In this two-part series, we will highlight common examples of how associations can unwittingly be stripped of their monies:
- The kickback. This widespread act of dishonesty is one of the most prevalent forms of embezzlement because it is extremely difficult to spot. Kickbasks can occur in any association – large or small, self-managed or professionally managed. Kickbacks can range from a few hundred to millions of dollars. Many kickbacks are made in cash, and the agreements are never in writing. All kickbacks have the ultimate effect of raising the unit owner’s costs. One association president directed all cleaning and maintenance contracts to his own company – a clear conflict of interest that owners were too busy to catch despite his fees being three times higher than competing companies.
- Overbilling. This blatant act of theft is the practice of a vendor or contractor billing more for services than was actually rendered. For example, a 20-minute chore is billed as a two-hour job. This can be done in error, but more often, is motivated by fraud. It ca nalso be described as “super-charging” or “gouging.” In the movie The Firm, Tom Cruise wins an impossible case against a dirty law firm by catching an intenional overbilling errors that were sent out via the US Postal Service – making the mail fraud a federal offense.
- Expense padding. This financial sleight of hand includes any type of purchase made allegedly for the benefit of the association owners, but personally benefiting a board member or property manager. It may start off small, such as a tank of gasoline once a month, but escalates to a gas fill-up every week. One association’s president completely furnished his home office on the association’s dollar. He bought an expensive new computer, wireless router, wireless mouse, printer, ink cartridges, paper and $2,000 of “forever” postage stamps and billed it all ot the association – with receipts – and no one even blinked.
- Volunteer compensation. This abuse is a true oxymoron that has been surfacing more and more since the Great Recession. For nonprofit associations whose bylaws clearly stipulate board members may not be compensated, some rogue boards are rewriting the “rules” to allow payment for their services. Other “volunteer” board members are charging associations for services such as conducting “meet and greet” sessions with new owners, supervising workers,” and “watering the grass” – despite having a full-time landscaping service One “volunteer” treasurer- an accountant – has been paying herself $250 an hour from the association’s checkbook for simply writing ordinary checks. These fees can quickly add up to thousands of dollars in unnecessary and frivolous “tasks.” Beware of any board director or member taking or accepting fees from the association. Be especially wary of board directors who have the capacity to issue themselves checks. These situations beg for abuse.
- Underreporting income. This trick is most often seen when financial statements are altered to decrease the actual income received by the association. The difference between the stated amount and the actual amount can then be pocketed by whoever is in charge of the checkbook. Aside from regular assessments, there may be unexpected income from insurance companies, banks, earned interest, fines, penalties, charged interest, and even attorney settlements.
In our next installment, we will cover more ways that your association can be swindled, as well as some clues that your HOA may be the victim of embezzlement.