9 Steps to avoid HOA Embezzlement

 

So what can you do to protect your association? We’ll walk you through the types of scams you should watch out for, and also provide you with tips for preventing them.

Recognize the Problem

To protect your community from embezzlement you must first understand and be able to recognize the following different types of embezzlement that can occur in an HOA. All of these forms of embezzlement generally can be committed by an employee or a board member and require the thief to be a person in a position of trust.

  • Cash receipts fraud occurs when an HOA employee pockets money received from a homeowner and then covers the shortage by pulling money from other accounts.
  • Payroll fraud occurs if checks are issued to fictitious HOA employees and cashed by the person who wrote the check.
  • Purchasing fraud occurs when a dishonest HOA employee with purchasing authority issues phony invoices to vendors and then pockets the money that your HOA paid for undelivered goods or services.
  • Expense reimbursement fraud happens when an HOA employee or representative submits reimbursement requests for expenses that he or she never incurred or that were unrelated to HOA business. Examples include receipts for untraveled mileage, personal telephone calls, and personal meals claimed as meetings about HOA matters.
  • Direct embezzlement consists of the theft of cash or inventory.
  • Indirect embezzlement typically involves employees taking bribes or kickbacks from vendors or customers who are bidding or doing work for the HOA.

It’s important to note that any of these types of misconduct can be perpetrated by an employee or a board member with access to HOA funds.

Proposed State Laws

As we detail in our story on new reserve disclosure requirements, states all across the country are creating legislation that regulates disclosure of association budgets, reserves, and expected expenses. This increased financial transparency will make it harder for embezzlement to go undetected, and hopefully deter potential thieves.

9-Step Theft Prevention Checklist

In addition to complying with the financial disclosure requirements of new state laws, following this nine-step checklist can help your HOA avoid getting ripped off.

1.    Require all books and records, including reserve accounts, be audited annually by a reputable, independent, licensed CPA who carries insurance.

2.    Closely monitor money being borrowed from the reserves to pay for operating expenses and have a system in place to verify the money has been returned within pre-established statutory time periods.

3.    Verify that any legal and professional fees your HOA pays are legitimate and necessary.

4.    Require bank account reconciliation each month by an independent bookkeeper that has no check writing permissions.

5.    Secure all blank and canceled checks in a secure, locked location. Most HOAs don’t use signature stamps, but if you do, you should keep them locked up as well.

6.    Separate duties whenever possible. Don’t have the same person who approves invoices for payment write checks. Don’t have the same person who writes checks sign them.

7.    Require two signatures on all checks your HOA issues—at least for any checks above a certain amount.

8.    Run background checks before hiring any employees or vendors of the HOA who will have any control of association funds.

9.    Purchase insurance to cover losses caused by theft.

Even if your HOA establishes all the guidelines discussed here, there is no guarantee that embezzlement will not happen in your community. By putting these smart measures in place, however, you can—at the least—help identify embezzlement early, make catching the thief easier, and minimize the harm done to your community.