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How to Prevent HOA Fraud, Theft, & Embezzlement

A homeowner association (HOA) is often made up of trusted friends and neighbors. However, that doesn’t make your community immune to fraudulent behavior. With over 40 million households in the United States belonging to an HOA, there is a lot of money at stake and safeguards should be put into place. Start protecting your community today by learning how to detect and prevent HOA fraud, theft, and embezzlement.

Common Types of HOA Fraud

As the size and responsibilities of HOAs have increased over the years, the potential for fraud has also gone up. While there can be a wide range of tactics used by unscrupulous board members or management companies to deceive their communities, here are some of the most common types of HOA fraud to watch for.

Theft or Embezzlement of HOA Funds

Embezzlement of HOA funds typically occurs in small amounts over a long period, and in some cases may go undetected for years or even decades - the average time is about 18 months. With HOA funds this could happen as a digital or physical withdrawal by an authorized person to their personal account or fake business account created for stealing funds.

Intentionally Lying on HOA Finances & Documents

There are numerous ways someone can lie or alter HOA documents for personal gain. For example, a manager, employee, or board member might inflate the number of items purchased on an invoice or return a purchase they have been reimbursed for and pocket the extra cash.

Bribes & Kickbacks

Often, board members control lucrative contracts for local vendors. Kickbacks can occur when a single board member, or group of members, conspire to receive gifts, favors, or money from a contractor in exchange for HOA contracts.

How HOA Fraud Impacts a Community

When any form of theft occurs within an HOA, it can have far-reaching impacts. Funds can be recovered by insurance or through other legal means, but this isn’t always the case. In some instances, it can be years before complete restitution is made. In the meantime, your association will have to continue to operate and pay their bills in full. Worse yet, when large scale fraud occurs, it may impact your association's ability to borrow money or continue to operate in the same way it did in the past.

Signs HOA Board Members Might be Stealing

Every member of an HOA board should be on the lookout for potential fraud. Some of the most common signs of HOA fraud include:

  • Bank statements & balance sheets that don't match
  • Payments made to vendors that don’t exist or who are not qualified for the services provided
  • Multiple, or unusually high, payments for unbudgeted purchases
  • Unnecessary repairs being made
  • Suspicious looking or forged signatures appearing on HOA documents
  • Lack of support for reimbursement requests, credit card statements, or general check requests

How to Investigate Suspicious HOA Activity

If you suspect theft or fraud has taken place within your association, then there are steps you can take to protect yourself. If you’re a board member, consider gathering any documents that may confirm your suspicions. Honest mistakes can happen, but it's critical you have a paper trail to establish any potential claims of fraud before the documents could be lost or destroyed.

Depending on where you live, homeowners and board members may have the right to request HOA documents, including information on financial statements, reserves, and audits. It may also be within your powers, depending on your association bylaws, to call a special meeting to discuss the possibility that theft has already occurred. In some cases, law enforcement should be involved. In these instances, you can report a theft to your local sheriff's department for investigation.

Best Ways to Prevent HOA Fraud

Prevention will always be your best option. Recovering funds after the fact is a long and painful process that will cost a substantial amount of time and money. Best practices your association can implement to help prevent theft include:

  • Limiting the access to vendor master files
  • Distributing deposit & bank statement reconciliation procedures across the organization
  • Securing check stock & printing procedures
  • Ensuring appropriate departmental supervision of employees
  • Regularly updating signature cards, PIN numbers, & authorization codes

Hiring an HOA Management Company to Help Prevent Fraud

Managing your HOA finances can require a lot of time and accounting knowledge. The problem is, HOA boards are often volunteers and don't have the time or expertise needed to handle the HOA finances and accounting properly. Outsourcing your HOA's finances can free up your board's time and, in some cases, even save you money. Other benefits of hiring an HOA management company include:

  • Enhanced payment options
  • Faster vendor payments
  • Consistent & timely financial reports
  • Increased transparency

What to Look for in an HOA Partner

While unloading the work of finances and accounting can sound enticing to many board members, proceed with caution. Not all management companies are the same. Just like your board, management companies are not immune to fraud. If you know what to look for in a community management partner, then you can significantly limit your risks and help secure your HOA's financial future. Some important things to look for in an HOA partner include:

  • Segregation of duties to protect against fraud
  • Full background checks conducted on all employees working with association funds
  • Fidelity bond coverage
  • FDIC protection

Ask About Their SOC 1

While lots of management companies will promise you the world, it can be difficult to know who you can trust. A solid control environment is necessary to help mitigate fraud. One very important step that service organizations can take is to have their control environment evaluated by a third party to provide an objective opinion about the control environment in which they operate. The most common of these evaluations for financial services is known as the Service Organization Control (SOC) Report. This report is issued by an independent CPA who follows the American Institute of CPAs (AICPA) SSAE18 attestation guidance. Before you turn over your HOA finances to any company, ask to see their SOC  report. You can see for yourself if their standards and practices are what they say they are.

Need Additional Help?

We know protecting HOA funds is essential to the long-term success of your community.  The problem is it's hard to know who to trust with your HOA finances. At Associa, we do everything possible to provide financial and accounting services your community can rely on, including hiring a third party CPA to evaluate our control environment and issue an opinion about its design which is included in the Associa SOC 1 Report. We are committed to maintaining the highest security measures, the tightest financial standards, and the broadest array of financial and accounting services in the industry. To learn how Associa can help keep your HOA funds protected, or to request a free proposal, visit our finance and accounting services page.

About the Author

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