Investigating Suspicious Financial Activity in Your HOA

By Joe Garza, CPA

Today, a homeowner’s association’s (HOA) board of directors depends on technology to store contracts, banking information, and other confidential documents. Unfortunately, while digitization increases efficiency, it also intensifies the potential for fraud and theft of community funds. Even with checks and balances, like collective oversight of a community’s financials from board members and community managers, an association’s money can still be at risk.

Managing an association’s account manually and collectively elevates the opportunity for mistakes to happen, making it crucial to differentiate human error versus ill intent. While it’s a board’s fiduciary duty to protect the financial health of its HOA, board members must also remain respectful, objective, and observant. If you see something, do something. Here are steps for investigating suspicious financial activity that may be going on in your HOA and tips for protecting your association’s finances.

UNDERSTANDING SIGNS OF FRAUD IN YOUR HOA

As a board member, you agreed to honor your commitment to the community and do what’s best for all residents. That responsibility includes keeping an eye out for misuse of association capital. Signs of fraud can look like multiple or unusually high payments for unbudgeted purchases, payments made to vendors that don’t exist, or suspicious-looking or forged signatures appearing on HOA documents.

Examples of deceit are theft or embezzlement, lying on financial documents, or bribes and kickbacks. On the other hand, suspicious activity may be merely a miscalculation or unintentional flaw, so investigating your suspicions before reaching conclusions is critical.

3 STEPS FOR INVESTIGATING SUSPICIOUS FINANCIAL ACTS WITHIN YOUR HOA

Suppose you suspect theft or fraud within your association. In this case, collecting the correct data and contacting the appropriate people is essential to preserve the board’s integrity. That means talking to your association attorney for general guidance and taking the following steps to confirm your belief of the suspicious activity and correctly identify the parties involved.

Step 1: Gather the Evidence

It’s easy to make assumptions about a fellow board member, a community manager, or an employee. To validate your suspicions, gather the data. Investigating fraud or theft that happened years before may be harder to prove since vendor agreements or monthly financial records might be lost or destroyed. On the other hand, a community’s financial statements, reserves, and audits may reveal clues, assuming they’re still available. Some states require certain documents to be stored indefinitely, so you might find it easier to start by reviewing legal records thoroughly to prove your claim. Some legacy records include:

• Meeting minutes
• Governing documents
• Legal settlement agreements
• Legal deeds and titles
• Tax ID issuance
• Paperwork granting tax exemptions
• Tax returns

While board members should have access to the community’s essential documents, you can also access the association’s records through a civil records request from your county recorder’s office.

Step 2: Call a Special Meeting

After confirming suspicions and collecting adequate proof, meet with your fellow board members to discuss. Depending on your association bylaws, it may be necessary to call a special meeting. These are rare and should only occur when something needs immediate attention or action, like addressing fraud in progress. The community’s governing documents outline the guidelines for a special meeting, which can be in-person, by phone, or by video conference; however, minutes should be taken and distributed.

Here’s what to do at the meeting:

• Present your suspicions to other board members.
• Provide the factual evidence to support your claim (the documents you’ve acquired).
• Consider an independent review of the HOA’s financials.
• Allow time for other members to review your data.
• Discuss all possible options or alternatives of what might have happened, if necessary.

Once it’s clear to you and the other board members that a crime has occurred, involve professionals and take action.

Step 3: Enlist Legal and Financial Professionals

When any theft occurs within an HOA, it can have far-reaching impacts. Funds can often be recovered by insurance or through other legal means. Contact your insurance provider to review your HOA policy for theft coverage and have a CPA perform a forensic or specialized audit that looks for theft of funds. Contact your association’s attorney to pursue legal action if the case warrants it. In some instances, you may also report a theft to your local law enforcement for investigation.

TIPS FOR PROTECTING YOUR ASSOCIATION’S FINANCES

Prevention is always best. Recovering funds after the fact is a long and painful process that will cost a substantial amount of time and money. Best practices your association can implement to help prevent theft include:

• Only accept checks payable to the association and never to a specific board member.
• Deposit incoming paper checks immediately and minimize the number of people manually processing payment checks.
• Require two signatures on a check, particularly for large amounts.
• Keep blank check stock securely locked up at all times.
• Confirm reconciliation of deposits and payments with bank statements monthly.
• Ensure the association has adequate insurance coverage for embezzlement or fraud.
• Perform background checks and verify credentials of those authorized to handle the association’s finances.
• Hire a community management company to protect funds and confidential documents.

Protecting HOA funds is essential to the long-term success of your community. When you hire a good community management company, you ensure the most accurate representation of your association’s finances while aligning with the highest security and safety standards.

Joe Garza, CPA, is senior vice president of client services with Associa, a global provider of community management services. He can be reached at 214-627-1450 or via email at [email protected].