How to Avoid HOA Fraud


How can landlords protect their communities against fraud? We asked an expert, as dozens of Southwest Florida HOAs continue to face alleged financial crimes.

In Collier and Lee counties, 35 community associations filed a civil suit against their former management company, accusing American Property Management Services of embezzlement, 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 payroll services company Paychex.

Related:Crooks allegedly stole $500,000 from The Landings

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 – discusses how to detect and prevent HOA fraud.

The following has been slightly modified.

What types of fraud or financial mismanagement are most common in community associations?

In my experience, the most common type of fraud community associations face is someone in a position of trust, without proper oversight, who then embezzles association funds. This person may be an accountant, manager, board member, or other owner who has been placed in a position of responsibility for the association’s funds. In Florida, community associations are required to carry fidelity bond insurance to protect against these issues.

Investigation:State regulators let APMS retain its license. Now dozens of communities are alleging fraud

Update: The state agency is taking action:Regulators seek revocation of American Property Management Services license for unpaid fine

What due diligence should prospective owners do before buying a property through an HOA or condo association?

Buyers are entitled to limited information regarding the association. The Condominium Act states that potential buyers are entitled to copies, at their own expense, of the condominium documents, question and answer sheet and year-end financial information. As such, any potential buyer must obtain the information to which he is entitled, in particular the financial information at the end of the year.

Generally, this information should disclose the association’s overall financial situation. However, if a person in a position of trust commits intentional fraud, such conduct may not be apparent from reading year-end financial information.

What procedures should an association’s board of directors follow to guard against fraud?

An association should consider who has access to its funds and what procedures are in place to ensure there are checks and balances. For example, if one person is generally the person who issues checks for the association, 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 controls 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 simplest step a board can take is to ensure that multiple people have access to the association’s account information and can see how and where association funds are spent and may question any charge that seems unusual. Additionally, I would recommend that any association discuss appropriate safeguards with their accounting and insurance professionals to ensure they are implementing best practices.

In addition, all community associations governed by Florida statutes for condominiums and homeowners associations must prepare year-end financial statements. The type of financial statement that should be prepared is based on the association’s total annual revenue.

Year-end financial statements must be prepared and provided to owners within 90 days of the end of the fiscal year or annually by the date specified in the regulations. However, owners can vote to reduce the level of financial reporting required on an annual basis and the vote must be taken before the end of the financial year in question.

For residents, what are the signs that their council is on top? What are the red flags?

Well-run associations are easily transparent about association finances. A major red flag is when financial information is not readily available and is not provided in a timely manner by the association. Other potential red flags are unexpected special assessments or increases in annual dues the owner must pay.

How can fraud in a community association affect individual owners?

Ultimately, owners will be responsible for paying any shortfall in the association’s budget, regardless of the cause of the shortfall.

So, if someone embezzles funds from the association, ultimately unit owners will have to make up the shortfall either through special dues or higher regular dues. In addition, embezzlement of association funds can 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 get involved. Attend board meetings, regularly review the association’s financial statements, and present to the board. Many fraud cases involve associations with uninvolved members and long-time accountants who have not been properly monitored.

How can nonprofits recover stolen funds and how long can this process take?

State statutes require the association to carry an insurance policy to protect against theft or misappropriation of association funds and that policy must cover the maximum amount of funds available to the association at any given time. . It is important for boards to have annual conversations with the association’s insurance professional regarding the appropriate level of fidelity bonding insurance protection.

As such, if the association suffers a loss, the statutes provide that there will be an insurance policy in place to protect the association. However, making claims on these policies is a complicated process and, at best, would likely take months.

Also, attempting to recover the funds from the person who improperly took the funds is often futile, as they have spent the funds and have no resources to run the association. Therefore, the best thing the association can do is to take reasonable steps to prevent the loss in the first place rather than relying on its ability to recover lost funds through an insurance policy or any responsible person.

Criminal justice investigative reporter Dan Glaun can be reached at [email protected] or on Twitter @dglaun.


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