF DUTIES

Bernie Madoff apparently "made off" (pun intended) with billions of dollars. That is until he was finally caught.

His criminal activity was revealed to the world last December after he had confided in his two sons that the asset management arm of his firm was an elaborate Ponzi scheme which he had actually begun back in the early 1990's. The most shocking revelations following his arrest may be that he never invested any of his clients' money at all, and that he insisted that he was solely responsible for the scheme.

If these assertions turn out to be correct, the concept of "segregation of duties" under the subject of Internal Controls takes on added meaning and importance. For Bernie Madoff, all "investment duties" were concentrated in him alone. For Homeowner Associations, and in particular for those who serve on their boards, segregating duties is not only good business, but also a compelling safeguard to protect assets and reputations.

Segregating the responsibilities for dealing with the "Cash" asset of an association is one function that deserves our attention. Cash represents all the assets from petty cash to balances in checking accounts and savings accounts, and also includes some investment accounts. Pertinent questions include:

1. Are the responsibilities for collection and deposit preparation adequately separated from those for recording cash receipts?
2. Are the responsibilities for cash receipts functions adequately separated from those of cash disbursements?
3. Are responsibilities for check preparation and check signing adequately segregated from those of entering cash disbursements information?

These are only a sample of Internal Control guideline questions that associations need to consider. In best case scenarios, duties must be segregated among responsible, trustworthy individuals. Of course, there is always the possibility of collusion, but that is a topic for another article.

Each process of the association should be evaluated to determine if adequate control procedures are in place to prevent misuse or theft of association assets. Internal controls are processes to prevent errors, theft and/or fraud. Some associations may be subject to unnecessary risk because they fail to institute processes or control procedures in a way that might protect them and their association's assets.

For homeowner associations, basic control procedures can be developed around the following areas:

1. Collections
2. Disbursements
3. Payroll
4. Budgeting

Depending on the size of the HOA, there can also be a number of sub controls that relate to these areas. Where fewer controls are in place, the Board will need to increase its oversight roll. This increased roll may require additional training. The "fiduciary" position of each board member can be safeguarded by tight internal controls which lightens the load for association members.

Submitted by Michael R. Gallacher, CPA and Marcos C. Goodman, CPA
Gallacher, Bosen, & Goodman, PLLC