Internal Control Refresher for Property Managers

In the Association of Certified Fraud Examiners’ latest occupational fraud study, real estate organizations had the highest median losses of any industry that was examined ($435,000). Internal control is an organization’s greatest weapon in the fight against fraud, but anti-fraud procedures may become obsolete without consistent monitoring and analysis. This week, some of CLA’s greatest real estate industry audit minds came together to make a list of the top five ways that property managers can strengthen internal control around cash receipts and disbursements.

1. While this may sound simple, a “no cash” policy means absolutely no cash. There should be no exceptions to this policy.  The company’s policy should be displayed on-site and visible to your customers (tenants). Property managers should create a written receivables and collections policy and stick to it.
2. Whenever possible, tenant receipts should be sent directly to the accounting department (not on site) or to a lock box. If that isn’t possible, check scanners or other electronic deposit options can be used to make and track deposits more efficiently. An added bonus is that many of these tools can now interface directly with accounting and property management software. Prenumbered receipts should be issued for payments received and a logbook should be maintained.  An occasional audit of these receipts to the tenant ledger is recommended.  Employees recording tenant receipts should not be involved in the bank reconciliation process.
3. Review rent rolls and accounts receivable aging reports, at least monthly.  Follow up on any outstanding items regularly and maintain the appropriate contact information for tenants to make collection easier.  Security deposits should be documented and tracked.  Accounts receivable aging detail and security deposit detail should be reconciled to the balance sheet, at least monthly. 
4. Expenses for a property should require approval(s) and be supported by invoices from pre-approved vendors.  A list of pre-approved vendors should be maintained and should include vendors to be used in case of an emergency.  Whenever possible, cash disbursements should be processed by an individual that is ineligible to approve them or perform the bank reconciliation.
5. Bank reconciliations should be performed monthly.  Inconsistencies noted, including transactions with vendors not on the pre-approved list, should be followed up on immediately. 

Guess what? You get enough accountants and auditors in a room, and there’s going to be at least one suggestion that missed the cut! Honorable mention to our list focuses on vacation and time away as an effective internal control. Cross-training or job rotation provides a similar, and equally effective, outcome. When an employee steps away from a role for a period of time, a different employee or employees will perform the absent employee’s job functions. This is a perfect opportunity to get a different perspective and to ensure adherence to company policies and procedures.  

We hope that this list helped. If you are looking for more ways to strengthen your company’s internal control or create more efficient business processes, CLA can help.  Thanks to Renee Bardenwerper for collaborating with our real estate industry colleagues on this very important subject and for authoring this blog post!

Source: Association of Certified Fraud Examiners’ Occupational Fraud 2022: A Report to the Nations