CCAL Seminar -- Fraud in Associations

I'm at a session now on fraud in associations; there's several hundred people here, and a show of hands reveals that a large majority -- probably 90% -- of the audience has had an association that was victimized by fraud.  Clearly it's happening a lot, and it's probably only being discovered some of the time.

Multivest Management was a major case of embezzlement; one of the principals of the company managed to embezzle 3.4 million from about 50 associations over a 7 year period.

One association in the state of Ohio resulted in a $650,000 loss.

Another association was victimized by a management team where the maintenance man, in connection with the accountant, was fabricating maintenance reports and getting paid on them.  Several associations have been victimized by improper use of credit cards.  (And indeed I personally served on a CAI ethics investigation involving improper personal use of a credit card.)

Another association was taken over by a disgruntled owner who took over an association by gaining the trust of other recent immigrants; the individual obtained control, took over the management duties, embezzled and stopped paying his assessments.  The 95 unit association lost  over $130,000.

An association with a volunteer owner/treasurer resulted in the loss of more than $80,000 from a 75 unit association.

Turning to prevention ideas, suggestions include:

Segregation of duties:

First, make certain there is no comingling of your association's funds.  Have them tied to your association's tax ID;
Use a lockbox system for receipt of assessments;
Segregate and monitor the association's reserves.

Oversight:

Require duplicate bank statements an assure that the person reconciling the account is other than the one writing the checks;
Enable online account review;
Compare invoices with the corresponding checks;
If the association allows  credit card, have a low limit and monitor the invoices.

Third Parties

Get banking services from reputable lenders
Consult with a qualified agent and get adequate coverages (and remember that D & O coverage is not the same as fidelity coverage.
Hire a qualified third party CPA to conduct reviews at a minimum, and even better yet, audits.


When obtaining insurance, make certain that everyone with access to money is covered.  Be aware of what the discovery requirements are, and what will invalidate your coverage.

The secondary mortgage market is requiring coverage for three months worth of assessments; there is no penalty for noncompliance, but noncompliance will complicate the ability to finance units.