HOA Nut House

By Pamela Dittmer McKuen, Special to the Tribune

Many community associations these days are besieged by owners who are delinquent on their assessments. That's only one recessionary woe. Boards need to be extra alert for fraud and embezzlement.

The temptations are greater than ever, said Arlen Lasinsky, a certified public accountant and director of litigation and forensic services for Frost, Ruttenberg & Rothblatt PC, in Chicago.

"The standard reasons someone commits fraud are drugs, alcohol, gambling, boyfriend, girlfriend and medical bills," he said. "Lately, with the recession, it's also to buy groceries and make the mortgage payment."

Anyone who has access to an association's assets, from petty cash to long-term savings, potentially could steal it. Most people won't. The ones who do nearly always meet three conditions: incentive, opportunity and rationalization. These conditions are known in forensic circles as the "fraud triangle."

Certified public accountant Brad Schneider, of Elmhurst-based Condo CPA, explained: A home foreclosure or job loss is incentive. A single person handling all accounting functions has opportunity. A person who feels slighted in some way may feel entitled to more money.

"The single-most effective deterrent in preventing fraud is oversight — oversight by managers, by auditors, by employees, by board members for your association," said Schneider.

Some of the ways associations have been deceived: an association's credit card used for personal expenses, checks paid according to vaguely written statements rather than detailed invoices, repairs billed but not performed, reimbursements without backup, theft of petty cash or laundry coins, summaries of bank records rather than originals, forged signatures and altered checks.

Most association frauds, when they are revealed, come as surprises to the boards, said Lasinsky.

Often there are warning signs. One is an employee who never takes a vacation or who resists cross-training, he said.

"They don't want to give their work to someone else because their fraud will be discovered," he said.

Other warning signs are employees or board members who are living beyond their means, bank statements that are not reconciled promptly, and slow collections of accounts receivable, he said.

Associations can't prevent fraud entirely, but they can establish controls, systems and policies that close off the opportunities. One control recommended by Schneider is requiring that invoices over a certain amount be approved by the board, except in case of an emergency or a utility payment.

"You need segregation of duties," said Lasinsky. "You never want to put one person in the position of consummating the transaction, recording the transaction and reconciling the transaction."

Lasinsky also recommends a bank service called positive pay. The way it works is you send the bank a record of the checks you have written. Then, before clearing them, the bank compares the actual checks to your record and notifies you of any discrepancies.

"It costs money, but this is insurance on your checks, just like you have insurance on your building," he said.

Protecting your money is easier than getting it back after it is gone. The unfortunate ending is most associations will not recover their losses, said association attorney Lara Anderson of Tressler LLP in Bolingbrook.

"You can file a lawsuit, supposing you can find the person and get them to come into court," she said. "Even if you get a judgment, it's usually worth only the paper it's printed on. Too often these people who steal money are gone immediately. It's not like they put it in a savings account and wait for you to come after them."

Recently, Anderson has seen homeowners in associations that were frauded file suit against board members for breach of fiduciary duty because they should have taken better care of the money.

"There's a legal concept called the business judgment rule," she said. "If the board makes decisions based on information and fact, and documents its actions, as opposed to doing nothing, it will not be held liable for anything that happens, including if their decision is wrong. That doesn't mean a lawsuit won't be filed, but if you use business judgment, you should be OK."

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