Detecting and preventing HOA fraud in your community

If you are a resident living in a community with a homeowners association (HOA), you place your trust in those who help manage your association’s money: board members. That is why we know that it can be a shock if you discover someone taking advantage of their roles and taking from your association’s funds. In this article, you will find all the information you need if you suspect HOA fraud is occurring in your community, including warning signs, prevention, and specific steps you can take during these situations.
 

Types of HOA fraud

HOA scams and frauds can manifest in many ways. Five of the most common cases are seen containing the following:

• Embezzlement: Occurs when there is stealing or misuse of association funds for personal purposes. This is typically seen within board members or property managers who may take the funds from reserves or other accounts initially intended for capital planning projects, community events, emergencies, and other necessities.
   
• Kickbacks: Takes place when a board member, property manager, or anyone in a position of power within a community receives something of value (money, gifts, favors, etc.) in exchange for a contract or deal to a vendor or contractor.
   
• Bid Rigging: When the competitive bidding process for an HOA project or service is manipulated to favor a specific vendor or contractor.
   
• Election Fraud: During election time for HOA board members, this occurs when votes are manipulated to influence results. It can also include suppressing voter participation to skew the outcomes.
   
• Forgery: Includes the falsification of document signatures to approve unauthorized decisions or access funds.

What are the warning signs of fraud?

• Lack of transparency: Inquire about why the board may be refusing to show financial records or if the statements they provide seem vague or incomplete.
   
• Financial Discrepancies: Watch out for sudden increases in dues or missing funds. If you notice expenses that just do not add up, it could be a sign something’s off.
   
• Irregular vendor contracts: If you see contracts awarded without competitive bidding, this could hint at kickbacks or favoritism.
   
• Canceled or delayed meetings: If board meetings are consistently getting postponed or if decisions are made without proper discussion, it might be a tactic to keep specific individuals out of the processes.
   
• Manipulated Elections: Keep an eye out for irregularities during elections—such as suspicious ballot handling or a lack of notice about voting.
   
• Unapproved Expenditures: If you find out that funds are being used for projects that did not get community or board approval, that is another cause for concern.

What to do if you suspect fraud

If you suspect someone of higher authority in your association is committing fraud or partaking in unethical activities, you should consider following these proactive steps:

• Document all evidence and keep a detailed record of suspicious activities. Make sure to include dates, amounts, and any relevant information. Some suspicious activities can include financial discrepancies, unusual contracts, and more.
   
• Review and familiarize yourself with your HOA’s bylaws, rules and regulations, or any governing document to see if there have been rule breaks.
   
• Ask for transparency in how your funds are being used or how processes are being made. If this cannot be provided to you, assess it with the information you have already gathered.

How to report HOA fraud

If you decide to take formal action against someone who you believe is committing HOA scams, you can begin this process by:

• Verifying the evidence documents you have collected
   
• Engaging other homeowners and discussing concerns. They may also have evidence that can help back your claims and create a more robust and collective report.
   
• Consult your HOA board and notify them of your concerns. Provide them with the documentation you have gathered, request transparency, and ask for an internal investigation.
   
• Consult an attorney specializing in HOA laws who can help with your case with industry expertise. They will then guide you through the steps to take.

How to protect your HOA from fraud

1. Protect your association’s bank accounts

   Association bank accounts should be insured by the Federal Deposit Insurance Corporation (FDIC) and opened in the name of the association only never in the name of a board member, community manager, or any other individual. Money— in these accounts should not be blended with an individual’s money, and no one should be allowed to write checks to themselves or use funds for personal expenses. Your reserves and your operating funds should always be kept in separate accounts as well. Choose accounts that guarantee the safety of your funds while maximizing your return.
    

2. Require two signatures to transfer funds from reserves

   Depending on where your association is located, you may be legally obligated to obtain authorization from at least two people before transferring money from your reserve fund. (California and Nevada, for example, have such laws.) Even if no such laws exist in your area, your association should require at least two signatures to transfer reserve funds and make large purchases.
    

3. Never attach a debit card to your operating account

   Debit cards make it very easy to withdraw needed funds anytime. However, they can also make it easy for someone to make off with all your association’s operating funds.
    

4. Implement internal controls

   The person who signs checks should not be the same person who reconciles bank statements and receipts. Separating duties limits opportunities to misrepresent purchases and creates a system of oversight and accountability. Remember that just because the treasurer of your board has been entrusted to handle finances does not mean that other board members should not be involved as well. Another precaution your board may want to consider is rotating financial responsibilities so that no individuals retain control of a specific function for long periods.
    

5. Reconcile transactions promptly

   One of the simplest ways to prevent homeowner association fraud is by staying on top of the task many boards put off: tying your balance sheet back to your bank statement. The longer you put off this task, the more prolonged fraudulent activity can go unnoticed.
   
   If you are partnering with a property management company, the company will prepare your financial statements for you and provide them to your board every month.
    

6. Know your vendors

   Whether your association is self-managed or professionally managed, we stress the importance of knowing the names of every vendor your association uses. A type of fraud seen is creating and paying nonexistent vendors. For example, someone can be pocketing payments that your association is paying to a fictitious landscaping company. If you are not familiar with your vendors, you may never realize these payments are fraudulent.
    

7. Use electronic payments whenever possible

   Electronic payments limit opportunities for theft and fraud by minimizing manual money handling. If you live in a province or state that does not restrict electronic payments for associations, implementing reliable and secure property management software can make it easier for homeowners to submit their assessment fees and other payments online.
    

8. Keep financial authorizations up to date

   Since association boards include volunteers, members can change frequently. Be sure to update bank signature cards and other financial authorizations immediately when there is turnover on your board.
    

9. Get annual audits

   A financial audit is an in-depth review of your financials conducted by a certified public accountant (CPA). It helps that your association’s financial statements are complete and accurate. Although some smaller associations opt to get less comprehensive financial reviews, annual audits are critical to uncover fraudulent activity.
    

10. Obtain adequate fidelity insurance

    Fidelity insurance will protect your association in the event of criminal activity by a board member or other named person. Ask your management company about fidelity insurance that is designed specifically for associations.
     

11. Learn to recognize red flags

    Seemingly innocent behaviors can indicate suspicious activity if they occur frequently or in tandem. Make sure that board members are familiar with the signs of questionable activity so that they will recognize them if they occur. Possible red flags include:
     
    • Bookkeepers or board treasurers who are reluctant to take vacations or give up their specific duties
       
    • Late or missing vendor payments
       
    • Payments to post office boxes instead of street addresses
       
    • Frequent double payments to vendors
       
    • Missing bank statements, invoices, etc.
       
    • Copies rather than original receipts
       
    • Delayed deposits
       
    • Board members with addictions or large debt



12. Get training.

    As volunteers, not all board members are experts in finance or accounting. If your community is managed by a professional property management company, find out if it offers training to help your board members better understand financial management.

As we have seen, protecting your community from fraud is not just the board's responsibility—it can be a community effort. By staying informed, asking questions, and actively participating in our association's governance, we can help create a culture of transparency and accountability. Regular audits, transparent financial reporting, and open communication are more than just best practices; they can become the foundation of a healthy association.

To learn how FirstService Residential can support your community's vision, contact a member of our team.