Detect and Prevent Theft, Fraud & Embezzlement in HOAs

Detect and Prevent Theft, Fraud & Embezzlement in HOAs
featured image

Condominium associations are frequent targets of embezzlement and fraud.

Large sums of money and lax controls make it attractive to commit this kind of crime.

Embezzlers manage to steal $100,000 and sometimes more than $1 million over the course of 1 to 5 years.

How to DETECT Fraud & Embezzlement in HOAs?

Watch for Red Flags:

  • Spend rate exceeds budgeted amounts
  • Multiple payments to a one-project vendor
  • Single-source contracts (i.e. Lack of multiple bids)
  • Duplicate payments
  • Accounts Payable and Accounts Receivable are out of balance
  • Someone gets defensive when asked for an accounting report
  • Fees paid for ‘consulting’ without approval by the board of directors
  • One common technique is overbuying. Example: Get four services per month, but pay for eight. Someone somewhere is pocketing a lot of extra money.
  • Another technique: A manager, employee, or board member goes to Home Depot and buys $500 worth of items or supplies. The association’s bookkeeper has a copy of the receipt and enters into the accounting system. The offender goes back to the store with a copy of the receipt, returns the items and gets a Store Gift Card (pocketing $500!!). Now your association is out the money and the supplies.

Don’t rely on background checks alone. The vast majority of embezzlers are first-time offenders.

How to PREVENT Fraud & Embezzlement in HOAs?

  • Establish a culture of awareness, transparency, and accountability.
  • Knowing that board members and property manager pay attention to accounting details should prevent most fraudsters from committing crimes.
  • Be proactive
  • Board members themselves must take the time to inspect records and paperwork.
  • Hold staff accountable for records, supplies and inventories.
  • Maintain checks and balances, separation of responsibilities:
    • Person #1: Verifying invoices
    • Person #2: Sign checks
    • Person #3: Ensure supplies and services were actually received
  • Cash & Reconciliation:
    • Person #1: Take in cash or money orders
    • Person #2: Reconciling bank statements
  • Reserve & Operating Accounts strictly separated.

    Require 2 signatures on checks.

    Update signature cards on file at your bank every time there’s a staff or board member change.

    Encourage automatic payment HOA fees. money should be automatically deposited into the association bank account, bypassing middlemen. The fewer people handing money, the less opportunity there is for fraud.

    Use a bank ‘lockbox’ service. Your bank may be able to accept checks on your behalf, either in person or by mail, and deposit them into your account.

    If fraud is suspected, consider using a certified fraud examiner–a specialized discipline within the accountancy profession. The Association of Certified Fraud Examiners has published a fraud prevention check-up to get you started.

    Purchase fidelity insurance. This is a specialty insurance policy that pays a benefit in the event that a person defined in the contract commits a crime such as insider theft, embezzlement, or fraud.

Blog Source