Several years ago, I met with a gentleman who sat on the Board of Directors of a local Homeowners Association (HOA). This gentleman firmly believed that there was fiscal mismanagement by the firm that was managing the HOA. While this gentleman wanted a financial review, the HOA did not have the funds to conduct one, nor did he have the support of enough of the Board members to pass having one completed. Unfortunately, the bylaws of the HOA did not address financial reviews or financial audits.
Using the statistics from our friends at the Association of Certified Fraud Examiners (ACFE) the median loss comes in at $145,000.00 over an 18-month period before being detected. In looking at a report from the Community Association Institute, in 2016 there were 342,000 communities covering 26.3 million housing units and 69 million residents that were living in communities that were active HOA participants. While often called different names such as a Condominium Community Association or a Community Homeowners Association we are going with the generally generic term of HOA in this paper.
Serving on the Board of a HOA is often a volunteer position. HOA Boards are usually elected by the residents/property owners living in the HOA. Board members can spend countless unpaid hours conducting business and attending meetings on behalf of the HOA. Those living in the HOA often blame the Board members for things they believe are wrong with the management and aesthetics of the HOA properties. These matters often turn personal, political or legal and can cause tension within the community. Board members also have control of the budget of the HOA including the amount property owners within the HOA are assessed. At times, the HOA may turn over day to day operations to a management company that contracts out services that support the HOA. This is often an area where fraud occurs.
Embezzlement is the most common type of fraud within HOA’s. The person embezzling from the organization is usually the treasurer, although sometimes additional members of the Board or the entire Board may be in on the embezzlement. If the management company does not have strict oversight from the Board, embezzlement can be a common problem there as well. In addition to the theft of funds, the embezzler can also be responsible for crimes related to false financial statement reporting. Those found guilty of embezzlement usually face financial reparations and possibly jail time.
As we mentioned earlier, members of the Board of Directors are elected by the residents/property owners living in the HOA. While a political election often has oversight from a government entity, HOA elections usually have no official oversight. Therefore, the opportunity to “rig” or “fix” an election is a common problem. The “rigged” election often leads to a Board that abuses its powers, leading it into areas where the opportunity for fraud is increased. Common problems are expense reimbursement scheme’s, bid-rigging, and embezzlement. A prime example of this was the HOA in Las Vegas where the Board was paying people to purchase empty condo units and forging ballots of residents that did not participate in Board elections. If the election includes a mail-in ballot, those committing the fraud may be tried for Federal Mail Fraud charges in addition to forgery.
Kickback schemes are very common in HOA’s as well. A Board member may direct contracts and funds to a friend of theirs, who in turns “kicks back” some of those funds to the Board member. While a kickback scheme usually involves a legitimate vendor, sometimes they involve fraudulent vendors that do no work for the residents of the HOA. In this case the fraudulent vendor and the Board member, which may be one and the same, split the fraudulent funds received.
As a resident in an HOA community, what can you do to help prevent or minimize the risk for fraud within your Board of Directors, Management Company or HOA? As a resident or property owner within an HOA community one should consider themselves an investor and like any investment, ensure that it is operating appropriately and profitably. Therefore, active participation in the management and activities within your HOA is important. Attend Board or General Membership meetings and ask questions of anything that may seem relevant. If finances are not provided, insist they are sent to all residents or property owners. If finances are provided, review them thoroughly to ensure that funds are being spent appropriately. Oftentimes the financial statement will not include a cash flow statement. Insist that a cash flow statement be provided in addition to the Profit & Loss and Balance Sheet along with a line item budget versus actual analysis.
Boards of Directors of HOA’s have a responsibility to the residents and property owners they represent. Part of that responsibility is implementing and enforcing a strict set of financial internal controls. Internal controls often allow for more than one set of eyes to review financial transactions and more than one person to approve financial transactions. Dual signatures may be an option for check signing, although banks often do not enforce this. Having assessment payments sent to a lock box or PO Box instead of an individual Board member should absolutely be implemented. The person collecting these payments should not be the same person posting them, and yet another person should be responsible for depositing them.
In order to keep an “arm’s length” transaction, the Board should hire an outside firm to examine the finances of the HOA. This examination does not need to be a full-blown CPA audit. Rather, it can focus on areas within the HOA financials that may be of concern as identified by the examiner. This examination could save the HOA financially by ensuring that the Board is operating effectively on behalf of its residents and property owners.
Being proactive and involved is the best way to minimize the risk of having the possibility of fraud occurring within your HOA. Every organization operates differently, so be sure to know how your HOA is operating, whether the management is at the Board level or if it is outsourced to a management company.