While not a pleasant topic, fraud, theft, or embezzlement can happen in any organization, and volunteer organizations such as homeowners’ associations are particularly vulnerable. With large sums of money and members’ personal information at stake, it’s crucial for members to be able to easily recognize fraudulent activity and understand how to best protect their association.
The Impact of Fraud on an HOA
Why should homeowners worry about fraud within their association? Contrary to popular belief, lawsuits coupled with insurance claims aren’t always the quick fix they may seem to be. In reality, it can take years to recover lost funds, leaving your HOA unable to pay bills and complete projects to maintain and improve the community. In the likely event that banks fail to issue a loan to the HOA, special assessments may be needed to make unhappy homeowners the key to bridging the gap between lost and recovered funds.
Types of HOA Fraud
While the vast majority of boards are committed and hardworking community volunteers who serve to make their community a better place, there may be a few who behave unscrupulously, although this is rare.
Homeowners and board members alike can help protect their HOA by watching out for these most common types of HOA fraud:
- Embezzlement – Most often, this occurs when funds are secretly stolen in small amounts over a long period of time.
- Rigged Elections – When individuals join together to elect specific people to board of director positions for a specific purpose, an abuse of power or conflict of interest may occur. For example, if contracts are awarded to specific contractors or money is skimmed from HOA funds to finance a pet project. Most association’s have parameters in place to prevent these scenarios from happening.
- Bribery & Kickbacks – This type of fraud occurs when favors or monetary gifts are accepted in exchange for contracts with specific local vendors. This is a conflict of interest that most board members are careful to avoid.
- Dishonesty on Financial Documents – This type of fraud occurs when financial documents, such as purchase invoices, are altered for personal gain.
Prevention is always the best way to ensure your association is financially sound and protected from any type of fraudulent activity. Because an HOA board consists of volunteers, it’s always worth considering hiring an HOA management company.
Though an added expense, a good community manager can actually save you time and money by offering faster vendor payments, increased transparency, enhanced payment options, and accurate financial reports.
Checks and balances are a great way to implement a system of controls for financial transactions. For example, when signing checks, each signer should be obligated to review supporting documentation (check number, date, amount, etc.) and note their review in a signoff.
When to Take Action
If you are suspicious of fraudulent activity within your HOA, you must recognize that this is a very serious accusation. As stated previously, the majority of board members serve for selfless reasons and desire to make their community better. After all, they are homeowners, too!
Still, if you strongly suspect that fraudulent activity is occurring within your HOA, gather as much documentation as possible to support your claim. If possible, request copies of the association’s records, including financial documents (budgets, statements, audits), vendor contracts, tax returns, board meeting minutes, check registers, invoices, purchase orders, and governing documents.
Your state law may require the support of a specific percentage of membership, with which you can call a special meeting with the board to discuss your suspicions and review supporting documents to either prove or resolve fraudulent activity. Should this request be ignored, you can then report your findings to the police department for further investigation.