Protect Your Association From Fraud

Whether it is a board member, property manager, or bookkeeper, most of you have probably heard horror stories about money being stolen from condominium and homeowners associations. While the majority of people are scrupulous, honest people, there are a few that have taken liberties with association bank accounts.

Many theories speculate that those who commit fraud must have three factors to be able to commit the fraud and ultimately embezzle money from the Association, often referred to as the “Fraud Triangle”.

Pressure. Financial pressure is prevalent these days, especially in a weak economy. Think about the person who just got divorced, lost their job, or can’t pay the employees that work for their small business. Or their house is about to go into foreclosure, or they can’t afford groceries. Or perhaps someone has a substance abuse problem or gambling addiction which they can no longer fund. Good people can commit irrational and illegal acts when they are driven to do so.

Opportunity. The person who is ultimately pressured into an act like stealing money must also have the opportunity. What checks and balances does your Association have in place? Do you allow money transfers online without written approval each time? How many people look at the statements each month? Do you conduct regular audits? You must protect the Association’s assets. Put two signatories on each bank account, and require that both people sign checks. Do not allow for online access or transfers to the accounts.

Rationalization. Often times, the person will take money for the first time with the intention of only borrowing the money and putting it back shortly. Then it gets to the point where they can’t replace it any more, so they either transfer funds from other accounts or falsify documents to cover their trail. Or maybe they feel that the Association has wronged them in some way or that they deserve to be compensated for their volunteer services.

How can you detect that fraud is going on in your Association? The best start is usually to have a Certified Public Accountant conduct an annual audit for your Association. When the accountant does the audit, make sure he/she gets ORIGINAL bank statements, not copies or online print-outs. Also, cross-check any vendors who were paid for services with actual invoices. Fraud can go undetected for a period of time when checks are made out to “ghost vendors”. For example, there is a check made out to Expert Plumbing for a few hundred dollars—it may sound legitimate, but that may be a front for someone stealing money from the Association. Another thing to be careful of—writing off an account as bad debt when it has actually been paid. Someone may finally come current after being delinquent, and their payment is never made apparent on the books, it is just pocketed.

Studies show that the typical fraud lasts about two years. After two years, many perpetrators can no longer hide the large sums of money they have extracted. Moral of the Story: Keep an eye out for anything unusual and put good checks and balances into place.

More on Community Associations