HOAs like to be proactive about preventing crimes in their communities by following local crime trends and creating neighborhood watch groups. While these preventative measures focus on crimes like vandalism and theft, there is another threat lurking among the HOA community, particularly ones that hire outside property management companies. Those companies have a fiduciary duty to the HOA board and ultimately the homeowners. Unfortunately, whenever a fiduciary duty exists, HOAs are vulnerable to fraud and embezzlement.
Many HOAs use property management companies to ensure a smooth and efficient operation of the community. By paying a regular fee to the management, the HOA shifts burdens like enforcing dues, making repairs, and addressing complaints to the management company. Typically, the HOA board retains the power to make major decisions, such as where and when to make improvements and which company they will contract. The management company, however, often takes it from there, accessing the HOA treasury to make payments to vendors and contractors. The trust that a board builds with its management company is crucial, and the management group has a legal duty to be ethical and honest in all of its financial transactions.
When a management company breaches the fiduciary trust in any way, it can be disastrous for the board. Examples of this type of behavior are more common than you think, and property management companies can accumulate millions of dollars before being caught.
It’s no surprise that both criminal and civil litigation has resulted from fraud and embezzlement in HOAs. In a 2016 case out of California, a property manager, Deip Silva, was hired by an HOA to handle jobs like “maintaining records, paying vendors, paying bills, and any other jobs that needed attention with respect to the housing complex,” a standard arrangement between the board and the manager. Silva had access to the HOA bank account and was authorized to write checks with the additional signature of one HOA board member. After just a few months of employment, Silva illegally siphoned $8,507.22 from the HOA bank account. Fortunately, the district attorney’s office intervened and charged Silva with embezzlement, and the court returned a verdict in the HOA’s favor.
While the property manager has a fiduciary duty to the board, the board has its own fiduciary duty to the homeowners. In a case out of Illinois, the homeowners themselves filed a lawsuit against the board for failing to properly supervise a property manager that stole over $500,000 from the association. The board argued that it had no such duty, but an appellate court found that this derivative lawsuit was valid. Bad actors in a property management group can cause a lot of trouble for both the homeowner and the board.
Common Signs of Fraud
If you notice one or several of the warning signs of fraud below, take the initiative or hire a professional to investigate your accounts right away.
- Accounts payable and accounts receivable do not match
- Expenses that exceed approved or budgeted amounts
- Contract disbursements before the work is completed
- Inappropriate duplicate vendor payments
- Payments to P.O. boxes instead of physical addresses
- Vendor addresses that match those of a property management employee or board member
- Lost documents, bills, or receipts
- Missing original copies of documents
- Large gaps of time between submission of bank deposits and reflection in the account balance
- Odd behavior from an employee or board member
How to Prevent Property Management Fraud
The best advice to avoid fraud is to be proactive. By having a system that provides constant checks and balances while ensuring transparency, your HOA can detect foul play as soon as it occurs and even prevent it.
Get Board Members Involved
The most basic way to prevent fraud is to have board members review financial documents, bank statements, and ledgers personally. By cross-checking the bank account on a regular basis (more than once a month), the board can directly look for the signs of fraud listed above. Share the responsibility over time so that no one member has complete control.
Hire a Professional
If you belong to a large HOA that is dealing with tens or hundreds of thousands of dollars on a regular basis, you may want to hire a professional to maintain your financial records. A bookkeeper will have the training to balance accounts and quickly see any signs of fraud. If you are suspicious of improper behavior, you may want to hire an unannounced auditor or a Certified Fraud Examiner.
In addition to close oversight, transparency with both your board and your homeowners can improve the accuracy and reliability of how funds are used. Require multiple signatures when checks are distributed so that more than one set of eyes are looking over disbursements. Make sure bank accounts are in the association’s name, not one individual. Share bank records among the board and share project expenses with the community. These simple steps of transparency can make the oversight process much easier.
Using some of these steps above may reduce the opportunity for a property management company to take advantage of your HOA. Be proactive for your homeowners and your own protection!
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