Posted on February 4, 2016
By Don DeBat

There are many clues to embezzlement, but the primary clue that theft or misappropriation of funds is occurring is secrecy. Any board member, officer, or management company that conceals records and financial transaction should be suspect. Best practice would mandate association finances to be transparent to the owners at all times. The monies belong to the owners as a whole – the board officers or members.

Although fraud activity may continue for years – even decades – the typical fraud lasts for approximately two years. By the time, others become suspicious of fraudulent activity, it has most likely been going on for quite some time -and by then, and the missing money is frequently unrecoverable.

Arlen Lasinsky, director of litigation and forensics for a Deerfield, Illinois, accounting firm, describes the “fraud triangle” of white-collar crime. According to Lasinsky, the fraud triangle’s three angles represent 1) opportunity, 2) motivation, and 3) rationalization.

Opportunity presents itself when a person sits in a position of trust and control- and has access to funds. The opportunistic mechanism is engaged due to lack of oversight and proper in-place financial controls. In short, opportunity arises when one person can compromise the transaction because he or she can a) consummate, b) record, c) reconcile the transaction.
Motivation may include job loss, drug or alcohol problems, divorce, gambling problems, death of a family member, illness, or any other change in life circumstances. These all can trigger fraud.

Rationalization frequently includes an inability for thieves to see themselves as criminals. Yes, they are stealing money, but their inner voice convincingly whispers, “I deserve this.” Other rationalizing voices include, “I’ve learned this, and no one will miss it anyway,” “I’m just borrowing a little bit,” and “I’ve made so much money for this place, they owe me.”

Most cases of theft and embezzlement start out small and snowball. Flashing warning signs include the following:
• Not taking vacations;
• Being the first and last to leave the office;
• Creating a fire drill to get reports or copies of bank statements;
• Unreconciled bank statements;
• Living an unusually lavish lifestyle

Just as some volunteer presidents know nothing about how to govern, many volunteer treasurers do not know how to conduct basic accounting – and virtually nothing about budgeting. Alternatively, they know about accounting, how to create false invoices, photo-shopped bank statements and false bottoms. It’s scary, but true.

One 19-unit condominium association provided a makeshift budget to unit owners. The budget- on just one single sheet of 81/2-by-11-inch paper – simply stated, “Electricity, $250 per month, same each month – same as last year,” and so on for each subsequent category.

At that point, a few residents who actually took the time to read the numbers doubted the treasurer could perform simple math. They started asking questions, but their questions were aggressively rebuffed: “Why are you asking me questions about the budget? Don’t you trust me? Everything is on the record. How dare you not trust me?” Later, when further pressured by one unit owner, the treasurer responded with a string of expletives and indignantly walked out of the room.

This type of highly defensive behavior combined with refusal to produce documents should be a screaming red flag – with neon-flashing chase lights – to fellow board members and owners deep in the dark. By law, owners are entitled to see all bank transactions concerning their association. Sadly, too many owners only glance at their association’s minutes and budgets and never request copies of actual bank statements. As a result, gross negligence, misappropriation of funds, and theft may go unnoticed for years – even decades.

In the above case, and unbeknown to the other owners or board members, the treasurer was pilfering thousands of dollars from the association funds. In addition to secrecy and concealment, other clues include boards that “punish” owners who inquire about financial matters by levying bogus fines and legal fees, and aggressive board attorneys who defend board secrecy.
Trumped-up “embezzlement assessments” for the whistleblowers has even resulted in illegal foreclosure on some owners’ homes.

Non-board-member owners should ask tough questions. They are entitled to request records and to lobby for a financial audit. Transparency should always be of utmost priority for board members, especially in areas related to finance. Any form of concealment begs suspicion.

According to certified public accountant Kimberly Waite of Frost Ruttenberg & Rothblatt PC: “It’s not enough to elect a treasurer- every board member is responsible for every action of the board.” Board members have a duty and an obligation to watch the finances and set up controls to reduce opportunities for fraud and negligence.
Ultimately, your HOA is your responsibility. Be vigilant about your HOA’s accounting practices. Be informed and demand transparency.