Financial Best Practice: Separation of Duties

Karen Danzinger - Saturday, December 1, 2018

Most people have heard the phrase “separation of duties”, but what does it really mean? How does it affect you, in your association?

By definition, separation of duties is the practice of having more than one person to complete a task. In the accounting world, it is an internal control designed to reduce fraud and error risk. Why does this matter to an association? It is the duty of the Board to protect the Association’s assets, and that includes implementing controls to reduce risk of fraud.

In the average association, separation of duties is very difficult, as most simply aren’t large enough to have a big staff all with their separate duties. However, separation of duties is the number one way to reduce the risk of embezzlement. So, what can you do?

Best solution: Outsource your bookkeeping. This is a very practical solution for many reasons. First, your property manager probably isn’t a CPA or an expert bookkeeper.  Most have no training in accounting or bookkeeping but know enough to get by. By outsourcing, you get professionals that are properly trained in accounting. Second, you automatically get that separation of duties needed. For example, the person approving the bills (the manager) is not the person who actually pays the bill (accounts payable), signs the checks (the treasurer and/or president), or reconciles the bank account (account manager). This solution also eliminates those annoying unit owner complaints that the manager “lost” their payment, or deliberate delayed posting it because “they don’t like me”. A third party doesn’t care who you are – all unit owners are treated the same. Lastly, most accounting firms have more sophisticated accounting and banking systems than you at the condo office are likely to have. For example, they almost all use bank lockboxes for receiving unit owner payments, and many are moving to payables lockboxes for the payment of bills, which is another excellent way to separate duties.

Good solution: Use a lockbox for unit owner payments. Most banks that specialize in Association banking offer free lockbox services. If the unit owners are mailing their checks directly to the bank, this is a major separation of duties, as the association staff then only has to post from the lockbox report. An independent third party received and deposited the funds. If the manager pays bills, make sure the Treasurer and President (two officers anyway) review all checks before signing them.  NEVER leave signed blank checks with anyone, regardless of the reason!

Acceptable solution: If you are large enough to have both a manager and administrative assistant, clearly separate their accounting duties. For example, have one person open the mail and list the checks received on a log, and the other actually post the payments to the unit owner ledgers in the computer system. Copies should be maintained of all checks, with a copy of the deposit ticket and posting report. The treasurer should be the one to do the bank reconciliations. To make this more acceptable, have someone else (another board member, or a finance committee member) do spot checks to ensure everything looks legitimate and all the documentation balances across. This setup would require some type of collusion to defraud the Association.

Poor solution: The manager does everything. Unfortunately, this is the most common, but it is a very poor option as it leaves the association wide open to embezzlement with no checks and balances – any one person would have the ability to embezzle funds. If this is your only option, ensure that the treasurer at least does the bank reconciliations, and carefully reviews all checks issued.

Remember, even “trustworthy” employees can be under financial pressure, and find ways to rationalize fraudulent activity: “they can afford it”, “I’m not paid enough”, or “I’m going to pay it back” (which of course never happens.) Better to have systems in place to prevent the opportunity thief.