Can community associations mismanage funds? The plain and simple answer is “yes.” Some communities mismanage community funds, whether maliciously or due to ineptitude, and it only takes one bad apple to give every community a bad rap. Here are some steps you can take to prevent the mismanagement of HOA funds.
If you suspect your board or management team is not managing your community’s financials correctly, you need proof, and you have every right to get it. Before you make any accusations, read on to see how you can investigate what you may suspect, and 5 actions you should take.
The Board’s Role
There is nothing in any statutes that says a board cannot mismanage an association. However, the business judgment rule does apply and there is little latitude for fiscal abuse. You cannot help it if your board is incompetent, but if they are reckless, then you may suffer the consequences of your own inaction. When you get hit with a special assessment you shouldn’t be surprised if you did nothing to stop the board from cutting corners and mishandling your funds. Even if you don’t suspect any mismanagement of funds as an active member of an association take steps to see it never happens.
1) Get a Copy of the Financials
In most states condo and HOA members have a right to see all the financials of their association. This is the ultimate check and balance to prevent your board of directors from misusing association resources. Associations are like governments, and every government needs to have good citizens keeping an eye on those that control the money. I’m not trying to sow the seeds of discontent in your community association but rather put a practice into place where your money is accounted for.
You have a right to see all the bank statements, invoices, bids, contracts, checks, and the profit & loss statement. Community associations are required to keep the records for a specific amount of time, depending on the state. Use this right and keep the board from mismanaging your funds.
Once you have those chosen documents look for unusual transactions. Such things as checks being made out to “cash” or directly to a board member. Look at the bids and the contracts that were awarded. Check up on the expenses. If you see that money was spent for new pool furniture go ahead and check to see if new pool furniture was delivered.
People do what is INSPECTED not what is EXPECTED.
2) Start a Committee
A good suggestion is to put together a group of members who will request to see these documents. As a show of good faith, the board can form an ad hoc committee, but the membership should be made up of members who are not on the board.
This group should review the financials, if not quarterly, at lease twice a year. Every few months a document inspection should be called for. A review of what was spent and what was collected should be made.
The most important part of this inspection is to see how well the budget is performing. Are you spending more money on a line item then you expected? Perhaps you are spending less. People do what is INSPECTED not what is EXPECTED.
Then give them a good review. Look at the reserve bank account to see if the proper amount of money was deposited, and question all withdrawals.
Your board of directors represents the owners
3) Ask the Right Questions
Ask questions of the board such as “what are you doing to collect delinquent HOA fees?” Put these questions in writing and ask that they be read during the next board meeting. Also, the questions that you submit should be included in the minutes.
Go on record if you have any doubts or concerns. If you wait for the meeting, you could be disrupted and nobody will ever get a proper response. Your board of directors represents the owners not a unique clique of elected directors. They work for you and the membership has a right to know.
4) Watch Out for Red Flags
Keeping your board honest can be accomplished in other ways as well. If you see that board meetings are constantly being held during the day when the membership cannot attend that is a red flag. Look at the sign in sheet and if nobody shows up at the board meetings you might want to encourage them to change the schedule.
5) Get Involved
Most of all, get involved and run for the board if you feel that you have something to contribute.
Don’t let the same board members maintain control over your condo or HOA over long periods of time. Cycling people in and out of the board is a good way to see to it that nobody has an opportunity to take advantage of your association. Term limits are healthy for any form of government including HOAs and Condos.
If you feel that things are not quite right in your community you have a lot of agency to step up and make them right. You simply need to take action.
Mitch Drimmer is a respected thought leader in his field and has led numerous continuing education classes in collections, His articles have been published in key trade journals and newspapers, and he is a speaker at educational seminars. Drimmer is also a former board member of the Florida Community Association Professionals (FCAP) and earned his company the distinguished FCAP Reader’s Choice Award for collections four years in a row. Throughout his career, Drimmer has worked with community associations to help them see their way through tough times, especially during the real estate crash. He is a passionate advocate for community associations and has participated in the legislative process over the years trying to bring fair and equitable legislation that serves community associations.
Drimmer earned a BA in History from Hunter College and served as CEO of Drimmer Industries, Inc. in New York City for 35 years.