Academy/Banking, Cash & Internal Controls
Operating accounts
The HOA's day-to-day checking account, and why it needs different eyes on it than the reserve account.
An operating account is the HOA's checking account for day-to-day expenses: landscaping, utilities, insurance, management fees. It holds working cash, not long-term reserves. Like any bank deposit, it's FDIC-insured to $250,000 total per bank, combined with the association's other accounts there, and it needs the same controls as any account: no single person should sign, hold, and reconcile it alone.
What the operating account is for
The operating account pays the bills that keep the association running this month: landscaping, utilities, insurance premiums, management fees, office supplies, routine repairs. It is meant to hold roughly what the association spends on ordinary operations, not the money being saved for a future roof replacement or repaving project. That longer-term money belongs in a reserve account, kept and usually managed separately (see Reserve accounts below).
Keeping the two apart matters for more than bookkeeping clarity. It makes it obvious, at a glance, whether the association is spending down money that was supposed to be set aside for something bigger.
The FDIC limit counts your operating account too
The operating account is an ordinary bank deposit, covered by the same FDIC rule as every other account the association holds at that bank.
"The standard maximum deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category."
Source: Your Insured Deposits, FDIC
That means an operating account with $50,000 in it and a reserve account with $220,000 at the same bank do not each get their own $250,000 of coverage. They are added together, because the FDIC insures the depositor, the association itself, not the account. See FDIC coverage for the full picture and what to do about balances that are getting close to the limit.
One person should not sign, hold, and reconcile it alone
The most common gap in a small association's controls is a single volunteer treasurer who writes the checks, holds the checkbook, and reconciles the bank statement every month. That is not a comment on the treasurer's honesty. It is a description of an account that no one else is watching.
"Require two signatures (including at least one board member) on all checks or transfers greater than a pre-designated amount."
Source: Danger! Warning Signs of Embezzlement, Mulcahy Law Firm, P.C.
A property management company's fraud-prevention guidance draws the same line a different way: whoever prepares a check should not be the person who signs it, and whoever signs it should not be the person who reconciles the statement. Route the monthly statement to a board member first, ahead of the treasurer, so a problem surfaces before anyone has a chance to smooth it over. See Separating duties and Dual approvals.
What varies by state
Some states legislate directly on how money leaves the operating account. California requires the board's prior written approval before a transfer out of the operating or reserve account above a set threshold. Check your own state's statute and your governing documents, since most states have no equivalent rule at all.
"The lesser of ten thousand dollars ($10,000) or 5 percent of estimated income in the annual operating budget."
Source: California Civil Code section 5380, State of California, via HOA Law Blog
How many signatures your own account requires is not standardized nationally either. That is set by your bylaws and by your bank's signature card. Ask both before assuming one signature is enough.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
Your treasurer writes checks from the operating account and reconciles the bank statement every month, alone. What control is missing?
The HOA keeps $50,000 in its operating account and $220,000 in its reserve account, both at the same bank. How much of that $270,000 is FDIC insured?
Your bylaws are silent on how many signatures a $15,000 transfer out of the operating account needs. What should the board do first?
Sources
- Your Insured Deposits, FDIC
- Danger! Warning Signs of Embezzlement, Mulcahy Law Firm, P.C. (Beth Mulcahy, Esq.)
- California Civil Code section 5380, State of California, via HOA Law Blog
- Segregation of Duties, Personal MBA (Josh Kaufman)
- HOA Fraud: A guide to detection and prevention, FirstService Residential
Banking, Cash & Internal Controls
Next, see exactly how FDIC coverage adds up across every account your association holds at one bank.
Signature thresholds, prior-approval requirements for transfers, and dual-signature rules vary by state and by your governing documents.