Many community associations leveling fraud charges had a single person receiving and paying bills. To stay safe, a system of checks-and-balances should be a fundamental part of day-to-day operations
FORT MYERS, Fla. – How can homeowners protect their communities from fraud? We asked an expert, as dozens of Southwest Florida Homeowners Associations (HOAs) continue to cope with alleged financial crimes.
In Collier and Lee counties, 35 community associations have filed a civil suit against their former management company, accusing American Property Management Services of embezzling funds, draining reserve accounts and falsifying financial records. And in Fort Myers, The Landings Yacht, Golf and Tennis Club is fighting to recover $500,000 allegedly stolen by thieves who accessed the association’s account with the payroll services company Paychex.
In this Q&A, Rob Caves – a Fort Myers-based attorney with the Becker law firm who has practiced community association law for 16 years – explains how to spot and prevent HOA fraud.
The following has been lightly edited.
What kinds of fraud or financial mismanagement are most common in community associations?
In my experience, the most common type of fraud that community associations experience is a person in a position of trust, without proper oversight, who then misappropriates the funds of the association. This person can be a bookkeeper, manager, board member or other owner who has been put into a position of responsibility regarding the association’s funds. In Florida, community associations are required to carry fidelity bonding insurance to protect against these issues.
What diligence should prospective owners do before buying a property in an HOA or condo association?
Buyers are entitled to limited information regarding the association. The Condominium Act states that prospective purchasers are entitled to copies, at their expense, of the condominium documents, the question and answer sheet and year-end financial information. As such, any prospective buyer should obtain the information they are entitled to, particularly the year-end financial information.
Generally, this information should disclose the overall financial status of the association. However, if a person in a position of trust is committing intentional fraud, such conduct may not be apparent from the face of the year-end financial information.
What procedures should an association board follow to safeguard against fraud?
An association should review who has access to its funds and what procedures are in place to ensure that there are checks and balances. For example, if one person is generally the person who writes checks for the association, the bank statements should not be sent to that person and/or that person should not be the only person with online access to the accounts.
In most cases of fraud involving associations, one person has control of both the funds and the account information for the funds – this would prevent the board or others from confirming that no improper payments are being made.
Therefore, the most simple step a board can take is to ensure that multiple people have access to the account information for the association, can see how and where the association funds are being spent and can question any charge that appears unusual. Further, I would recommend that any association discuss proper safeguards with its accounting professional and insurance professionals to ensure that it is implementing best practices.
Additionally, all community associations governed by the Florida statues for condominiums and homeowners associations must prepare year-end financial statements. The type of financial statement that must be prepared is based on the total annual revenues of the association.
The year-end financial statements must be prepared and provided to the owners within 90 days of the end of the fiscal year or annually on the date provided in the bylaws. However, the owners can vote to reduce the level of required financial reporting on an annual basis and the vote must be taken prior to the end of the subject fiscal year.
For residents, what are some signs that their board is on top of things? What are some red flags?
Well-run associations are readily transparent regarding the association’s finances. A significant red flag is when financial information is not readily available and not timely provided by the association. Other potential red flags are unexpected special assessments or increases in the annual assessments the owner must pay.
How can fraud at a community association affect individual owners?
Ultimately, the owners will be responsible to pay for any shortfalls in the association’s budget, regardless of what causes that shortfall.
As such, if someone misappropriates funds of the association, at the end of the day the unit owners will have to make up the shortfall either through a special assessment or higher ongoing regular assessments. Further, the misappropriation of the association’s funds may also lead to higher insurance premiums and higher ongoing operating costs for the association.
What can owners do to hold their boards accountable?
The best thing owners can do is be involved. Attend board meetings, review the association’s financial statements regularly and run for the board. Many instances of fraud involve associations with uninvolved memberships and longstanding bookkeepers who have not had appropriate oversight.
How can associations recover stolen funds, and how long can that process take?
State statutes require that the association carry an insurance policy to protect against the theft or misappropriation of the association funds, and that policy must cover the maximum amount of funds the association has at any one time. It is important that boards of directors have annual conversations with the association’s insurance professional regarding the appropriate level of fidelity bonding insurance protection.
As such, if the association experiences a loss, the statutes anticipate that there will be an insurance policy in place to protect the association. However, making claims on these policies is a complicated process and under the best of circumstances would likely take months.
Further, attempting to recover the funds from the person who has improperly taken the funds is often pointless, as they have spent the funds and do not have any resources to make the association whole. Therefore, the best thing the association can do is take reasonable steps to prevent the loss in the first place rather than counting on any ability to recover the lost funds through either an insurance policy or from any responsible individual.
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