Unfortunately, it’s not uncommon to find suspicious financial activity in HOA communities. HOAs hold a lot of power over community life. The board and staff are responsible for managing the HOA’s finances to ensure smooth operations. Not all of them are trustworthy, though, so fraud can happen. Here’s what to do if you suspect illicit activity behind the scenes.
What are the Common Types of HOA Fraud?
Board members and community residents must know the warning signs of suspicious financial activity. Being aware can help them spot potential misuse of funds, fraud, and suspicious documents. Here are some of the common types of HOA fraud.
- Embezzlement. Fund embezzlement involves someone unlawfully taking something entrusted to them. For example, an HOA board member might steal some of the HOA funds for personal use.
- Corporate Law Violations. Violations of corporate law include exaggeration, deceit, and cooking the books. It can include lying about the community’s finances, exaggerating about its finances or operations, taking possession of HOA property without making an entry in HOA records, and fabricating or destroying records to defraud the HOA.
- Kickbacks. Board members may push vendor contracts in favor of contractors who have promised to give them money in return, also known as a kickback.
- Election Rigging. Residents may work together to rig the elections in favor of their associates or friends. Once elected, those board members may steer contracts in those residents’ favor. The residents might have a financial interest in certain contractors, receive kickbacks, or intend to siphon funds from the HOA.
What to Do About Suspicious Financial Activity in HOA?
Homeowners associations hold a lot of confidential information. They manage HOA contracts, association bank accounts, homeowners’ accounts, and other confidential documents. All of these can be hard to manage. Thus, human errors in documentation and accounting are almost guaranteed.
Many HOAs have turned to technology to make these accounts and financial documents more manageable. While technology is efficient and less prone to human error, it can also facilitate scams, fraud, and theft. Regardless of the method, HOA board members must distinguish between human errors and fraudulent activity.
What can board members or residents do if they suspect fraudulent activity in HOA communities? Here’s how to have your HOA investigated.
1. Collect Evidence
Residents who think there’s suspicious financial activity in HOA communities should start by gathering evidence. It’s not enough to accuse someone based on assumptions alone. They should validate their claims by collecting evidence of theft or fraud. Remember that if something happened years prior, it may be harder to gather the evidence as financial records and contracts might be destroyed or lost.
Here are some of the ways homeowners can collect evidence and find traces of fraud within their community:
- Reviewing Records. Community members often have the right to review the HOA’s stored records, including financial statements, financial documents, governing documents, vendor contracts, meeting minutes, legal settlements, deeds and titles, tax ID issuance, tax exemption grants, and tax returns.
- External Audit. Homeowners can verify their assumptions by asking for an external audit. In an audit, the HOA asks a third-party accounting firm or company to check the HOA’s books and records comprehensively. They may spot errors and inconsistencies that might point to fraud.
2. Ask for a Special Meeting
After obtaining evidence, residents or board members can call a special meeting. Typically, this power is granted to the board members and community members by state law. For instance, California law allows the president, vice president, or secretary to call a special meeting. Any two board members or a petition of 5% of association members may also call a special meeting. It’s also important to check the governing documents for any requirements for the special meeting.
During the special meeting, the board or resident who has gathered the evidence may present their case. They should provide factual proof to support their claims. It may be wise to consider an independent review of the community’s financials. The other meeting attendees may review the evidence and discuss potential courses of action or alternative explanations of what might have occurred.
In some cases, many of the board members and residents are involved in fraud or embezzlement activity. As a result, they might ignore your accusations and evidence at the special meeting. It may be best to take your suspicions and evidence to local law enforcement if this happens.
3. Get Professional Help
After further investigation, the board should be able to conclude whether there was a crime. If so, the board should call in a legal and financial professional to help them with the case. The board members should also contact their insurance provider and review any policies involving HOA theft. A CPA can also conduct a specialized audit focusing on theft and fraud.
In addition, the board should ask the HOA attorney to take legal action against the person who committed the crime. They may also ask for help from law enforcement should it be necessary. The HOA may also ask the local sheriff’s department to conduct an investigation.
How to Prevent Fraud and Theft
Suspicious financial activity in HOA communities is concerning, but it can be prevented. Here are some checks and balances the HOA can implement so to protect their money:
- Do not accept checks made payable to a board member
- Only accept checks that are payable to the HOA
- Deposit paper checks at once to minimize the number of hands it may pass through
- Require two signatories for checks
- Securely lock the HOA’s stock of blank checks
- Reconcile the payments and deposits with bank statements every month
- Obtain adequate insurance coverage for fraud, theft, and embezzlement
- Verify the credentials and conduct background checks on the people in charge of HOA finances
Stay Proactive
Suspicious financial activity in HOA communities is pretty common. After all, the board holds a lot of power, so they can easily take a few of the funds for themselves. Hence, it’s best to stay proactive and implement checks and balances to prevent theft and fraud from happening in the first place.
Clark Simson Miller provides exceptional remote HOA management and financial management services to planned communities. Call us today at 865.315.7505 or reach out to us online to request a proposal!
RELATED ARTICLES:
- Should The HOA Board Get Paid?
- ARC Request Denied: What Steps Can Homeowners Take
- Do HOA Late Payments Affect Credit Score?