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Protecting Association Funds: Preventing and Identifying Fraud and Embezzlement

Learn how to prevent and identify fraud and embezzlement in community associations. Discover the reasons behind these actions, who commits them, and the steps you can take to safeguard your association's financial resources.

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Protecting Association Funds: Preventing and Identifying Fraud and Embezzlement

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  1. Welcome to the WASHINGTON STATE CHAPTER of Community Associations Institute The leading professional organization providing education, resources, and advocacy for community association living.

  2. Keeping Association Funds Safe From Sticky Fingers: How to Prevent and Identify Fraud and Embezzlement Presented by: Catherine Kuhn, CPA Newman & Associates, CPA, PC Duncan Kirk, CIC, CIRMS HUB International Northwest, LLC Theresa Torgesen, Esq.Sound Legal Partners, PLLC

  3. Questions We Will Answer • What is fraud? • Who is responsible? • Why does it happen? • How does it happen? • How can you prevent it? • What do you do if it happens to you?

  4. What is Fraud? • Embezzlement • Theft • Misappropriation • Conversion • Corruption

  5. Who Commits Fraud? • Board members • Employees - onsite managers/bookkeepers • Association Managers • Developer • Investment managers

  6. Why does it happen? Opportunity (or perceived opportunity): - Access to funds without checks and balances - Believe they can do it without getting caught Incentive/Pressure: - Need money (bills, debt, addictions) - Retribution (anger, resentment) Rationalization: - Virtuous: Just borrowing and will pay back - Vengeful: I deserve this for all the work I do

  7. How the Law Helps AssociationsCondominium Act RCW 64.34.372: • Requires annual audit • Reserve account must have two signatures • Prohibits commingling of funds • Owners access to Association records

  8. How the Law Helps AssociationsHomeowners Association Act RCW 64.38.045: • Requires annual audit • Prohibits commingling of funds • Owner access to Association records • Requires turnover of records immediately upon termination of management RCW 64.38.065: • Reserve account in name of Association • Board responsible for reserve account

  9. How the Law Helps AssociationsWUCIOA RCW 64.90.530: • Requires annual audit • Prohibits commingling of funds RCW 64.90.535: • Reserve account under direct control of Board, administered by Board RCW 64.90.470: • Fidelity insurance required RCW 64.90.495: • Owner access to Association records • List of records that must be kept and how long

  10. Management Companies • Service your Associations well! • Not meant to cast in a negative light • Instead: • Increase awareness and healthy skepticism • Controls to prevent fraud

  11. True Story: • SoCal • Sept, 2013: Management company owner and CFO arrested for allegedly embezzling $900K from Big Sky HOA (Simi Valley) • Master planned community, 800 homes • Theft, forgery, ins fraud, criminal conspiracy

  12. And there’s more……. • Management company managed 50 communities (Ventura/Orange Cty) • Losses reported from these communities • Fall 2013: CEO charged with another $700K embezzled from Oak Park Calabas HOA.

  13. It takes time….. • Big Sky started with Mgmt Co: Feb 2008 • Board discovered thefts: Oct 2009 • CEO then opened a NEW company! Arrests did not occur until September, 2013

  14. Not easy to prosecute: • Enormous volume of paperwork • Complexity of financial evidence • Jurors become “bored”/difficult to sort through and decipher the evidence

  15. HOW did she/they do it?? • Inflated management fees/falsified management contracts • Ancillary services not justified • Invoices payable to Mgmt Co, no back up • Mgmt Co had control of reserve cash accounts • Bank statements NOT provided to Board! (regular a/c AND CDs!) No scanned checks with bank statement

  16. How did she/they do it? • Financial Statements NOT provided to Board • Bank Reconciliations NOT provided to Board • Buried them in non-essential paperwork: Excessive delinquency info

  17. How did they CATCH it? • New Board Member (Big Sky) • Reviewed Monthly Financial Packet • Asked questions! • Asked other Board members to review inconsistencies noted

  18. Potential issues CA Industry: • Kickbacks • Vendors pay extra amt to Mgrs/BOD members • Corporate Credit Cards • Non-Assn costs • Statement not reviewed

  19. Potential Issues….. CA Industry • Paying for work not performed • Paying for same work or materials multiple times • Payroll for non-existent employee • False expense reports or invoices

  20. An ounce of prevention… • BOARD governs financial affairs, not the Mgmt Co • Read monthly financial package! • Balance Sheet • Income Statement- Budget to Actuals • Cash account statements/recons • Accounts Receivable detail (Delinquencies) • Expense support

  21. Prevention…. • Signing Authority: • Reserves – Board • Operating- MC • BOD Review invoices/checks

  22. Prevention……. • Reserve expense approvals and other material transactions- approve in the Board minutes • Review Mgmt and other Contracts carefully • CPA audit (May be required)

  23. The Rest of the Story…. • March, 2016: (Ventura County Star) • CEO sentenced to 12 years in state prison (Big Sky and Oak Park Calabasas) • DA claimed $1MM Big Sky, $600K Oak • Seeking $1.4-3 MM in restitution • CFO- 180 days/jail

  24. Protecting Against Loss if Prevention Fails • Fidelity Bonds/Employee Dishonesty • Common Misconceptions • Who to cover? • How much to cover? • What a management company’s bond covers? • What a bond for your association covers?

  25. COMMON MISCONCEPTIONS • Our management company handles all the money • We don’t have any employees • Our management company has coverage

  26. WHAT DOES THE MANAGEMENT COMPANY COVER? • Fidelity bond or employee dishonesty coverage protects business owner from theft of business’s money or property by business’s employees • Boilerplate policy does not extend to money of an independent organization whose funds the manager handles

  27. AN ASSOCIATION NEEDS EMPLOYEE DISHONESTY/FIDELITY BOND Protects the insured from loss of money or other property due to the dishonesty of an employee

  28. WHO IS AN EMPLOYEE? Who should be covered? Compensated employees Directors & officers Management company

  29. Crime Insurance Coverage Employee Theft Forgery or Alteration Theft, Disappearance or Destruction Computer Fraud or Wire Transfer

  30. Crime Insurance Coverage What might give rise to no coverage?

  31. EMPLOYEE DISHONESTY/FIDELITY BOND Declaration should have requirements FNMA requirements – 3 months assessments plus reserves

  32. What if the Safeguards Fail? Contact CPA Contact police Contact insurance carrier Contact attorney

  33. Questions? Catherine Kuhn, CPA Newman & Associates, CPA, PC cathy@hoacpa.com Duncan Kirk, CIC, CIRMS HUB International Northwest, LLC Duncan.Kirk@hubinternational.com Theresa Torgesen, Esq. Sound Legal Partners, PLLC Theresa@SoundLegalPartners.com

  34. CAI and theWashington State Chapter of CAI Working Together to Serve You Locally and Nationally www.WSCAI.org 425-778-6378 www.caionline.org 1-888-224-4321

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