Homeowners association fraud or embezzlement can happen anytime, anywhere, and anyone — even to the closest, tight-knit communities. If you want to safeguard the financial health of your community, consider these strategies to prevent HOA fraud.
Most Common Types of HOA Fraud to Look Out For
HOAs are run by a handful of people, known as the board of directors. They handle the day-to-day operations of the association, including the management of funds. If there are no checks and balances set in place, it can be very easy for a dishonest board member to commit fraud. However, HOA fraud isn’t exclusive to board members. Managers, employees, and volunteer homeowners can also commit fraud if the HOA has lax rules and standards.
What is HOA fraud? Fraud is a deliberate act of deception for the purpose of personal or financial gain. If you don’t want your community to become an unwitting victim, here are the most common types of HOA fraud that you need to look out for.
Homeowners association embezzlement is a form of theft. It involves a person taking property that was entrusted in his/her care by the association and using it for him/herself. HOA embezzlement comes in different forms. It can be a board member issuing checks made out to their name, collecting dues and payments but pocketing the funds, or altering financial documents.
HOA Mismanagement of Funds
Mismanagement or misappropriation of funds in a specific type of embezzlement. It involves a person taking HOA funds and using them for his or her personal benefit.
Kickbacks are payments or gifts that a vendor gives to a board member in exchange for hiring their company. It is also HOA fraud when a board member receives a portion of the contract money.
HOA Election Fraud
Election fraud can have many forms. The board can skip the annual elections or postpone it indefinitely to keep their positions. Individuals may also rig the election results to produce their desired outcome or forge proxy signatures to collect votes.
Best Ways to Prevent HOA Fraud
HOA fraud can occur due to a lack of oversight. If you want to prevent HOA fraud, it’s important to establish checks and balances. These will make board members, managers, and employees accountable for their actions, thereby reducing the potential for fraud or embezzlement.
1. All Checks Should Be Made Out to the HOA
Sometimes, for the sake of convenience, the board may issue checks to themselves or to certain individuals. However, this makes it easy for a dishonest member to commit fraud.
To prevent check fraud, ensure that all checks are made out to the HOA. You should also limit access to the checks to prevent unauthorized persons from issuing checks out to themselves.
2. Require Double Signatures for Checks
Another way to avoid check fraud is to require signatures from two members of the board. While this strategy may not be as efficient, especially when there are emergency situations, it helps prevent HOA fraud.
An option would be to set up this rule for transactions that exceed $500. The HOA can safeguard its bank accounts without hampering the essential day-to-day operations.
3. Do Not Let Management Sign Checks for Themselves
HOA management makes life easier for board members. Your manager handles HOA operations, including financial transactions that may occur throughout the day.
However, to discourage potential fraud from your management, do not let them issue checks for their own services. They can still issue checks for third parties. But if they perform maintenance work or other services, have a board member review the invoices and issue the checks.
4. Have Board Review Financial Documents
The HOA treasurer shouldn’t be left to do all the financial tasks. One way to safeguard the HOA is to have the board (or at least two members) independently review financial documents each month. This will make it harder to alter bank statements, inflate budgets, or duplicate reimbursements.
Regularly monitoring financial documents will also make it easier to spot anomalies or errors. Whether it’s an honest mistake or a sign of HOA fraud, the board can address the issue quickly.
5. Delegate Financial Responsibilities
Having just one person in charge of finances — whether it’s the treasurer or the manager — makes it very easy to commit fraud. As such, consider delegating the financial responsibilities to different members of the board.
You can have one person in charge of making the deposits while another is in charge of reconciling bank statements. This is a good example of introducing checks and balances in your HOA.
6. Require Board Approval for New Vendors
HOAs should be suspicious if a board member is pushing for a new, more expensive vendor even if the current one has been providing quality service. He or she may be receiving a kickback in exchange for the vendor contract.
Also, watch out for board members who recommend a company that is unqualified for the job. There may also be a kickback or the company may not even exist at all. Make sure that the board of directors is aware of vendor changes. You also need to properly vet new vendors to ensure that they are qualified professionals and that their prices are reasonable.
7. Make Sure HOA Is Insured for Fraud
To protect the financial status of your HOA, make sure that you are insured for fraud. Crime and fidelity insurance coverage will cover financial losses due to fraud or embezzlement.
You should also have directors and officers (D&O) insurance. This can protect board members from personal liability in case an employee or manager commits HOA fraud. Just because you have insurance, though, doesn’t mean that you should be complacent. In many cases, the payout can take a very long time and the HOA is left to deal with rising expenses.
8. Establish an HOA Election Committee
The board is responsible for scheduling and announcing the HOA elections. However, beyond that, the board should not be involved in the election process. Create an election committee that is comprised of homeowners who are guaranteed to be fair and impartial. They will be the ones to handle the election process to prevent HOA corruption or fraud.
Examples of HOA Fraud
Most HOA board members, managers, and employees are hard-working and good-intentioned people. However, this doesn’t mean that associations should be lax or complacent. We are all human and under dire or unfavorable circumstances, it’s possible that an individual might feel compelled to commit HOA fraud. To overstate the importance of vigilance, here are some examples of HOA embezzlement cases:
A woman, who served as the secretary of her Florida HOA, was charged with grand theft after taking over $300,000 from HOA funds. The woman withdrew $121,390 from the HOA’s bank accounts and had written checks to herself and her husband for $97,045. She admitted that she used the stolen funds to pay for her mortgage and other bills.
A man was indicted for money laundering and embezzlement after stealing more than $450,000 from a Virginia HOA over the course of four years. The man served as the association’s finance manager. The HOA discovered his theft through an HOA audit, which uncovered evidence of his wrongdoings.
In New Jersey, a property manager was sentenced to six years in prison after embezzling over $400,000 from the condominium complex that he managed. The judge also ordered the woman to make full restitution to the HOA. She was caught after HOA residents notified residents of their delinquent dues despite having paid the fees.
Always Be On the Lookout for Signs of HOA Embezzlement or Fraud
Most HOAs don’t know that there has been fraud or embezzlement until it’s too late. By then, your association may have already lost a large sum of money. It could take years to recover these stolen funds — if they can be recovered at all.
This puts the HOA in a precarious financial situation. Add to that, bad press can also turn off new homebuyers and cause property values to drop.
To protect the financial well-being of your community, consider implementing these strategies we recommended. These additional steps may take more time and effort but oversight and vigilance are crucial for preventing HOA fraud in your community.
HOA fraud can go undetected if your finances are a mess. If you need help with financial management, feel free to contact the Condo Manager team today! Call us at (800) 626-1267, email us at firstname.lastname@example.org, or contact us online to learn more about our HOA software solutions.
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