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Cards, cash, and daily controlsLesson 19 of 27

Academy/Banking, Cash & Internal Controls

Bank reconciliation controls

Comparing the books to the bank statement, every month, without the person who wrote the checks grading their own work.

Bank reconciliation is matching the association's own accounting records against the bank statement line by line, every month, so any difference gets explained. Its value depends entirely on who does it: if the person who writes or signs checks also reconciles, they can hide their own mistakes or theft. The reconciliation should go to someone else.

01

What the reconciliation actually checks

Reconciling means lining up every deposit and every withdrawal on the bank statement against the same entries in the association's own ledger, and accounting for anything that appears on one but not yet the other, usually a check the payee has not cashed yet. Once the two match, the ending balances should agree exactly. A reconciliation that never gets done, or only gets glanced at, is the single biggest reason a problem in the account goes unnoticed for months.

Beyond the reconciliation itself, a monthly look at the statement activity and how spending compares to the budget catches things a once-a-year audit cannot: an unfamiliar payee, a round-number withdrawal, a pattern of small charges nobody remembers approving.

"Monthly bank reconciliations and routine review of cash activity are also key detective controls that can help identify errors or unusual transactions in a timely manner."

Source: Safeguarding HOA Funds: Best Practices to Prevent Fraud and Theft, McKonly & Asbury LLP

02

Who reconciles, and who never should

This is a segregation-of-duties problem: no one person should authorize a payment, hold the checkbook, and then be the one who checks the bank's numbers against the books. If the treasurer does all three, a mistake, or worse, is graded by the person who might have made it. The reconciliation should go to a board member, or a bookkeeper, who did not sign the checks being reconciled.

The same logic applies to who sees the statement first. If it comes to the account signer before anyone else, that person has a window to notice and remove anything before a second set of eyes reviews it. Routing the raw statement to a board member other than the treasurer closes that window.

"The person who signs checks should not be the same person who reconciles bank statements and receipts."

Source: HOA Fraud: A guide to detection and prevention, FirstService Residential

This is one piece of a larger principle covered in Separating duties, and it connects directly to who holds signing authority in the first place.

03

Red flags a reconciliation should surface

A reconciliation is only useful if the person doing it knows what a problem looks like. A missing statement, a ledger that will not balance, or a check image that looks like a photocopy instead of an original are not paperwork glitches to shrug off; an HOA attorney's own list of embezzlement warning signs names all three.

"missing bank statements and reconciliations, general ledgers that do not balance, missing and altered documents," "photocopies rather than originals, unexplained cash shortages, unauthorized credits to receivable accounts," and "duplicate payments to vendors, unexplained overdraft and other bank charges, unauthorized purchase transactions."

Source: Danger! Warning Signs of Embezzlement, Mulcahy Law Firm, P.C.

If any of these turn up, the answer is not to wait for next month or accept a verbal explanation. It is to look closer, now, before it becomes a larger loss. See Fraud warning signs for the fuller list.

Check yourself

Answer before you read the explanation, recalling it is what makes it stick.

The treasurer signs every check, keeps the checkbook, and reconciles the bank statement each month. What control is missing?

The board president wants bank statements mailed straight to the treasurer each month. What should the board set up instead?

This month's reconciliation will not balance, and one check image looks like a photocopy, not an original. What should the board do?

Related elsewhere in the Academy

Banking, Cash & Internal Controls

Next, see how to divide the rest of the money handling so reconciliation is not carrying the whole control on its own: Separating duties.

How often a reconciliation must happen, and who is required to review it, is set by your own bylaws or board-adopted financial policy unless your state statute or governing documents say otherwise. Check your governing documents for any specific reconciliation or reporting schedule already in place.