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Fraud and Embezzlement Challenges

Home | Fraud and Embezzlement Challenges

Manager

  • Embezzled as much as $4 million
  • Elaborate scheme involving multiple associations
  • Ran the entire day-to-day operation, writing and depositing checks, balancing the books, and getting bank statements

Bookkeeper

  • Embezzled $398,000
  • Forged board member signatures to obtain bank loans
  • Convicted, but skipped bail and is at large
  • Previous conviction for tax fraud; served 14 months

Manager

  • Embezzled $167,000
  • Wrote checks to herself from the association account for personal items over seven years
  • Plea: to serve ten days jail time on weekends
  • Total control over books; HOA account had $83 despite $250,000 in assessments

Treasurer

  • $666,000 missing
  • Loans or advances made to related entity
  • Plead guilty
  • “Trusted:” Due to high regard in the community, HOA never audited the books until discrepancies appeared on the balance sheet

Manager/President

  • Embezzled $166,000
  • Purchased trips to Disney World, artwork, jewelry, and cash advances
  • Obtained unauthorized credit cards tied to condo association accounts, issued in both his and association’s name

Lawyers

  • Accused of stealing $300,000
  • Money possibly used for personal business ventures
  • Association audit showed funds shuffled around and missing
  • Prior lawsuit detailed failed development/investment project with alleged misuse of funds


Fraud Triangle
Side One: Opportunity

  • Complete control for a long duration of time
  • Inadequate prevention
  • Seemingly trustworthy and professional

Side Two: Rationalization

  • Work hard for the association without reward
  • Association has a large amount of money

Side Three: Pressure/Incentive

  • Prior crimes
  • Gambling addiction
  • Unemployed
  • Failed business ventures
  • Extravagant lifestyle
  • Illness in the family

 

Prevention: Banking

  1. No commingling; separate reserve/operating accounts
  2. Require dual signatures
  3. No debit or credit cards
  4. If you use online viewing of accounts, have multiple people with access, but no linked accounts for online transfers; disable online bill pay; change passwords
  5. Always reconcile bank statements; don’t leave it to the person handling most of the transactions
  6. Never ignore odd transactions
  7. Require the bank to send canceled checks back so you can verify the signatures are real and see to whom checks are endorsed when deposited


Prevention: Internal Controls

  1. Segregate duties so person that is receiving funds isn’t the same person that is issuing payments
  2. Rotate responsibilities, such as reconciling bank statement or signing checks
  3. Independently verify that vendors are real
  4. Check the background of all money handlers
  5. Keep association accounting records up-to-date, especially cash receipts and disbursement journals
  6. Get an annual review or audit, and—every few years—get a full audit


Prevention: Insurance Considerations

  1. Buy fidelity coverage along with your general liability policy; if you don’t, your loss is likely excluded
  2. Set an adequate “sub-limit” in an amount proportional to the annual assessments
  3. Watch for endorsements that limit whose acts are covered; ask if your money handlers are all included, whether it be officers, directors, employees, managers, or other agents
  4. Don’t buy a policy that requires completion of fraud prosecution as a prerequisite to coverage


Signs of Trouble

  • A large number of owners show as being past due on assessments, and either there is no active collection effort or owners claim to have paid
  • Services are paid for, but don’t seem to have been performed; a lot of deferred maintenance is present; there are vendors no one recognizes
  • Association always seems to be out of money, bounces checks, has unusually large transactions, or has an unusually high number of small transactions
  • Person handling funds has a sudden change in lifestyle, is always on vacation, or has new cars and nice belongings, all without an exceptionally high-paying job


Recovery

  • Pursue criminal investigations
  • Hire a “forensic” accountant and lawyer
  • Civil suits: Attach property and garnish funds that may not have been spent
  • Insurance: Notify carrier immediately
  • Always openly communicate with owners about what may have happened

For the information on a current case of fraud affecting local HOAs quoting VF Law’s Rich Vial, see the Oregonian article at: http://www.oregonlive.com/business/index.ssf/2012/06/northwest_empire_community_man.html