Homeowners associations are not immune to fraudulent activity. In fact, because associations tend to deal with a lot of money, they are prime targets of HOA fraud. The sad part is that most instances of fraud are perpetrated by people working inside the HOA in the first place.
Types of HOA Fraud
While financial fraud can take many shapes and forms, it can typically be broken down into three types: outright theft, forged documents, and bribes or kickbacks. Let’s discuss each one below.
Stealing Funds
HOA theft, in its most primal form, happens when someone physically steals money from the HOA. If an association collects dues the old-fashioned way (door-to-door or via mail), it is easy to skim some off the top before submitting it to the HOA or recording it.
Forging Financial and Other Records
Fraud can also take place through the forging or destruction of financial or other records. A person can lie, exaggerate expenses, or falsely lower income reflected in financial documents or reports. In doing so, they can pocket the extra cash. Sometimes, someone will simply destroy financial records to get rid of any traces.
Soliciting or Receiving Bribes and Kickbacks
Sometimes, a board member may solicit bribes or kickbacks from vendors. They can accept cash, gifts, or favors. And, in exchange, they will award the vendor the contract. They might also negotiate with the vendor and receive a percentage of the contract payment.
Warning Signs of HOA Fraud
Fraud can happen to any association, but it usually takes place in increments over a long period of time. The person may begin stealing small amounts at first, growing more daring and bold as time goes by. Board members should always remain vigilant and watch out for signs of potential HOA fraud, such as:
- Missing invoices, receipts, and other financial records
- Bank statements and financial statements that don’t match
- Improperly hired vendors or vendors that don’t meet qualifications
- Multiple or inordinately high payments for expenses not included in the budget
- Unnecessary expenses
- Suspicious signatures on financial documents
- Lack of supporting documentation for expenditures
- Limited access to bank statements (to only one or two board members)
- Overly complicated financial statements, particularly the general ledger
Ways to Protect the HOA from Fraud
Bad people will always find ways to do bad things. But, that doesn’t mean your HOA has no way of shielding itself from HOA fraud. Here are some of the best ways to mitigate fraud in your community.
1. Impose a Two-Signature Requirement for Checks and Withdrawals
No one person should ever be left in charge of all the association’s money. As such, when signing checks or withdrawing money from the HOA’s bank account, it is best to impose a two-signature requirement. That means two board members will need to sign the form or check. It is also a good idea not to have your president and treasurer be the same person, as this can create problems with internal controls.
2. Vote on Vendors
When hiring vendors, it’s good practice to have the entire board vote on the candidates. This will help prevent bribery and kickbacks from vendors. It will also allow the board to avoid potential conflicts of interest.
3. Use a Lockbox
Many homeowners pay their dues to the association by sending a check. To keep these checks safe, an HOA can ask its bank to use a lockbox service. With this service, homeowners can mail their check payments to the bank. These check payments are then deposited directly into the bank account of the HOA.
4. Checks Must Always Be Made Out to the Association
As a standard, all check payments to the association should be made out to the HOA’s name. The board should never accept checks that are made out to the name of a single board member. This way, no board member will even have a chance to deposit the check into their personal account.
5. Review Bank Statements Regularly
Comparing your bank statements with your financial statements will allow you to stay on top of your association’s finances. If there are discrepancies you can’t explain, investigate further, as it can be a sure sign that HOA fraud has taken place. Additionally, always remember to reconcile your bank statements every month.
6. Compare Budgeted and Actual Expenses
Preparing a budget is one thing, but an association’s actual spending is an entirely different ball game. If your association’s spending is way beyond your budgeted expenses, then you should look into it more. It’s especially important to investigate the differences if the expenditures are unusually high or happen more often than anticipated.
7. Make Financial Statements Available to All
Once they’re finalized and signed, financial statements should be made available to all homeowners. This is like having an extra pair of eyes (or many extra pairs) on your association’s finances. Beyond just allowing owners to request the documents, consider posting them on your community website for easy access. Homeowners can then review the statements and report any suspicious transactions to the board.
8. Hire an Auditor
An audit can measure the financial health of your homeowners association. It can also identify discrepancies, gaps, and inconsistencies in your finances. Some states, such as Florida, even require HOA audits. Even if your HOA isn’t required to have one done, it is still good practice to have an accountant perform an audit every couple of years or so.
What to Do About Possible Fraud or HOA Embezzlement
If you suspect that your HOA is the victim of fraud or embezzlement, the first thing you need to do is gather evidence. Collect all documents that may confirm your suspicions.
Both board members and homeowners can usually request a copy of HOA documents, including financial documents. If your association’s governing documents permit, you may want to call a special meeting to talk about the issue. You may also want to contact local law enforcement by reporting the theft to your sheriff’s department.
Hiring an HOA Management Company
Boards already have enough problems as it is. Adding the risk of HOA fraud to the list can only make things more challenging. A good way to protect your HOA from fraud, though, is to hire a thoroughly vetted HOA management company. Such companies usually already have internal controls in place to prevent fraud and embezzlement in communities.
Elite Management Services offers a wide range of management services to homeowners associations and condominiums. Call us today at (855) 238-8488 or email us at help@emspm.com to learn more about how we can help you.
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