Sunset Villas is a condominium complex with fifty units on the shores of Lake Michigan. Owners pay $550.00 a month in dues towards neighborhood and maintenance, including the upkeep of the pool and common areas. When the owners hired a property management company, they didn’t realize Sunset Villas was a tempting, lucrative target. Homeowners associations are often victims of misappropriation by property managers, due to having relatively large amounts of monies and lax, volunteer boards responsible for accounting and control. One recent case involved a property management company stealing more than $300,000.00 from a homeowners association over a period of nine years.
According to the Association of Certified Fraud Examiners, 28% of all organizations and companies with fewer than 100 employees are victims of fraud, with an average loss of $154,000.00. Fraudsters keep up the misappropriation for an average of 18 months before being caught. Smaller organizations experience bigger losses than larger firms, generally due to weaker control measures.
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Common fraud tactics used against HOAs include, but are not limited to:
- Payments made to non-existent vendors or multiple payments to a vendor for one-time services
- Payments for services not performed
- Payments for administrative, legal, repair and maintenance fees without the board’s approval
- Payments in excess of agreed-upon management fees
- Reimbursement for personal expenditures
- Overbuying: for example, the purchase of fifty sets of tables and chairs for the pool area, instead of five
- Fees paid for consulting without the board of directors’ approval
- Falsified bank statements and financial records to conceal misappropriation
Sometimes the misappropriation is discovered when a new board of directors assumes office or a new property management company is retained and begins examining the financial records. Other times, HOAs don’t discover the misappropriation until they receive notice from the police indicating their property management company is under investigation for fraud against other HOAs. Either way, by the time the misappropriation is discovered, the fraudsters have often been long at work lining their pockets with money that isn’t theirs. And recovery can be a time-consuming, difficult, emotional process.
- Simple fraud prevention techniques and consistent internal controls can go a long way to prevent and mitigate fraud.
- Board members should be on the lookout for:
- Delays in bank deposits
- Addiction to alcohol, drugs or gambling
- Defensive behavior
- Vendors’ addresses having P.O. Boxes or the same address as an employee or other board member
- Missing documents or copies of documents on file instead of originals
- Excuses and delays in providing documentation to the board of directors upon request
- Bank statements being mailed directly to and reconciled by one board member
Taking the following steps can help prevent fraud:
- Bank reconciliations should be performed regularly by more than one individual.
- Separation of duties. No one individual should have responsibilities of signing checks, recording invoices and preparing the bank reconciliations.
- Payees on the checks should be compared to the list of vendors on a regular basis.
- Require two signatures on all checks.
- Expenditures over a certain dollar amount should be reviewed and approved.
- Background checks for property managers and members of the board of directors should be performed.
- Retain a CPA to conduct a review of financial accounts and investments and perform an assessment of procedures, safeguards and checks and balances.
- Having a fidelity insurance policy that addresses volunteers and property managers as employees.
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Fraud requires both motive and opportunity. While the board of directors can’t control a fraudster’s motivation to steal, they can control the opportunity. An actively engaged, aware board of directors can help to keep their neighborhood safe from financial fraudsters.