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How to Investigate Suspicious Financial Activity in Your HOA

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Today, a homeowners’ association’s (HOA’s) board of directors depends on technology to store contracts, banking information, and other confidential documents. While digitization increases efficiency, it also intensifies the potential for HOA fraud, HOA scams, and theft of community funds. Even with checks and balances in place, like collective oversight of a community’s financials from board members and community managers, an association’s money can still be at risk.

Managing an association’s account manually and collectively elevates the opportunity for mistakes to happen, making it crucial to identify what’s human error versus ill intent. While it’s a board’s fiduciary duty to protect the financial health of its HOA, you must also remain respectful, objective, and observant. If you see something, do something. Here are steps for investigating suspicious financial activity that may be going on in your HOA, and tips for protecting your association’s finances.

Understanding HOA Fraud Signs 

As a board member, you agreed to honor your commitment to the community, doing what’s best for everyone who lives within it. In that effort, service to the HOA includes keeping an eye out for a misuse of association capital. Signs of HOA fraud can look like multiple or unusually high payments for unbudgeted purchases, payments made to vendors that don’t exist, or suspicious-looking or forged signatures appearing on HOA documents. Examples of deceit are theft or embezzlement, lying on financial documents, or bribes and kickbacks. It’s possible that a suspicious act may be merely a miscalculation or unintentional flaw, so investigating your suspicions before rushing to conclusions is critical.

3 Steps for Investigating Suspicious Financial Acts Within Your HOA

If you suspect HOA theft or fraud has happened or is happening within your association, it’s important to collect the right data and contact the appropriate people to preserve the integrity of the board. That means talking to your association attorney for general guidance and taking the following steps to confirm your belief of the suspicious activity and correctly identify the parties involved.

Step 1: Gather the evidence.

It’s easy to make assumptions about a fellow board member, a community manager, or an employee. To validate your suspicions, gather the data. Investigating fraud or theft that happened years before may be harder to prove, since vendor agreements or monthly financial records might be lost or destroyed. A community’s financial statements, reserves, and audits may reveal clues, assuming they’re still available. Some states require certain documents to be stored indefinitely, so you might find it easier to start by reviewing legal records thoroughly to prove your claim. Some legacy records include:

  • Meeting minutes
  • Governing documents
  • Legal settlement agreements
  • Legal deeds and titles
  • Tax ID issuance
  • Paperwork granting tax exemptions
  • Tax returns

While board members should have access to the community’s important documents, you can access the association’s records through a civil records request from your district clerk’s office.

Step 2: Call a special meeting.

Once your suspicions have been confirmed and adequate proof has been collected, meet with your fellow board members to discuss. Depending on your association's bylaws, it may be necessary to call a special meeting. A special meeting is rare and should only occur when something needs immediate attention or action, like addressing fraud in progress. Guidelines are outlined in the community’s governing documents, but due to the nature of a special meeting, it can take place in person, by phone, or by email, and advance notification isn’t mandatory. However, minutes should be taken and distributed. Here’s what to do at the meeting:

  • Present your suspicions to other board members.
  • Provide the factual evidence to support your claim (the documents you’ve acquired).
  • Consider an independent review of the HOA’s financials.
  • Allow time for other members to review your data.
  • Discuss all possible options or alternatives, if necessary, of what might have happened.

Once it’s clear to you and the other board members that a crime has occurred, involve professionals and take action.

Step 3: Enlist legal and financial professionals.

When any form of theft occurs within an HOA, it can have far-reaching impacts. Funds can often be recovered by insurance or through other legal means. Contact your insurance provider to review your HOA policy for theft coverage and have a CPA perform a forensic or specialized audit that looks for theft of funds. Contact your association’s attorney to pursue legal action and law enforcement if the case warrants it. In some instances, you may also report a theft to your local sheriff's department for investigation.

Tips For Protecting Your Association’s Finances & Preventing HOA Financial Trouble 

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:

  • Only accept checks made payable to the association and never to a specific board member.
  • Deposit incoming paper checks immediately and minimize the number of people who manually process any payment checks.
  • Require two signatures on a check, particularly for large amounts.
  • Keep blank check stock securely locked up at all times.
  • Confirm deposits and payments are reconciled with bank statements monthly.
  • Make sure that the association has adequate insurance coverage for embezzlement or fraud.
  • Perform background checks and verify the credentials of those authorized to handle the association’s finances.

Hire a Community Management Company to Protect Funds & More

Protecting HOA funds is essential to the long-term success of your community. When you hire a community management company like Associa, you’re ensuring the most accurate representation of your association's finances while aligning with the highest security and safety standards. Read our article, “6 Reasons Your Community Should Hire an HOA Management Company,” to learn the additional benefits of hiring a management firm.