Preventing Community Association Fraud: Part One – The Board’s Role

Posted on Thursday October 05, 2017 |



As a homeowner who lives in an association, you put a lot of trust in the people designated to manage your association’s money. So it can come as quite a shock if you discover that one of those people has been stealing from your association’s funds. Fraud can leave you and your neighbors feeling betrayed and vulnerable. Unfortunately, it happens more frequently than you might think:

  • The former president of a Staten Island, NY, condo board was convicted of embezzling in excess of $300,000 from his association over a three-year period.
  • More than 30 townhome and condominium associations in the Twin Cities area of Minnesota were allegedly defrauded by a former executive at a local management company. The dollar amount stolen is estimated to be in the millions.
  • A Santa Paula, CA, couple serving as the president and treasurer of their condo association stole $22,000 and left town.
  • The former board treasurer of a Palm Beach Gardens, FL, community was arrested for allegedly embezzling nearly $58,000 from the association.
As these stories show, no association is completely immune from being a victim of fraud. “However, there are a number of ways your board can make it less likely,” says Drew Ahrensdorf, vice president at FirstService Financial.
 
In the first of our two-part series, we describe 12 precautions your board can – and absolutely should – take to help protect your association.

1. Safeguard your association’s bank accounts.

Association bank accounts should be FDIC insured and opened in the name of the association only – never in the name of a board member, community manager or any other individual. Money in these accounts should not be comingled with an individual’s money, and no one should be allowed to write checks to themselves or use funds for personal expenses.
 
Your reserves and your operating funds should always be kept in separate accounts as well. Choose accounts that guarantee the safety of your funds while maximizing your return.
 

2. Require two signatures to transfer funds from reserves.

Depending on where your association is located, you may be legally obligated to obtain authorization from at least two people before transferring money from your reserve fund. (California and Nevada, for example, have such laws.) Even if no such laws exist in your area, your association should require at least two signatures to transfer reserve funds and to make any large purchases.
 

3. Never attach a debit card to your operating account.

Debit cards make it very easy to withdraw needed funds anytime. However, they can also make it easy for someone to make off with all of your association’s operating funds.
 
Fortunately, there is a way to simplify purchases without putting your entire account at risk, says Shawnee Penrod, manager of client accounting for FirstService Residential in Tucson. She recommends keeping a small amount of money from your operating fund in a separate account and allowing authorized users to access it with a debit card. “Depending on their size, most communities that do this keep approximately $500 to $2,000 available,” says Penrod.
 

4. Implement internal controls.

The person who signs checks should not be the same person who reconciles bank statements and receipts. Separating duties limits opportunities to misrepresent purchases and creates a system of oversight and accountability. Remember that just because the treasurer of your board has been entrusted to handle finances doesn’t mean that other board members shouldn’t be involved as well. Another precaution your board may want to consider is rotating financial responsibilities so that no individuals retain control of a specific function for long periods of time.
 

5. Reconcile transactions promptly.

According to Penrod, one of the simplest ways to prevent fraud is by staying on top of the very task that many boards put off: tying your balance sheet back to your bank statement. The longer you put off this task, she cautions, the longer fraudulent activity can go unnoticed.
 
If you are partnering with a property management company, the company will prepare your financials statements for you and provide them to your board every month. Ahrensdorf warns that even if you do work with a management company, your job isn’t over once you receive your statements. “It may seem obvious, but many boards don’t bother to read their financials,” he explains. “Having engaged board members who are actively reviewing them monthly is important.”
 

6. Know your vendors.

Whether your association is self-managed or professionally managed, Penrod stresses the importance of knowing the names of every vendor your association is using. She explains that a common fraud is creating and paying nonexistent vendors. For example, she says, “Someone can be pocketing payments that your association is paying to a fictitious landscaping company.” If you aren’t familiar with your vendors, you may never realize these payments are fraudulent.
 

7. Use electronic payments whenever possible.

Electronic payments limit opportunities for theft and fraud by minimizing manual handling of money. If you live in a province or state that doesn’t restrict the use of electronic payments for associations, implementing reliable and secure property management software can make it easier for homeowners to submit their assessment fees and other payments online.
 

8. Keep financial authorizations up to date.

Since association boards are made up of volunteers, members can change frequently. Be sure to update bank signature cards and other financial authorizations immediately when there is turnover on your board.
 

9. Get annual audits.

A financial audit is an in-depth review of your financials that is conducted by a certified public accountant (CPA). It ensures that your association’s financial statements are complete and accurate. Although some smaller associations opt to get less comprehensive financial reviews, Ahrensdorf says that “in almost all cases, annual audits are critical” to uncover fraudulent activity. Look to your management company for a recommendation of trustworthy CPAs to conduct your audit.
 

10. Obtain adequate fidelity insurance.

Fidelity insurance will protect your association in the event of criminal activity by a board member or other named person. Ask your management company about fidelity insurance that is designed specifically for associations.
 

11. Learn to recognize red flags.

Seemingly innocent behaviors can be a sign of suspicious activity if they occur frequently or in tandem. Make sure that board members are familiar with the signs of questionable activity so that they will recognize them if they occur. Possible red flags include:
  • Bookkeepers or board treasurers who are reluctant to take vacations or give up their specific duties
  • Late or missing vendor payments
  • Payments to post office boxes instead of street addresses
  • Frequent double payments to vendors
  • Missing bank statements, invoices, etc.
  • Copies rather than original receipts
  • Delayed deposits
  • Board members with addictions or large debts

12. Get training.

As volunteers, very few board members are experts in finance or accounting. If your community is managed by a professional property management company, find out if it offers training that can help your board members better understand financial management.
 
Preventing fraud may involve taking extra steps that create more work for your board. But the alternative is something that no association ever wants to face. Take the right precautions up front to avoid problems down the road. The homeowners in your community will thank you for doing your fiduciary duty.

To find out how a professional management company can help you understand your financials and much more, fill out the form below. We’ll send relevant articles right to your inbox.


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