Fraud Prevention - need opinion

I am new to the board but experienced in the accounting field.

After joining the board I found out that the MC writes and signs ALL checks for operation and reserve accounts. There are no limits to the dollar amounts for which they can write checks. No dual signatures as prescribed in our bylaws.
The association has never had an external audit (in the works now), and the only reconciliations and financials were prepared by the MC and never really reviewed by the board. The association does not receive copies of the bank statements, except those provided through the MC.

As a CFE, this makes me cringe. The other board members do not understand fraud risk and will not listen about it, putting 100% trust in the MC.
The MC is giving me pushback saying I am micromanaging and that dual signatures are antiquated. I disagree completely.

Again, as a CFE this sends up giant red flags. Maybe there’s nothing wrong, but why the intense pushback?

Has anyone successfully convinced their board that anti-fraud measures are necessary? And how did you do it?

If you mean that an external audit is taking place right now, then in my (granted pretty limited) experience chances are high that the CPA-auditor is going to make many recommendations that answer well your concerns. I would wait until the audit is completed and the board has reviewed the report. If the board does not follow the recommendations, they are damned fools and you may want to consider resigning. Embezzlement happens often enough at HOAs (and is often reported by the media) that the board must take this seriously. Also FWIW, I do not like the setup your HOA has (where the MC is signing checks et cetera) one bit.

I think you misread my post. I’m not saying it’s fraud. Fraud prevention is a protocol to do just that -Limit exposure to instances of fraud. The providers I outlined are the current (insufficient) practices that leave gaping holes in terms of opportunity.

Policies and procedures to prevent fraud are very important. Selling these policies to a board that does not appreciate the exposure they have allowed by lax oversight is difficult.

I’m looking for advice as to how others have sold fraud prevention measures to their boards.

Hi Maddy,

If the rest of the board isn't interested, it may be a very hard sell. Are you able to speak with a lawyer? Perhaps he or she could be of help and advise on how you can encourage the other members to adopt smarter financial practices.

It's gotta be sheer laziness, absolute stupidity, and/or complete ignorance on the part of your other board members that have them burying their heads in the sand, unwilling to even listen to your POV.

Like Sheila said . . . there are plenty of lessons learned out there from other HOAs. Pick a few, synopsize each, and present those as examples of what can easily happen without proper checks and balances.

Like AugustinD said . . . let the audit run it's course and I'm sure many of the auditor's findings/recommendations will be ones that are the same as yours (assuming this auditor is an unbiased outside party).

Finally, it may help to simplify your info/ideas as much as possible so it can be easily digested by your Board Members. I could see a bulletized list of common fraud protection practices, another column explaining why it is done, and a third column with a check mark indicating that your HOA does (or does not) do this.

Hello Maddy - my team and I have been working on an app to solve for this very problem which a) gives control and visibility to board members while b) automating accounts payables approvals for management companies.

As a CFE, you are an expert in your field and I would love to get your expert opinion. Our app is still in beta, but someone like you could really help us shape the future of our solution so others don’t have to experience the potential problems of exposure to fraud.

Any interest in taking 15-20 minutes to give us your feedback?

AustinH look at the Posting rules here. We don't do what your selling...

Some chance ...

I agree with you, but I had to blow that chance during our last board meeting. They privately agreed to forming a finance committee and then tried to refuse a second to my motion during the meeting. I professionally, but strongly, called them out. They finally seconded the motion.

OUCH!

Maddy,,

everything you have said strikes me as correct..

just be aware,, you will get majore pushback from those that have a vested interest in not having any checks and balances in place.

No audit ? ever?? omg..

who many many homes are in the hoa?? how much money are we talking about the mc being in control of?

I suspect your colleagues are beginning to think you're on to something and would rather not admit they may have been bamboozled -otherwise they'd have angry homeowners to answer to. And that's as it should be.

Since they aren't listening to you (yet), start with educating the new committee. Talk to them to see where everyone is, as far as what they know regarding HOW finances. They will need to understand the basics before they can start thinking about the checks and false that should be in place. Keep it simple a d show them the stories to drive home the point of why oversight is important.

Hopefully, these folks will be concerned enough to demand answers of the board and tell the neighbors so they'll chime in. It's one thing to ignore yoy, but get the neighbors missed off enough and they will start calling for changes to be made - or else.

Fasten your seat belt, this is going to be a ride, but you are heading in the right direction. This is what is like to see more board members do - use your experience to help find ways to make the association operate more effectively and educate each other, because no one knows everything. It's ok to say you don't know, but that should be followed up "I will go and find out" and report back. Good luck to you - I see an board officer position in your future....

A month ago a poster came on and asked for advice on purchasing a condo and attached a three page document which included 2 pages of a income statement and one page of a balance sheet. The balance sheet was off by $260K and no one noticed.

What good are checks and balances when people don't understand association financial reports?

https://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/282208/view/topic/Default.aspx

Works for me!

Our MC collects our dues and makes all payments. Monthly dues are paid to a bank lockbox then transferred to the MC. The BOD has a "key word" they can use to stop any payments to the MC. The MC can deposit to but not withdraw from our Reserve Accounts. It takes two signatures (Pres and myself, VP/Treasurer) to withdraw any funds from our Reserve Accounts. The MC prepares a monthly 40 odd page financial report which is available to any owner that requests such. The BOD President and myself (VP/Treasurer) review it each month.

No matter what procedures one puts in place, cheaters will find a way to cheat

You haven’t mentioned a budget and a standard y-t-d expenditure vs. budget report. Pretty standard stuff.

Unless something is way out of whack, yes, you are micromanaging the financials.

Let the audit play out and see if it points out potential “fraud.”

Your process is very similar to ours, except there are no dual signatures, the MC withdraws however much from whatever account they deem necessary, and no one has been reviewing the financials.

True, but instead of mitigating the opportunities, we have just left the door wide open.

Why would it be a COI?

It’s common for management companies to sign checks for the associations they manage.

Few board members are willing to drive the management office several times a month to sign checks. Check processing houses don’t bother looking for two signatures. It’s a pain to change names on the account with the bank every time there’s a change on the board.

It’s the board’s responsibility to review the financials and understand what they mean. There’s a GL entry for irrigation repair? Where’s the invoice for that? Where’s the work order for that? Does the work order have photos? Is there an email chain showing a leak reported and repairs requested.

You don’t have to do that for every invoice every month but at least spot check once in a while.

I have worked for several large management companies. Typically their internal controls are to have the manager submit invoices, AP specialist review it, confirm we have a W9 and COI for the vendor, and pass it on to the accountant who authorizes payments. If it’s over $10k, an accounting VP might need to review it too. But the big companies might have a dozen accountants and 2 AP specialists for 800 properties so things slip through the cracks.

Just google HOA embezzlement and you’ll find lots of examples. It does happen and you’re not paranoid to worry about it. Nothing wrong with regular audits - although those might simply confirm that the numbers you gave them add up correctly.

The best defense against fraud is an attentive, involved board. There shouldn’t be any expenses the board didn’t know about ahead of time or can’t confirm after the fact.

Just wanted to add a quick note to thank you all for your responses, advice, and insights. I appreciate you taking the time and talking things out with me.

It's common for only the HOA treasurer and one other to sign checks as well. Particularly in condominiums where there is an office for the manager. Of the three HOAs in which I have resided, never did the management company sign the checks.

Let's also be clear here: BarbaraT1, isn't it true your company stopped managing condominiums because condominiums are inherently more complicated?

I don't like managing condos either and the company is selectively getting out of that type of HOA.

Augustin

Actually, it is easier for a self-managed HOA to commit fraud, embezzle, etc. There is little oversight, people don't say anything and the governing body doesn't change.

The real question, what are YOU personally doing to effect change. Offering a few letters to disgruntled homeowners, in my book, just doesn't cut it.

In 2008, I bought into an HOA (first mistake). Like everyone else, didn't read the governing docs. Escrow company didn't know who the management company was, so didn't forward my collected HOA dues. Management took four months to figure I wasn't paying, oops they didn't have a record of a change. Later that year tried to get appointed to the Board. Because of my background, deemed to be a threat.

In 2009, ran for the Board, but lawyer cancelled because the people who voted by mail, by secret ballot weren't present to vote to adjourn.

In 2010, re-wrote the Bylaws, no more quorum for elections, no cumulative voting, no more proxies. Prior to 2010, only one election in which ballots were opened. Since 2010, all ballots opened.

Between 2009-2010 three homeowners, along with management and legal counsel blackmailed a Board to pursue a $250K homeowner to homeowner dispute, which the HOA ended up losing.

From 2011-2015, I learned that, unless homeowners are forced to do something, they don't give a rat's ass about anything.

From 2011 to 2015 I worked for three different management companies, each one worst than the other. Taking shortcuts were the word of the day and who was going to stop them, HOA Boards?

In 2015 I started my own company, which my daughter now runs. Nothing really hasn't changed, except we follow the rules, don't take shortcuts. Our job is to make sure the Association, through our company, complies with state guidelines and is kept up to date with new changes and legislation.

I have dropped HOA's because they felt they didn't need to follow state guidelines and who was I to tell them differently. I let one go because they refused to provide bank statements for their reserve account, it wasn't any of my business. They were quickly given a 30 day notice.

Our mission wasn't about money. It was about educating associations. For the most part, I believe the industry failed.