Protecting Your Association Funds - What you need to know
Board members should be aware of a tactic used by management companies that could expose their Association to significant financial risks. Some companies require all Association funds to be held in a bank account controlled solely by the management company. This results in the Association effectively assigning all of its money to the management company.
These companies may hold all of their clients’ funds in a single, co-mingled bank account owned by the management company. Alternatively, the funds for each Association may be held in separate bank accounts, each under the sole control of the management company.
Either arrangement is unethical and preys upon the trust of board members that innocently allow the control of their Association assets to be transferred to the management company. This often ends in disaster.
Great for Management Companies, Bad for Associations
It is important to understand the reasons why unprincipled management companies propose this type of "put your money in our bank account" arrangement.
- Free Money.
- The management company earns interest on the Association’s funds. With the bank account in the name of the management company, all interest earned is the property of the company.
- More Free Money.
- The management company can earn “cash back”, points and other benefits by paying for the Association’s expenses using a company credit card. With both the bank account and the credit card in the name of the management company, all resulting rewards are the property of the company.
- Leverage Client Cash.
- If all client funds are held in a single bank account, the management company is free to use a portion of this money for a variety of investments. While some of the total funds must remain “liquid” and available in the account to pay bills on behalf of their clients, the vast majority can be used by the management company without clients being aware.
- Minimum Transparency.
- Clients have no direct access to their funds and no ability to verify that the funds are being properly handled. Financial statements may be issued by the management company to indicate the amount of Association funds being held, but these can be easily falsified.
- Discourage Client Cancellations.
- It often becomes difficult for a Board to obtain their funds if they elect to terminate the relationship with the management company. It is not uncommon for these management companies to force clients to wait months after the termination date before issuing a final disbursement check.
- Retain Power.
- If there is a dispute over the amount being held or how the funds are being handled, the management company has all of the power. With no access to the bank account and banking records the only option available to a Board is to file a law suit. Due to the high cost of legal actions, most Boards simply give up.
How to Protect Your Funds
Never allow Association funds to be held in a bank account that is owned or solely controlled by a management company. The bank account should be in the name of the Association with the board members having full and complete control and access.
The management company should be added as a signer on the Association's bank account so that it may perform the required financial-related duties. All earned interest and other benefits remain the property of the Association. The board can remove the management company from the bank account at any time.
This is the only appropriate financial arrangement and is the model followed by Connected Management.
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