Fraud - Don't Let It Happen to You (Or Your HOA)!

The staffing of a Board of Directors with volunteers always presents opportunities for theft.  In one community, two of the three Board members lived out-of-state and did not monitor the financials.  The third Board member regularly conducted odd jobs in the neighborhood, such as keeping the area around the compactor clear.  In his mind, his work should have been compensated, so he regularly used the Association’s corporate card to purchase various electronics for personal use.  It wasn’t until our firm was retained to provide management services that this was uncovered and stopped.

The two disengaged Board members did not realize that the Association could be held criminally liable, under the legal concept of imputed liability.  They also didn’t realize that they could be personally held responsible for failing to properly discharge their duty as Board members. 

This situation is an example of what can occur because of agency dilemma, which is created whenever there is an inherent conflict between motivations between Board members, the Board and homeowners, and the Board and vendors.  In each of these relationships, one party has information not easily accessible by the other.  To combat this, there needs to be processes in place so that no single party can make all the decisions without the influence, input or approval of others.

Monthly bank statement reconciliations are a must.  This ensures that, at least every thirty days, if a questionable transaction occurs, it will be spotted by someone not directly involved.  In instances of rampant fraud, the Board may decide to go to an expensive ‘positive pay’ system where a list of payments is submitted to the bank on a daily basis for comparison.  Reconciling isn’t something just for the Association to focus on:  Homeowners should be encouraged to regularly reconcile their own bank statements each month, even if assessments are only paid a few times a year.  While missing or misapplied assessment payments do occur, if this occurs frequently it may be a sign for certain fraud schemes. 

Annual CPA audits, even if only for a limited review of financials, are vital.  Something basic like the requirement that all reimbursement requests have actual physical receipts (issued by third-party vendors) helps deter false claims. Just knowing that these and other monitoring activities occur will deter many would-be fraudsters. 

Pressure for committing fraud often comes from family needs, personal debt or simple greed.   Feeling unfairly treated, ignored or unappreciated are also factors.  87% of those who commit fraud are first time offenders.   Four out of five fraudsters display the following red flags: 

·         36% live beyond their means

·         27% are experiencing financial difficulties

·         19% have an unusually close relationship with a vendor or customer

·         18% have control issues

·         15% are going through family stress

·         15% like to wheel-n-deal

·         13% are irritable, suspicious, defensive

The best defense is to have a clear and open method of reporting.  The tone set by the Board can either encourage or discourage an environment where fraud thrives.  Nearly one in ten cases is tied directly to poor tone at the top. 

Another defense is to setup a formal review process for potential Board members.  Does your Association have a nomination committee, or conduct any type of vetting of potential Board candidates?  Require resumes, a list of references, and be sure to actually contact these references.   When conducting the interview with the candidate, be aware that, according to studies conducted by psychologist Robert Feldman, on average people tell three lies during a 10-minute conversation.  Only half of these lies are detected.  "Trust-but-verify" is the best way to increase the odds when interviewing potential Board members.

Some behavior to watch out for during a nominating interview when discussing issues such as theft:  The candidate repeating each question; starting each response with “honestly” or “to tell the truth”; or answering each question with a question, such as “Why would I do something like that?”  Other warning signs are an unwillingness to end the discussion, displaying a lenient attitude toward real or hypothetical wrongs, paying very little attention to any paperwork presented during the meeting, noticeable changes in voice volume on certain topics, and leaning away from the interviewer.

While most of us who volunteer for Board service are honest and will do right, we must reduce opportunities for those who might be tempted to do otherwise.