Associations and Fraud

CPAHOA - Associations and Fraud

Who’s Watching?

Far too often we have read the story of an embezzlement or theft involving a homeowner association and we may think; “How could this have happened- Wasn’t anyone watching the store?”   In some cases, it may be true; no one was watching.  But fraud, by definition, involves deception and people intent on wrongdoing don’t always make it easy for us.   So how do we reduce the risk of a bad actor harming our community for their own financial gain?   Fully addressing the issue is far beyond this post and remember there is always a cost/benefit to every prescription, but the following are some thoughts and steps to consider.

The Fraud Triangle

Good auditors are familiar with the Fraud Triangle, but anyone in leadership and management should also be acquainted with this idea as well.  The Fraud Triangle essentially says that if the following three key components are present in a fraudster’s situation- PressureRationalization and Opportunity, the environment can be ripe for a fraud to occur. What do these terms mean in our context?  Let’s look at the first one-Pressure.  The person that has pressure, strong incentives or unmet desires in their mind or life, may be looking to come out from underneath this weight- whether real or perceived.  From bills to pay, greed or addiction, the person has pressure or an incentive to get money- no matter what.

Of course, we all have pressure in our lives, but the fraudster is different in how they may rationalize it. So, they will move to Rationalization as the next factor they consider. They may rationalize that they deserve the money since they believe they are being underpaid. The organization doesn’t need the money in their mind, they think they will pay it back, or they just don’t think they’ll get caught. These can be some of the many irrational rationalizations a fraudster may consider. 

The last aspect of The Fraud Triangle is Opportunity.  This final component to the Triangle is different from the other two aspects in that as pressure and rationalization are within the mind of the embezzler, (something out of our control), the concept of opportunity relates to the business environment we are all working within.  Yes, we should be aware of apparent warning flags we may see with folks, but the financial working environment and effective internal controls should be established to reduce opportunities for the thief.  In the Association world, what does that look like?  

Introducing Checks and Balances

The basic principle is two- fold; we should have more than one set of eyes on a transaction and secondly, we work to bring financial activity into the light for all involved to see. The following is not an exhaustive list but these ideas can help promote an environment with checks and balances, including promoting the principles of segregation of duties, thus reducing the opportunity for someone to commit fraud:

  1. Each month, the Board Treasurer should review the bank statements and bank reconciliations, noting the activity and transactions, including bank debits. This includes operating and all investment accounts.
  2. All bills expended for the month should be reviewed, even after the fact, comparing the amount expended with an invoice.
  3. The bills expended for the month should be ratified and entered into the minutes of the Board meeting as approved- even after the fact.
  4. Vendors of the Association should be familiar to the Board.   All vendors serve at the pleasure of the Board and their vendor file and profile should be available to the Treasurer at a minimum, when requested. 
  5. A review each month of homeowner assessment write offs and adjustments, noting any abnormalities normal assessments charged and payments recieved.
  6. The Association should consider adopting a “No gift policy”.   This policy simply states that managers and board members are not to receive any gifts or services from vendors.
  7. The Board should discuss and establish a “tone at the top” philosophy of doing business.    This is an attitude of encouraging solid ethics and acting above approach and blameless in all we do.  It is an environment where it is ok to ask questions and it is also good to provide transparency.  Most of us who have served on a Board or managed properties, are aware of “institutional mistrust” that many outside of governance have about our or any organization.   Our job in leadership is to serve well, without being defensive of our responsibilities and to provide transparent, truthful data and let the facts speak for our actions.   Easier said than done when accusations fly, so we counter with transparent truth and clear processes.  It helps protect us from falsehoods as we strive to do the right thing-and from those that are looking to take advantage of dark opportunities.

There is always more that can be done to protect your Association, but these ideas, can be a good starting point.  Consider talking to your manager, accountant and attorney to formulate your approach and document your processes.

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