Early Warning Signs of Fraud & Embezzlement

Typically before HOAs learn of fraud or financial ineptitude on the part of their treasurer, manager board members, etc, there are small signs that should have been red flags. Here are five signs that your HOA funds may be in jeopardy.

- Checks written to individuals, not the association. - Board member asking people who owed money to the association to make checks out to him and pocketing funds that should have gone into the association's coffers.

- HOA checks are made out to association members - People writing checks to themselves, hiring themselves to perform services, or reimbursing themselves for things they've allegedly bought for the association.

- New vendors or big price increases for current vendors - Could be a sign that the vendor is overcharging or that someone in the association is getting a kickback from the vendor for having pushed the selection of that vendor.

- Fees paid to unqualified service providers - Dummy companies that the board brings in supposedly to perform a service, and you start seeing checks written to those companies on a monthly basis

- Big decreases in revenue. - Whenever your association is losing revenue, ask for an independent audit to ensure that nobody's siphoning off association money.

- Financial statements dont match bank statements - Monthly, quarterly, yearly statements created by the treasurer or mgmt company should always be matched to official bank statements. If there are discrepancies, they need to be investigated. The reports created by the treasurer or mgmt company could be fake numbers.

- Segregate duties - Typically one person may be in charge of accounting records and cash/check receipts, making it easier to conceal fraud. Break this up into two different people. One person writes checks, another person deposits cash/checks.

- "Less cash" deposits - Bookkeepers can commit fraud by depositing checks into the HOA account and then deducting a "less cash" amount.

- Sloppy book keeping - Many times people will think the bookkeeper just does sloppy work, but what is really happening is they are embezzling. The sloppy bookkeeping ensures no one will ever makes heads or tails of the finances and thus never catch them. And they probably wont.

- Lock Box Service - Prevent many types of fraud by using your bank's lock box service. A lockbox service allows customer payments to be remitted directly to a post office box. The bank is responsible to collect receipts from the box, post the amounts to the company’s account, and send all appropriate documentation to the HOA.

- Checks written to "cash" - HOA checks should never be written to: CASH

Trust, but verify

Red flag #1, anytime you are denied access to Assn related financial information the first question should be WHY? Then don't give up.

Paul T

I'm with Paul, but I think the first sign may be secret meetings (instead of open meetings with appropriate and very obvious notifications).

The second sign would be refusal to turn over documents of any kind--not just financial documents. For instance, our HOA wouldn't release the documents related to landscaping. When they went after us for so-called damages (previous board decision to let the lawn die since the twice a week waterings per L.A. drought provisions wouldn't keep it alive), we learned that the amount requested was actually over the amount required to replace the lawn. They sought to profit from us.

Third, if your HOA refuses to have contracts then you can't really tell if the amount requested is the amount of the actual work provided. So refusal to have contracts, particularly those required by the state.

As a member of a non-profit, one should be eager to review all documents.

Benny Kass, a well-known real estate attorney who writes for the Washington Post had a terrific article on protecting association funds a few weeks ago. Here's the link http://www.washingtonpost.com/realestate/steps-that-should-be-taken-to-protect-a-community-associations-funds/2012/11/15/0c881ee6-2d23-11e2-9ac2-1c61452669c3_story.html
Definitely food for thought.
Jeanne

JM, you said:

"I'm with Paul, but I think the first sign may be secret meetings (instead of open meetings with appropriate and very obvious notifications)."

"Executive Session", aka "Secret Meeting", kind of hard to beat. One would only hope that if "they" know they will be audited "they" MAY tend to be more careful about what they are doing.

Paul T

Or the opposite might happen, they might not keep records of anything so there is no evidence. I've seen that too.

Ok... all the warning signs are there. The DA won't do anything. The HOA Attorney wrote the contract for the Managing Agent suspected. The current President worked out a deal to terminate him AND pay him even though it has been proven he has not done his job and is under suspicion. The current Treasurer was not allowed to see any finances for 8 months (managing agent would not let anyone "look over my shoulders" and by that time the books were altered, a one year audit was done by the accountant working with the managing agent who oversaw audit. The excessive legal fees for a case that should have never gone to court were not included in the audit. The President refuses to hold working sessions and will only do everything by email. The Treasurer is not given voting rights. She wasn't even allowed in the HOA office but the managing agent was. There are no motions just a vote between President and Secretary. Homeowners are afraid to cast a vote during the current election because they are afraid of what the managing agent and the President will do or that they will be fined by the lawyer for whatever reason the board can come up with. The Secretary won't answer voice mail, the homeowners contact list and information regarding dues payment is either outdated or was intentionally altered with incorrect and outdated information, equipment is missing and the lap top finally returned by the terminated managing agent was scrubbed except for traces of files and that it was used for inappropriate presentations! let's see.. there is more but I'd be typing forever. The Attorney General can't do anything because of the lies coming back from the President and Attorney and files continue to disappear so it becomes a he said she said. The attorney and President have lead one to believe that they will bankrupt the association because they can. Oh, did I mention contracts were written in the best interest of others and NOT THE HOMEOWNERS by the attorney? When asked to step down the President said "No". Yes it does get worse. My question... now what? Who will protect the financial interest of the people of this community when funds have disappeared and more. The HOA Attorney is from a large firm and lawyers won't touch this. Who do you call for help when the right people tell you they have to let it alone while your community goes down the tubes and people have to sell their homes in this economy because they can't stand to live here anymore. Who do they call now? Who has the clout to make this situation end so these people can have their community back? Anyone know?

Thank you but I don't know how... just found this site and thought I might get some useful information or possible direction. Can you direct me so that I might get some feedback on this topic?

Homeowners that spineless deserve whatever they get.

Bernadette,

It would be best to start a new thread/topic for your specific issue. However, since your question sort of runs with this thread (what to do after you see the warning signs) I thought I would try to offer advice.

First a question, is the Association under control of the developer or the membership?

If the individuals were appointed/elected by the developer, it's likely you can't get rid of them until control of the Association is turned over to the membership. This is simply because the developer has the votes to keep them on the board.


As you are finding out, typically, there is no State or Federal government agency that can be contacted to gain assistance. Therefore, it's up to the membership to take care of the issues themselves.

In general, the CC&Rs (deed restrictions) are considered a civil contract between all owners of the properties that have the same deed restrictions attached. Associations are formed to maintain and/or operate the common area and fulfill any services (trash/recycling, snow removal, street lighting, etc.) required by the CC&Rs. Per the CC&Rs, the Association is also given the authority (in addition to the owners) to enforce the covenants, restrictions and conditions of the deed restrictions (contract). Typically, Associations are incorporated (usually as a nonprofit) as this provides them certain advantages. As a corporation they must comply with corporate laws in addition to any HOA/COA laws.

There are civil laws and criminal laws. Criminal laws are enforced by the State. Civil laws are enforced by the individuals involved and they do this through the court system. Since contracts, hoa/coa laws and corporate laws are considered civil laws, there is typically limited governmental authorities to "oversee" or enforce those laws.

Sure the State corporation commission may fine for not filing the annual report on time. The IRS will certainly go after the Association for failing to file taxes. The District Attorney will prosecute if there is proof that criminal laws are broken (example embezzlement). However if the Association doesn't comply with the Bylaws or a civil law, it's up to the membership to hold the Board accountable. The easiest way would be to recall the board or not reelect them to the Board. The more expensive option is to go through the court system.

This is why it's imperative that the members remain active in the development and actually take an interest in how the Association is governed. If apathy sets in (and, unfortunately it does), it becomes that much more difficult to change things when issues are discovered.

Typically when there are issues, the best thing a member can do is read and understand the governing documents (CC&Rs, Articles of Incorporation, Bylaws, resolutions) and applicable State laws. This why they can identify if the issue is real or perceived. If the issue is real the easiest way to address it is to approach the board about it. If they are not listening, the next easiest is to vote the Directors off the board either by recall elections or at the next scheduled election.

However, if your membership is "afraid" to hold these individuals accountable by casting a vote, then the reality is it's going to be harder and more costly to fix the problem because you will need to document and have proof of the board violating the governing documents and then take them to court. Whenever you go to court it's always a 50/50 chance to lose. Even if you do win, the outcome might not be what you really wanted.

You could try to gather support by educating the membership of the governing documents and how the current board is violating them. Nothing will change overnight but overtime (could be years) things may change. If there isn't membership support (for whatever reason) to recall or not reelect the current board, then [to be honest] it may be better to sell and move elsewhere.

I know that this isn't exactly what you wanted to hear but I hope this helps,

Tim

Executive sessions aren't the same as secret meetings. My former HOA had both. Executive sessions can happen during a regular board meeting. Members are supposed to be notified about all meetings in advance except emergency meetings. Just to clarify. Forget the HOAs, ask the City of Bell about secret meetings.

We are a small association without a credit card. I think it would be easier for someone to siphon money using a credit card that being reimbursed for expenses. At the next meeting we are going to vote on a resolution (my idea) that would allow the Secretary to be reimbursed up to $100.00 a month for routine office supplies not to exceed $600.00 per calandar yr and up to $200.00 when preparing for a meeting of the members.

SO far this year the Association has only paid $224.53 for office supplies. This includes postage an mailing. I have spend a lot of my own money on office supplies for the assoiciation as I use my on computer and printer and I can not afford to do this. If the resolution passes and I think it will this will limit what I or any Secretary can be reimbursed for without Board approval.

We have Board member who has paid for over $6,000.00 worth of material and services for the Association. Our problem at this time is definitely not theft by Board members. It is more a problem of fees not being high enought to cover all costs. We just raised fees in June and may need to raise them again in 2014.

Yes we are working on the budget. When I first became a Board member I mentioned that we needed a budget. The Vice President kept saying there was not time to go over a budget. Basically I prepared a budget (Rembember I was a brand new board member who had never served on a Board of any kind before.) I prepared the budget and the Board accepted it without any questions. We did raise fees 7% in June of this year. I mentioned at the meeting when this decision was made that we should have a budget first. Basically I was shot down. We are currently working on a budget for next year and I think we are beginning to get our act together regarding a budget.

Everyone is paid current through November and Decembers fees are not considered lat until the 15th of the month.

Carolyn,

It's best to start a new topic then reactivate an old thread.

This is done by clicking on "start new topic" on the left side of the page just above the list of topics blue bar.