There hundreds of stories on blog sites about the association management, staff, and board members spending money without accountability and downright unethical directors who steal association funds or find a way to benefit one way or another. With this alarming number of homeowner association members or owners complaining about fraud - or perceived fraud - we need to turn the spotlight on fiduciary responsibility.
We should all know individuals commit the act of fraud not corporations. Community associations are a type of corporation, but they lack a corporate-like investigatory body to flush out suspicious activities. In other words, most members of community associations are not equipped to expose fraud.
The catching these bad guys stealing association funds or diverting them for their own needs is left to individual members. Maybe a director, maybe an owner, somebody has to do the work before getting authorities involved.
But how do you find proof? You have to ask questions, request an appointment to review association records, request and perhaps pay for copies, read through statements, reports, receipts, etc. and create your own investigation file.
There are an alarming amount of indications in increased losses suffered by associations from fraud and embezzlement. With all of the recent high-profile corporate and nonprofit scandals there is a heightened awareness of a board's fiduciary responsibilities, leaving a need for associations to review and revise procedures. The opportunities to commit fraud do not magically disappear and are an ever-present danger to your community.
While the number of reports of association fraud is high and includes many high-profile cases, there are no central statistics about the amount of fraud and its effect on individual associations available for review.
The first part of the problem is the difficulty of detecting fraud. When fraud is detected unfortunately it is not always reported. It can be very damaging--resulting in financial loss, damage to an association's reputation, negative publicity, internal upheaval, and in many cases, loss of owner's members and improvement needed for the community.
As more and more fraudulent activity surfaces involving misappropriation of assets and issuance of misleading financial reports, fraud and business ethics have become hot topics. Homeowners should want to start discussions about ethics, resolving moral dilemmas, and establishing internal control procedures to prevent and deter theft in their individual homeowners association.
The HOA's are particularly vulnerable to misappropriation and or fraud for a number of reasons, which includes a high environment of trust because volunteers are often charged with the mission of helping those in need, they are rarely suspected of acting in deceptive behaviors. The atmosphere in an HOA results in a higher level of trust than that associated with most for-profit businesses.
In a high percentage of HOA's, the association management, staff, and board members are sometimes unfamiliar with the importance of strong accounting and financial controls. It is also obvious Board members are sometimes reluctant to get involved in association financial operations or don't realize that accountability and control of funds is critical to short-term success and long-term survival. Everyone involved not just the treasurer has a fiduciary responsibility to understand the financial aspects of operating an association and making sure that fraud and misappropriation of funds does not take place.
The common elements of HOA have set the stage for fraud. In general, they lack effective internal accounting control procedures--including separation of duties and responsibilities--a lack of proper documentation to substantiate possible counterfeit transactions, and fail to establish line item checks on spending or performance. In almost cases it is fairly simple for each fraudster, put in a position of trust, to commit multiple acts of fraud that go unnoticed for a period of time.
Fraud involves the unlawful activity with malicious intent for the financial benefit of an individual. Fraud includes several elements including, misrepresentation or concealment of significant information by the perpetrator, the victim's reliance on the perpetrator's misrepresentations, and the victim's loss of something valuable.
Then when you add greed, lack of ethics, and an oversized ego, and you have the ingredients for a fraud scheme that can negatively affect an association and its members.
At the beginning, fraud is not always obvious to others in the HOA, although, red flags always will emerge. The largest sign is people who commit fraud generally have difficulty looking other people straight in the eye, become easily annoyed, they become defensive and overly argumentative, and find excuses and like to blame others when the fraud surfaces that he or she is trying to conceal.
If you discover that fraud is happening in your homeowners association, it is critical to take the following steps without delay:
Start a process to have the suspected fraud perpetrator removed from a position of control.
- Keep track, organize and secure all documents and evidence related to the misappropriation or fraud.
- Consider reporting the problem to the police or local authorities. The reporting of the crime serves other purposes, including deterring other employees from committing further fraudulent acts. You will need to provide information concerning the date, time, and place of the occurrence of the fraudulent activity; the manner in which the alleged crime appears to have been committed.
- If your HOA has fidelity insurance coverage, consider calling the insurance company and filing a claim.
- Do not call your association's attorney to obtain advice about how best to proceed as they work for the association and board members.
Remember, fraud often starts small; unfortunately fraud can exist in any homeowners association. Homeowners need to take whatever measures necessary in order reduce the likelihood of financial mismanagement and fraud.
We must be vigilant against fraud, recognizing its signs and taking proactive, definite, and realistic steps to not only prevent it but also punish it.
It starts with me.
It starts with you.
It starts with us...
Michael S. Richardson
Director/Mortgage Fraud Services
Author of "An American Epidemic, Mortgage Fraud a Serious Business"