By Joseph A. Bucceri, Orten Cavanagh Holmes & Hunt, LLC
The Board of Directors of an owner’s association wears many hats: decision maker, mediator, judge, and community organizer. Quite possibly the most important role a Board member serves is that of a fiduciary. A fiduciary is a person or entity put in a position of trust to protect the interests of a third party. While establishing and enforcing community design guidelines and use restrictions are essential actions for a Board of Directors, the primary need for a Board is to collect assessments from their members and spend that money for the benefit of the community. As with any situation where someone has access to other’s money, it is important to take steps to protect the community from the misuse or misappropriation of the association’s funds.
- The first, and simplest, step a Board can take to protect their community’s funds is to be transparent with both income and spending by creating (and maintaining) a budget process. Transparency with your members about where association money is coming from and how it is to be spent protects against misappropriation of funds. For example, if $20,000.00 is budgeted for landscaping every year, it is easier to observe overspending than if no budget is set at all.
- Additionally, a Board should avoid hiring its own board members or their board members’ companies for association business. This presents a conflict of interest and exposes the association to unnecessary risk of overcharging or self-dealing. While there may legally be no issue, assuming all necessary steps are taken, when a board member is in a position to benefit financially from the association it has a tendency to raise red flags that are best avoided.
- Another way to protect the association’s funds is to properly supervise who the Board has selected to manage the funds (i.e. a property manager, accountant, or treasurer). As the fiduciary, it is not sufficient for the Board to merely hire an accountant or manager, and review summaries produced by the same. Instead, the Board should be active in managing their own affairs. They should review actual invoices, balance sheets, and bank statements. A summary can be falsified, but a bank statement will show every transaction that has occurred. There are few in this industry who haven’t heard the horror stories of associations realizing too late that the bank account is empty and the reserves have been spent. If an association’s Board reviews the above-mentioned documents regularly, it is much less likely for any funny business to slip through the cracks.
- Management or accounting contracts should always require that the Board of Directors sign off on all expenditures over a specified minimum amount. Requiring a manager to get the Board’s sign-off on significant spending will help to prevent improper or unauthorized outlays. Whomever is hired to maintain the association’s books should also be willing to provide statements and invoices with minimal notice and quick turnaround time. Stonewalling or delays in accessing the underlying financial data is a major red flag and should be grounds for seeking a new financial vendor.
- In addition to being proactive in reviewing documents to prevent the misuse of association funds, a Board should maintain proper insurance to protect the association in the event that the unthinkable should happen. Few embezzlers are caught at the first withdrawal. Proper fidelity and crime fraud insurance policies are necessary ways to protect the association if funds are misused. However, the Board must be sure that the policy is set at a level that will cover their actual risk exposure. A $50,000.00 policy may be cheap, but it won’t refill $500,000.00 in reserves that are needed to replace the community roof. In addition to the association’s policies, the Board of Directors must require that their accountant or management company also maintain proper insurance to cover misappropriation of funds by their employees.
Just as with personal finances, a Board of Directors must maintain vigilance with the association’s finances to protect the interests of their community and not place themselves in the untenable position of needing to explain to their neighbors that all the money is gone, but the costs are still there.
Joseph A. Bucceri is an attorney at Orten Cavanagh Holmes & Hunt, LLC. He provides covenant enforcement services to community associations throughout Colorado.
