Common Fraud and Theft Activities in Community Associations.
It seems like fraud and theft are becoming increasingly common these days, especially in community associations. As a community association leader, it's important that you understand the most popular fraudulent activities so that you can protect yourself and your community from them.
With help from a couple of awesome contributors to a question we posted on the Community Association Institute (CAI) group on LinkedIn, we've compiled a list of popular fraud and theft activities and how to avoid them.
Let's start with some common fraud and theft practices and techniques:
- Depositing funds meant for one account (ex: HOA) into other accounts
- Under the table kickbacks, bribes and payments
- Tampering with checks
- Creating and paying fake vendors or nonexistent employees
- Theft of inventory
- Ballot tampering, ballot box stuffing, counterfeit ballots, and ballot destruction in board elections prior to the vote counting day and time.
- Modifying data and submitting personal energy bills for reimbursement from management company and/or association.
- Using association debit/credit cards to buy personal items.
- Using a spreadsheet (which are easily manipulated) that purports to show bank balances, not a copy of the account statements.
- Using a consolidated account for multiple HOA's rather than a dedicated account for each HOA. This makes tracing legitimate bills a lot harder.
- Threatening vendors with being fired if they talk directly with any director about their contract or billings.
- Removing past due charges from association records when board members or officers who don't pay their fees or don't pay on time.
Now to move on to tips for avoiding fraud and theft:
- When you make an assessment payment, check the back of your returned check to see if the account it was deposited in matches the Association's bank account. Same goes for ACH payments. If they don't match, that means your funds are being deposited somewhere else.
- Review the management contract for “affiliates” or “partners” that the management company discloses they may receive a benefit from. Then look up that company to see if they own any other companies (ex: your landscaper).
- Request in writing from every vendor on an annual basis disclosure of the actual dollar amounts paid to your manager or management company, or any entity affiliated with the management company.
- Do not allow your management company to choose the CPA for your HOA
- Do your required annual audits. Yes, it may be an expense, but it is a lot cheaper than the financial loss involving a fraud if allowed to go unchecked.
- For your CPA to accurately do an annual audit, insist the file, not reports, are sent to the CPA. The CPA needs to see the file and ensure things are done properly. They cannot do that with a report.
- Require at least one Board Member's signature to expend funds of any kind – operational or reserves. If you give authority to someone else to sign on your bank accounts you have already lost 90% of the battle.
- Ensure that a board member or finance committee member does the monthly account reconciliation with the employee or management company. Also if the HOA has a credit card, do the credit card monthly reconciliation with a board member too. Debit cards are not in the best interest of the HOA, they put the company at risk and should never be used for business.
- Require that bank statements come to the board, as well as a management company.
- Ensure that the cancelled checks are on the bank statement and that they match the accounting entries. People will change the name on the check after it has been processed by the accounting software.
- Ensure that the signatures on the checks are correct and not forgeries.
- Ensure that all information for all vendors is in the software. Do not allow checks with just a name to be processed. You want address and phone numbers and SS# for 1099 contractors. If the vendor refuses to give you the info, find another vendor.
- Randomly pick things out of the bank statement and question it at reconciliation. Look at the invoice make sure it was for the amount indicated. If your telephone bill looks too high, have them pull the invoice. Maybe the amount is the employee's or management company's telephone bill. Verify that what you are looking at on the bank statement is indeed what it is supposed to be.
- Rotate board members, do not keep the same people in the same place at the same office for any length of time. Remove or do not re-elect any “lazy” board member that does not want to go through the extra steps to ensure the accounts are secure or relaxes fraud controls. They are not worth the risk to the organization.
- Be wary of any board member(s) that has a personal agenda. They are on the board to use their position to push that agenda, no matter what. They are not looking out for the members or the HOA.
- Lock down your cash collections. If you must use cash collections, utilize a 3 part cash receipt book. When cash is received, one receipt goes to the payer, one receipt gets attached to the bank deposit record when it is deposited, and one receipt stays in the book (these should always be consecutive- never allow someone to tear out the receipt. If a mistake was made, cross through it and go on to the next one).
- List checks separately on the bank deposit, not a total. It is very easy to slip out a few checks with a lump sum amount listed. Unless you take the time to add up all the checks yourself, how would you know with a lump sum? Ensure that there is a total of the checks that are being deposited and keep all information together for each deposit.
When it comes down to preventing fraud and theft, prevention is key. Documentation can be a pain, but it can act as a real deterrent to theft when done properly and monitored. Everyone is at risk for fraud, so don't wait until it's too late to prevent it. Look at how your HOA does business, and determine whether there is anything you could do to break the chain of financial control. The more eyes you have on actions being taken, the lower the possibility of a crime being committed. Get smart and get organized or risk being taken advantage of and becoming a victim of fraud or theft.