Homeowner associations are rocked by a triple whammy when they discover they are victims of fraud.
First, there's the financial loss, which may be substantial. Next, the association members have to deal with the betrayal of trust. And third comes the nagging realization that this might have been prevented.
Fraud at nonprofits and small businesses -- both categories that include homeowner associations -- mostly involves conflict of interest, bribery and illegal gifts, false reimbursement of expenses, billing issues, check tampering and cash theft, according to the Assn. of Certified Fraud Examiners, based in Austin, Texas.
Perpetrators may be board officers or members, managers or other staff, association homeowners or outside parties such as vendors or tradespeople doing business with the association, said Ronald S. Stone, professor of accounting and information systems at Cal State Northridge and a certified fraud examiner.
Homeowner associations, as nonprofits handling large sums of money -- in reserve and replacement funds, and daily operating accounts -- are especially at risk, Stone said, because they lack the checks and balances, and financial acumen, of most commercial businesses.
But at the same time they are expected to exercise prudent judgment and maintain detailed financial records.
"They have a fiduciary responsibility to all the owners to exercise good business judgment," Stone said, adding that they must also keep adequate books, records and files, including copies of major contracts, paid bills, bank statements and detailed collection records.
Red flags can include missing bank statements and other documents, photocopies instead of originals, unexplained cash shortages, duplicate payments to vendors and payments for unspecified services.
Stone recalls a case in the early '90s in which a Calabasas community manager used phony invoices and false bank statements to steal more than $1.5 million of association funds. He was eventually sentenced to six years in prison for check forgery and grand theft.
Many warning signs went unheeded in that case as the manager of the 268-unit association set up a system involving duplicate checkbooks, hidden bank accounts, bogus and real vendors, photocopies of documents and a set of false financial statements, Stone said.
Boards often are composed of well-intentioned volunteers, unit owners who typically are elected; however, they undergo no screening or background checks, Stone said, and may lack financial training or experience.
