Q&A: Checks and No Balances

Q My association is in the process of changing its bylaws. One such change pertains to check signing. Our current bylaws state that two board members' signatures are required for disbursement from any of the association's bank accounts. The board wants to change the word 'signatures' to the word 'approvals.' This will allow the board to use a new system that was recommended by our management company, under which two board members would review and approve vendor invoices online and then the management company would cut the checks and electronically sign them using the company president's signature.

I object to this system on grounds that the board will be allowing a third party that is not a member of our association to have access to our bank account. Since the management company will control the checks, sign said checks and reconcile the bank account, it seems like an ill-advised distribution of power to me. Is this becoming an industry practice, and are the public auditing firms in agreement with these new systems?

—Worried in West Caldwell

A “The use of online systems for reviewing, approving and paying vendor invoices is becoming increasingly common. These systems allow for faster and more convenient processing of payments to be made by a community association,” says attorney Jeffrey S. Paige, an associate at the law firm of Cutolo Mandel, LLC in Manalapan. “Your caution is warranted, and you are correct to be concerned with ensuring the proper controls are in place if an association is to transition to such a system. In this regard, I have spoken with Ed Wilkin III, CPA of the New Jersey based accounting firm Wilkin & Guttenplan, P.C. While each association must consult with its own respective accountants and counsel prior to implementing such a system, Mr. Wilkin and I have identified several areas of concern that should be discussed with your professionals.

“The association should consider implementing this system only with respect to the operating account. Further, management should only have access to, and be able to draw checks or otherwise transfer money out of, the operating account. The association should consider retaining sole access to the reserve accounts and deferred maintenance accounts in an effort to prevent co-mingling. In addition, the association must receive bank statements directly from the bank (or have direct online access to bank statements through the bank's website). The board should review these statements and reconcile same with the checks drafted each month, ensuring that both the payees and amounts of the checks are correct. The board should crosscheck the invoices approved on line to the actual payments made. The board should also approve all contracts and require that the approvals be recorded in the minutes. Finally the board should ask management what their internal controls are over the use of the electronic signature.

“The online approval system should be able to identify exactly which board members approved each invoice and corresponding payment. The association should also ensure that the management company has the appropriate types and amounts of bonding and insurance in place and should be required to notify the association immediately in the event of any reduction or cancellation of appropriate coverage. With respect to changing the by-laws to implement this new system, the association should carefully review all concerns with their counsel to ensure that all of the desired protections are clearly set forth in the amended bylaws.”   

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