Last week, we gave tips to bulletproof your HOA against embezzlement and asked, “Who is guarding the guardians?” This week, we continue our
discussion about HOA fraud and how to protect your investment.
Frank Abagnale, one of the nation’s most respected authorities on the subjects of forgery and embezzlement, knows about thievery. He was credited wiht the dubious title “the world’s greatest check forger.” So, of course, the FBI ended up hiring him. He was the focus of a 2002 autobiographical comedy/drama movie directed by Steven Spielberg and starring Leonardo DiCaprio as Abagnale. The movie? Catch Me If You Can.
Consider two houses side by side. They are absolutely identical in every way except one house has a shiny metallic security sign in the front yard. The other house does not. Regardless of whether the alarm system is hooked up in either house, which one will the thief choose to break into first? The one without the warning. According to accounting-fraud specialist Lasinsky, white-collar crime perpetrators will move to the easiest target every time.
Management companies can provide a benefit to associations by serving as an extra layer of oversight. Yes, they too can commit fraud, but the association’s books are generally being handled by an independent corporation rather than a single individual or board member. Management companies are far and away more accountable to the board and residents than a single board officer might be. No one person should ever have complete control of any homeowners association, no matter how small.
The most important step in bulletproofing your association’s funds is prevention. Associations need a “financial-procedures manual,” and every association should mandate use of the manual to be a part of its bylaws. The manual should specify a series of checks and balances, such as timely bank reconciliation and keeping more than one set of eyes on the books. These two activities alone are critical to preventing fraud.
There has never been a time in history where complete and accurate financial accounting has been more urgent. The transparency of an association’s finances is absolutely critical to maintaining fiscal health and preserving values. Treasurers and management companies alike should provide monthly accounting reports – or at least quarterly reports – detailing all account balances and expenditures.
Additionally, association bank accounts must be reconciled monthly. Quarterly reports to unit owners should be accrual based, including an operating account budget to actual variance report and cash flow projections. Further, a detailed unit-owner maintenance-receivable report including any delinquent fees and prepaid balances should be provided to the owners. Please refer to our 35-point guide and checklist for bulletproofing your association for an in-depth look at how to protect your HOA against embezzlement.
Next week, we will be discussing the appropriate steps to take if you do uncover fraud within your HOA.