Tips for Avoiding Embezzlement and Fraud

To keep homeowners’ trust and fulfill their responsibilities to the HOA, board members need to know how to avoid fraud and embezzlement against the HOA, which can result in faulty elections and stolen funds.

While an HOA can take legal action against a person who has stolen funds or property from the HOA, legal action can be expensive, and it may take a long time for the HOA’s funds to be returned. That’s why we’re going to cover some tips for preventing fraud and embezzlement in HOAs, so you can stop the HOA from losing funds in the first place.

Know how to read the HOA’s financial documents

A big part of volunteering or working for an HOA is knowing how to analyze financial documents. Without knowing how the various documents should add up (such as the income statement, balance sheet, cash disbursement journal, and general ledger report), you will not be able to distinguish whether anything is amiss.

Keep detailed, accurate financial documents

Without accurate, detailed financial documents, the HOA won’t know how much income it has, how much money it is and should be saving, and what percentage of its income is being used for operating expenses and maintenance. And, if an HOA does not know how much money it should have, how would it discover whether some of its income is being stolen?

Keeping accurate records and monitoring each transaction to or from the HOA’s accounts is an important first step in avoiding fraud and embezzlement. Poor budgeting creates ample opportunities for board members (or anyone else with access to the association’s accounts) to take money without being caught. So, it is recommended to renew the HOA’s budget every year and review the HOA’s finances every month.

Establish controls for those handling the HOA’s finances

When one person is in charge of all the financial tasks for an association with no oversight – drafting the annual budget, accepting invoices, paying invoices and bills, balancing the accounts, and reconciling balance sheets with bank accounts, etc. – it makes it much easier for that person to commit fraud or embezzlement without being detected. They can alter or make up for any discrepancies in the books to hide any fake invoices or personal withdrawals from the HOA’s accounts.

However, by splitting up the tasks among several people, or by assigning a second person to review these documents frequently, these types of things are much easier to find, and the opportunity to commit such theft is greatly narrowed.

Share financial information on a need-to-know basis

Limit the number of people who have access to the HOA’s bank accounts—this means account numbers, debit cards, credit cards, and any other method of accessing the association’s funds, such as through an HOA’s computer. The fewer people who have the temptation of stealing the HOA’s money, the less likely it is to occur. Or, at least, the easier it will be to pinpoint the culprit.

Each HOA runs differently according to its particular needs, but if possible, consider using a reimbursement system instead of sharing the HOA’s debit card number. This way, instead of giving the social committee the HOA’s debit card each time they need to purchase event supplies, the board can use the purchase receipts to refund the committee member the appropriate amount. However, keep in mind that a reimbursement system is dependent on effectively keeping track of and recording various receipts and invoices.

Perform due diligence when hiring employees

When hiring an employee for the HOA, especially one that will handle HOA funds, it is in the HOA’s best interests to conduct background checks and drug tests on candidates. It is best to know that a candidate committed embezzlement at her last position before she is hired to be the HOA’s accountant.

Use only validated vendors, and keep track of which vendors have been hired by the HOA

By hiring only validated vendors, the HOA can reduce the risk that their vendors will commit fraud against the association. If a vendor has been validated, they have proven themselves to be a real business through the existence of tax information. Validated vendors are much less likely to commit scams or other fraudulent activities.

Additionally, the board should keep careful tabs on which vendors have been hired and approved to complete work for the HOA. This way, if a fake invoice is submitted to the HOA for payment, the board can spot it easily.

Plan and execute elections with care

A fair election will help ensure that no candidate can manipulate the vote in their favor, that results cannot be altered, and that the best possible candidates are elected onto the board. Following state law and widely accepted parliamentary procedures, such as Robert’s Rules of Order, can help the HOA use the best possible processes.

So, overall, a good defense against fraud and embezzlement consists of keeping detailed financial records and carefully controlling who has access to the HOA’s funds. Be transparent about how money is being used, but keep account information confidential.

Thank you for joining us, and we hope these tips will help your HOA protect against theft. For more helpful articles for HOA board members be sure to visit the Boardline Academy blog. Another great resource for reading more about preventing HOA fraud is the Clark Simson Miller blog.