Academy/Banking, Cash & Internal Controls
Petty cash
A small cash box is still association money. Here's how to keep it honest without making it a hassle.
Petty cash should run on a fixed imprest amount: cash on hand plus receipts should always equal that set total. The person who holds the cash should not also approve the replenishment check or record the entry in the books. Reconcile the fund every time it's replenished, and treat any mismatch as something to ask about right away.
The imprest method: a fixed amount that always adds up
Most HOAs that keep petty cash run it as an imprest fund: a fixed dollar amount, set by the board and written into policy, that never itself changes. When someone spends $20 on postage, the fund isn't now worth less, it's now $20 lighter in cash and $20 heavier in receipts. Add the two together at any moment and they should equal the fixed amount exactly.
"Physical Cash on Hand plus the total dollar amount of all Vouchers and Receipts must exactly equal the original Fixed Imprest Amount."
Source: Petty Cash Internal Controls: Procedures and Best Practices, LegalClarity
That equation is the whole point. It turns "does the cash look about right" into a number anyone can check in thirty seconds: count the cash, add up the vouchers, compare to the fixed total. If your board doesn't already have a written fixed amount for its petty cash fund, that's the gap to close first, not what the number should be (that's a board and policy decision) but the fact that one fixed number needs to exist to reconcile against.
Keep the custodian out of the approval chain
The person who holds the petty cash box should not be the same person who signs the check that refills it, or the one who records that entry in the association's books.
"The custodian, who physically handles the cash, must not be the same individual who performs the final journal entry or approves the replenishment check."
Source: Petty Cash Internal Controls: Procedures and Best Practices, LegalClarity
This is separating duties applied to a locked box instead of a bank account: custody of the cash, approval of the refill, and the bookkeeping entry belong to different people, so no one person controls a transaction from start to finish. A CPA firm advising HOA boards names this split as one of the most effective fraud controls available, and it isn't a judgment about any one custodian's honesty. It removes the opportunity, regardless of who holds the box.
Reconcile it every time, and treat a mismatch as news
Check the fund against its fixed amount whenever it's replenished, not just once a year at audit time. A CPA firm advising HOA boards describes routine review of cash activity as a detective control that catches errors or unusual transactions while they're still small.
"missing bank statements and reconciliations, general ledgers that do not balance, missing and altered documents"
Source: Danger! Warning Signs of Embezzlement, Mulcahy Law Firm, P.C.
If the count comes up short, or a receipt looks like a photocopy instead of an original, that's exactly the kind of detail an HOA attorney's embezzlement checklist flags. Treat it the way you'd treat a bank statement that doesn't balance: ask before you assume there's an innocent explanation.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
Your petty cash custodian buys office supplies, keeps the receipts, and then writes and signs the check that refills the fund herself. Which control does this violate?
At month's end, the petty cash box holds $42 in cash and $53 in receipts, against a $100 fixed fund. What should the board's first move be?
The treasurer wants to be the sole petty cash custodian and also record the replenishment entry in the association's books. Why should the board say no?
Sources
- Petty Cash Internal Controls: Procedures and Best Practices, LegalClarity
- Segregation of Duties, Personal MBA (Josh Kaufman)
- Safeguarding HOA Funds: Best Practices to Prevent Fraud and Theft, McKonly & Asbury LLP
- Danger! Warning Signs of Embezzlement, Mulcahy Law Firm, P.C.
Banking, Cash & Internal Controls
Next, see how this same idea, keeping custody and approval in different hands, applies to your operating account signers in Separating duties.
How much a petty cash fund should hold, how often it must be reconciled, and who may serve as custodian are set by your association's own board policy and governing documents, not by a uniform legal standard.