Homeowners rely on their board of directors to govern responsibly and honestly, entrusting them with overseeing financial operations to promote the community's best interests. While most associations operate transparently and ethically, fraud, embezzlement, and mismanagement can and do occur.

Association fraud is a serious problem that should not be taken lightly. Not only can fraudulent activities result in significant financial losses for the association and its members, it can also potentially lead to legal consequences for those involved.

Why some people commit fraud

Most association stakeholders are trustworthy, hardworking contributors who want to make their communities better places to live. Unfortunately, some individuals with selfish motives can engage in fraudulent activities for personal financial gain. Other factors can contribute to fraud, including:

Opportunity (from a lack of oversight): Individuals may exploit loopholes or manipulate records to cover up deceptive accounting practices.
Financial Pressures: An association stakeholder may feel desperate for solutions when facing personal financial difficulties. In such circumstances, resorting to fraudulent practices could be tempting.
Every stakeholder should be vigilant about potential fraud – this can save your association from financial losses, legal troubles, and damage to its reputation.

In recent years, cases of association fraud have become increasingly common. In 2023, several board members of one of the largest HOAs in Florida were accused of stealing from their association. In response to years of complaints, four ex-board members were investigated and ultimately arrested for allegedly siphoning $2 million of association funds.

“An event such as the one that happened in South Florida underscores the urgency with which board members should take proactive steps to protect the community's financial integrity,” said Dante Chiabra, vice president at FirstService Residential. “Individuals must recognize signs of questionable activities and address any concerns, ensuring the responsible governance of the association.”

Learn more about proposed fraud legislation that could impact Florida associations by reading: The 2024 Florida legislative session: How will new laws impact your community association?

Red Flags to Watch For

Fraud prevention begins with awareness. Here are a few common red flags to watch out for:

  • Lack of controls, such as when accounting tasks are concentrated in the hands of one individual, can set the stage for fraudulent activity. Checks and balances should be in place to safeguard against errors and ensure accountability.

  • Drops in revenue that are unexpected or inconsistent with standard financial patterns can indicate fraud.

  • Vendor price increases can also indicate potential fraud. Some individuals may manipulate vendor pricing or create fake vendors to embezzle funds.

  • Checks made out to “cash” should raise serious concerns about fraud and should warrant investigation.

  • Missing petty cash or a lack of proper documentation and transaction reconciliation raise concerns about financial transparency.

  • Copies of receipts rather than original documents may suggest an attempt to conceal alterations or fabrications, as copies are easier to manipulate.

  • Payment for non-existent items or services can be a tactic to create fictitious transactions, inflate expenses, and divert funds to unauthorized parties. 

Financial strength involves a proper annual budget, sound financial planning, and a strategic approach to your reserve fund. Download our checklist to get your budget on track.

Types of Association Fraud

Fraud carried out within an association can manifest in various forms. These include fund misappropriation, embezzlement, financial manipulation, and other unethical practices. The following are some common types of association fraud:
Kickback schemes - An example of this type of fraud is when an employee or board member accepts money or other incentives in exchange for directing the association to a specific vendor.   
Creating fictitious vendors - This type of fraud can sometimes be challenging to detect, as it involves creating false invoices showing payment to nonexistent vendors. Similarly, fictitious employees may be added to the payroll, with wages ultimately paid to the fraudster.
Borrowing funds - Borrowing for personal reasons diverts funds away from their intended purpose, constituting a misuse of resources.
Embezzlement - This illegal act involves diverting funds for personal gain instead of their intended and legitimate purposes within the association.
Bribery - This is when an individual offers money or other incentives to a board member or employee in exchange for them taking a specific action. This can manipulate decision-making and lead to other questionable practices.
Financial manipulation, also known as "cooking the books," refers to misreporting expenses or revenue, creating a false picture of the community's finances. This can lead to severe repercussions for the association, including legal and financial penalties.

If you suspect fraudulent activity in your association, it is essential to gather as many documents as possible to support your suspicions. Contact your association’s attorney and the local police if a crime has been committed.

Preventing Fraud

Ensuring that clear rules and processes are in place is essential to safeguarding your association's financial integrity. Here are 6 tips to help you get started.

Tip #1.  Immediately reconcile transactions. Reconciling your transactions – comparing financial records, such as bank statements and accounting records, to your balance sheet, credit card statements and invoices to receipts – is one of the simplest yet most effective ways to prevent fraud. Reconciling helps identify discrepancies or inconsistencies, serving as a crucial mechanism for early fraud detection.

Tip #2. Implement regular audits and financial reviews.  Leaving all financial responsibilities to one person isn't a good idea. To enhance safeguards, it is recommended that, at minimum, two board members independently review financial documents monthly. This practice adds an extra layer of protection, making it harder to manipulate bank statements, exaggerate budgets, or duplicate payments or reimbursements.

Tip #3. Require board approval for new vendors. Requiring board approval adds oversight to vendor selection. Board members, collectively representing the community's interests, can thoroughly evaluate potential vendors, ensuring their legitimacy and appropriateness for the association.

Tip #4. Hire a professional management company. Professional management companies have the expertise and resources to handle association finances properly. A good property management company can be crucial in preventing fraud through proactive measures such as strong internal controls and established safeguards such as regular audits, thorough financial reviews, and the implementation of secure systems and protocols.

Tip #5. Avoid using cash when possible. Unrestricted access to cash without adequate controls or oversight can create problems. One way to alleviate this issue is through a credit card program. FirstService provides a purchasing card program that allows employees to make purchases on behalf of the association. The program includes monitoring for any unauthorized transactions to help mitigate risk.

Tip #6. Educate yourself. Given that most board members are volunteers who may have limited expertise in finance or accounting, it's advisable to explore training opportunities such as industry seminars, online courses, or workshops designed to enhance their financial management knowledge and skills. The right management company will offer training that can help your board members better understand financial management.

Establishing robust record-keeping practices and implementing adequate checks and balances are essential to preventing fraud in your association.

For expert guidance on fraud prevention best practices, contact FirstService Residential.

Tuesday February 27, 2024