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Fraud traps await unwary associations

A lack of safeguards and financial acumen can leave homeowner groups vulnerable.

April 06, 2008|Frank Nelson | Special to The Times

He said the law grants broad access by board members and homeowners to most association records, and when information is improperly withheld it unnecessarily elevates the level of mistrust and conflict.

Stone believes much fraud is driven by ego, greed and hubris. "People think they'll get away with it. It's like stealing cookies from the cookie jar. It takes a while to be detected but time works against them and eventually the fraud gets found out."

Still, the fraud examiners association believes a great deal of general fraud goes unreported, perhaps because organizations do not realize it's happening -- the association says most instances of small-business fraud are discovered by accident -- or they want to avoid bad publicity and other awkward consequences.

Among 1,134 cases of fraud between 2004 and 2006 that were surveyed in the association's 2006 national report, about 800 were referred to law enforcement. Though some cases were still pending at the time of the survey, preliminary results suggested that almost 89% were prosecuted.

Richardson said prosecutors and police are more likely to be interested when there's a lot of money involved and clear evidence of embezzlement.

In situations involving elected members or officers, where the chances of conviction and recovering the losses are slight, it may be best to "plug the leak, get the people out of office and move on."

If an association discovers funds are missing, there are a number of steps it can take, Stone said, starting with removing the suspect from a position of control and securing books and records.

Richardson also recommends putting a stop on all bank account activity and asking the bank to call before it processes any checks or withdrawals. It may also be a good idea to consider closing accounts and opening new ones, at the same time reviewing bank signature cards and, if necessary, changing the authorized signers.

Other moves suggested by Stone include gathering all documents and other evidence, contacting the association attorney and insurance agent, and considering reporting the matter to the police.



Built-in safety checkpoints

Ronald S. Stone, a professor at Cal State Northridge and a certified fraud examiner, offers these tips to prevent fraud against homeowner associations:

Require two signatures on checks or transfers of a predetermined amount such as greater than $500.

Never make checks out to cash or sign blank checks in advance.

Obtain multiple bids for all major contracts and check references.

Avoid conflicts of interest by not soliciting or accepting bids from board members, their friends or relatives.

Set low limits on credit cards issued to board members or employees.

Verify that expense reimbursements are legitimate and supported by receipts.

Thoroughly review invoices and supporting documents before signing checks.

Keep association records up to date.

Review bank statements and financial reports every month.

Keep minimum petty cash and count it periodically on a surprise basis.

Update bank signature cards whenever an authorized signer leaves.

Consider a thorough financial review or audit when management companies change.

-- Frank Nelson

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