HOA Fraud: Know the Signs

Warning signs of theft and misuse of funds, and the safeguards Florida law provides

Community associations collect and spend a great deal of money on behalf of their owners. Still, theft and misuse of funds do occur, and they are most often found in associations where one person controls the money and nobody else is looking.

This article is general information and is not legal advice. The association's attorney should be consulted.

Common Types of Association Fraud

The schemes seen in community associations tend to fall into a few groups.

• Embezzlement. Association funds are moved to a personal account, checks are written to cash, or personal expenses are paid from the operating account.
• False invoicing. Invoices are submitted for work that was never done, for inflated amounts, or by a vendor that does not exist.
• Kickbacks. A contract is steered to a vendor in return for money, gifts, or free work on a private home.
• Undisclosed conflicts of interest. A contract is awarded to a business owned by a director or a relative without disclosure to the board and the members.
• Election tampering. Ballots or proxies are altered, withheld, or forged so that control of the board, and of the bank accounts, is kept.

Warning Signs

A single item on this list is not proof of wrongdoing. Several of them together should be looked into.

• Financial reports are late, incomplete, or never presented at meetings
• Bank statements are received and reconciled by the same person who signs the checks
• Requests to inspect records are delayed or refused
• Payments are made to vendors that no one else on the board can identify
• Round-dollar payments, duplicate payments, or checks made out to cash appear in the ledger
• Reserve balances fall without a board vote or a matching project
• Large contracts are signed without competing bids
• One director or employee resists any change in how money is handled

What Florida Law Requires

Several safeguards are written into the Florida Statutes for homeowners associations (Chapter 720) and condominiums (Chapter 718).

Annual financial reporting. A financial report must be prepared each year under sections 720.303(7) and 718.111(13). The level of report is tied to total annual revenues: a report of cash receipts and expenditures below $150,000, compiled statements from $150,000 to under $300,000, reviewed statements from $300,000 to under $500,000, and audited statements at $500,000 or more. A lower or higher level of reporting may be approved by a vote of the members as the statutes allow. A copy, or a notice that a copy is available at no charge, must be provided to the owners.

Access to records. Official records, including accounting records, must be made available for inspection within 10 business days after a written request in a homeowners association, and within 10 working days in a condominium. More detail is given in our post on who can access HOA documents.

Insurance or fidelity bond. Insurance or a fidelity bond must be maintained for all persons who control or disburse association funds, in an amount that covers the maximum funds in the custody of the association or its management agent at any one time. The rule is found in section 718.111(11)(h) for condominiums and section 720.3033(5) for homeowners associations. In a homeowners association, the requirement may be waived only by an annual vote of the members.

Kickbacks and conflicts. Kickbacks may not be solicited or accepted by an officer, director, or manager, and a knowing violation is a third degree felony under sections 720.3033(3) and 718.111(1)(a). Contracts with a director's business must be disclosed and approved as section 720.3033(2) describes.

Controls That Reduce the Risk

The following practices are widely recommended and cost little.

1. Duties should be divided, so that the person who approves an invoice is not the person who signs the check or reconciles the account.
2. Two signatures or two approvals should be required on payments above a set amount.
3. Bank statements and reconciliations should be reviewed by the treasurer or the full board every month.
4. Competitive bids should be obtained for large contracts, and new vendors should be verified before the first payment.
5. Reserve and operating funds should be held in separate accounts, and transfers should be approved by board vote.
6. A conflict of interest policy should be adopted and signed by every director each year.

The duties owed by directors are described in our post on the role of the board of directors.

What to Do When Fraud Is Suspected

Records should be secured first, including bank statements, invoices, and electronic files. The association's attorney and its insurance or bond carrier should be notified promptly, since coverage may depend on timely notice. When theft appears likely, the matter should be reported to law enforcement.

Help With Financial Oversight

Monthly financial statements, bank reconciliations, and separated accounting duties are provided for the communities managed by Condominium Associates. To talk about your association's financial controls, contact us.