HOA fraud is sadly not uncommon, even within the board of directors, managers, or people who should have the HOA’s best interest at heart. People may think that it isn’t as common within communities, however since associations deal with a lot of money, they are not immune to fraudulent activity and can actually be even more vulnerable to them.
A case of fraud occurred this year within The Hammocks Community Association whose “ex-board members accused of siphoning $2M from the association, revealing holes in state regulations“.
Even when HOA fraud is not as extreme as the examples above, any theft and illegal activity can cause significant harm to an HOA.
In this article, we will cover the main signs of HOA fraud and how you can help to prevent them.
HOA Fraud: Embezzlement
This occurs when HOA board members misuse the funds of the community, which were originally directed to helping the association itself, to benefit the members themselves. They can either redirect residents’ dues for their own individual purposes or they can use any service that the HOA provides for their own gain.
Ideally, there should be a separation of tasks to manage internal controls. This could include the approval of a check, bank access, accounting information, and monitoring results, where each of these duties would be managed by a separate company or person. However, as this can be costly, two or one person might be in charge of this entire process, and the risks of embezzlement occurring are much higher.
Signs of embezzlement:
Common indications of HOA embezzlement are when budget dues have dramatically increased in order to cover the fraudulent actions, no access to the original bank statements, or the financial statements are either not provided or limited.
How to prevent embezzlement:
It’s important to always review and check everything that is happening with the board’s money and how it’s managed. Review the budget, be transparent with homeowners in terms of financial information, reconcile bank statements, and approve and analyze checks frequently.
Election fraud
Board elections are crucial to ensure that everyone has a say in finding the best-suited people for the board. So, it’s imperative that these elections are transparent and conducted honestly because HOA frauds are even more susceptible if the individuals leading it are committing illegal schemes.
There are many ways that one can manipulate voting elections. Either through intimidating homeowners to vote for them or even altering the ballots to ensure that a certain candidate wins.
While this happens to ensure financial benefit to a certain individual or for power, sometimes it can happen accidentally as election errors are always possible.
This is why it’s important to know how to prevent election rigging.
How to prevent election fraud:
Online voting is a great way to reduce election fraud since people will be more likely to participate since it’s digital and as a machine is operating the vote, errors are less likely.
Kickbacks
Kickbacks also referred to as bribes, are illegal payments for added benefits or preferential services. This occurs when a service or company offers something — which could be a gift, money, or favors — in exchange for a contract.
This has several issues for the association. If a board of directors only contracts vendors who offer kickbacks, the number of companies in the field decreases. For residents, costs may increase and the service provided could be worse. Also, if discovered, HOA could be embroiled in a legal battle that is expensive and difficult.
How to prevent kickbacks:
As a way to avoid conflict of interest, having the board vote on the vendors being contracted will reduce the likelihood of a board member accepting bribes from a certain company.
You could also have committees that could find and recommend good vendors to the board.
Finally, if a company is linked to a board member, the board member should be transparent so there isn’t a conflict of interest.
Lying or forging HOA records
One of the easiest ways of covering up HOA fraud is by falsifying records. The guilty party may also lie about financial records to either exaggerate them or decrease them significantly so that they can add more money to their own pockets. In other cases, they destroy evidence in order to hide what they have been doing.
How to prevent lying or forging HOA records:
In order to prevent any misuse of financial records, many HO’s will have their residents send their checks directly to the HOA’s bank — this is also known as a lockbox. It’s also important to make sure that the association is spending its money consciously and that its budget matches its expenses.
Wrapping Up: HOA Fraud
Every association is susceptible to fraud and sadly it is common. Embezzlement, election frauds, kickbacks, and lying on documents are all extremely damaging to an HOA and can negatively affect the productivity and quality of a community. Fortunately, however, by implementing the right preventive measures, you can lower the chances of any fraud or illegal activity occurring in your HOA.
