How Is Fraud Perpetuated?
How Is Fraud Perpetuated?
This is by no means the totality of how fraud can happen. These are real life community association examples, which show a variety of ways that fraud can or might occur. In some examples, the issues were settled confidentially or the victim did not pursue the matter, so there is no record of the actual event. Thus, we will present most of the cases as possible or potential ways fraud can occur.
Check Fraud
This has happened to Associations in Washington and California.
FACTS:
Somehow the thieves got the bank encryption on the bottom of the Association checks. Note: any vendor that receives a check from the Association has this information.
They duplicated the information in a check writing program. Note: even the simplest of accounting programs can do so. They wrote checks out that appeared to be payroll checks. These checks were then cashed at a local cash check store.
PREVENTION:
Very little can be done to prevent check fraud from happening, but you can secure the bank information in house. It is very easy to obtain check stock these days and copy a legitimate check.
DISCOVERY:
It is vital that bank reconciliations be performed in a timely manner. This was discovered when the bank reconciliation was performed a couple of days after receipt. One banker told me that one Association did not perform bank reconciliations for almost a year, so when it was discovered, there was no recourse back to the bank.
Signature Card Fraud
This occurred many years ago in Southern California and the manager was prosecuted and sent to jail.
FACTS:
The manager took signature cards to the board meetings to have the board members sign. The Board only wanted officers to sign on the account. After signing the cards, the Board handed the cards back to the manager to take to the bank. The manager added her name to the signature card before turning in.
She then began to “borrow” monies when she needed them. She would repay them each time, but the repayment period got longer and longer. Finally, she got so that she could not repay the monies.
PREVENTION:
The Board members should mail or take the signature cards to the bank, or at least verify with the bank the signers on the account. (Side note: Important to change signature cards at the time of change of board members) The Board members should review all bank statements at least quarterly.
DISCOVERY:
The manager did not provide financial statements with copies of checks, and the Board got suspicious.
“Additional” Amounts Paid to Vendors
This occurred several years ago in a very prominent management company. It was perpetuated by one of their managers.
FACTS:
The Board approved X dollars to be paid on a large project. Each invoice was approved for a specific dollar amount. When it came time to make the payment, the manager made the voucher out for slightly more than the amount, cashed the check (he actually had set up a bank account with the Association’s name), and then sent the vendor the lower amount.
PREVENTION:
Have the board meeting minutes reflect approval of all unusual expenses noting the vendor, the dollar amount and whether it is a reserve or operating expense. The Board should closely review all financial statements.
DISCOVERY:
The CEO found it. When she did find it, she was extremely above board, open and honest about the whole situation. She advised her boards, the accountants, and those in the industry. It is my understanding that the manager agreed to repay the monies.
Use of Association Credit for Personal Reasons
We have had numerous examples of this over the years. The events have been combined into one example. Note: one onsite manager went to jail for this and this was one of the tactics she used!
FACTS:
The person (manager, board member or employee) has a credit card or authorization to charge on an open account (such as at Home Depot). In one instance, the manager bought everything from coloring books for his grandchild to a TV. Then in another instance, the employee purchased expensive cable, returning it later for cash credit. Then in yet another instance, the Association was replacing doors in the complex, but the employee purchased 20 extra doors and sold them to friends.
PREVENTION:
All purchases should be approved in advance, where possible. When it is not possible, then the board should approve each line item on the charge requiring back up of the actual purchase.
DISCOVERY:
In a couple of cases, we found them during the audit process. In another, the manager discovered what the employee was doing. In one of the instances, a new treasurer questioned a part number on the bill and wondered what it was. In most all of these situations, it had been going on for quite a while.
Payments for Work not Performed
We can’t even begin to tell you how many of these we’ve seen over the years. A large one in Southern California involved the person running the management company for an owner. She has been in this industry for 20+ years. Again, we’ve combined the facts into one example.
FACTS:
The Association pays for services that were not rendered.
PREVENTION:
If the Board would be more diligent in reviewing the financial statements, if the accounting department (in some cases) would question why there are numerous payments “per board” or to the same vendor, same amount, but to different account codings, if the auditor would have checked closer – the larger amounts would have been discovered sooner. If the fraudster does not get greedy, it is possible for a low level fraud to continue for quite awhile.
DISCOVERY:
Change in management companies, new board member, or a new auditor – various reasons for the discovery.
Stolen Cash
Three instances of stolen cash stand out to me, so we will outline them separately in the Facts section.
FACTS:
The receptionist was in charge of getting documents to escrow and title companies when there were sales of units or refinancing by owners. She told each title company that the management company would only accept cash.
The Association charged per use fees for clubhouse use, RV parking and storage containers. The on-site manager did not require checks, but said cash was acceptable.
The Association owned the laundry machines and only one person collected the coins on a weekly basis.
PREVENTION:
With cash there are a few prevention tools:
DISCOVERY:
The receptionist was discovered when she was out ill one day and the title company brought in cash. The person taking her place thought they did not accept cash.
The clubhouse fee cash scandal was discovered after the manager left and someone wanted their deposit back.
The laundry money was tested by utility usage once a new management company came on board.
Payment of Personal Items by the Association
This example is similar to a couple of examples above, but with a little “twist”.
FACTS:
The accounting person put her own utility and vendor bills in with the Associations. Thus, instead of paying for 24 electric meters, there were 25 paid that month. When the Association made a payment to a local office supply house, she included her bill.
PREVENTION:
The person signing the check should review all supporting documentation and ensure that it agrees with the payment.
DETECTION:
Another employee of the company “stumbled” upon it when looking for something else.
Fraud Perpetuated by “Serial” Offenders…
We have seen several instances where when fraud is discovered, it is found that this was not the first offense.
FACTS:
The management company was desperate for a manager, so either did not call the former employer or ignored “warning bells” when getting answers to questions.
PREVENTION:
Make sure that you thoroughly check all references and ask as leading of questions as legally possible. If a former employer is evasive or is not willing to hire the person back, don’t always assume that the employee was “wronged”. Keep involved in a network of peers in the CA industry.
DETECTION:
In all but one case, it was discovered AFTER the frauds occurred. In one case, the manager was talking to another manager and brought up her new employee’s name, and learned the facts behind the change in employment.