Preventing Fraud & Embezzlement in Community Associations

A community association is a legal entity, much like any other business organization, whether for profit or non-profit. While many residents and members of a community organization believe that fraud and embezzlement would never happen in their community, the fact is that they are just as vulnerable as any other legal entity. In some cases, even more so, due to the fact that associations are often run by volunteers who may not be as experienced in identifying fraudulent activities.

Common fraudulent tactics used against community associations include falsified bank statements or balance sheets, fake invoices to solicit payments to non-existent vendors or excessive payments for unnecessary repairs/amenities.

Depending on the circumstances, it can take multiple years for a community to recover from an incidence of fraud or embezzlement, and in some cases, some of the missing assets may never be recovered. It’s important for community associations to take all possible steps to prevent their community from being a victim of fraud or embezzlement.

Here are a few steps community associations can take to prevent fraud and embezzlement:

  • Keep financial operations transparent. Financial records and paperwork should be routinely inspected by one or more people to ensure everything seems legitimate and all board members are held accountable for any financial operations, even something as simple as ordering office supplies. Knowing that multiple people are regularly looking over the community association’s finances can help hinder fraudulent behavior.
  • Require more than one person to authorize checks. No one person should be in charge of receiving and paying invoices. Have a system in place where two parties must authorize payments. This not only prevents someone from taking advantage of an opportunity to commit fraud, but it can also serve as a way to catch any errors that may happen.
  • Secure and regularly inventory checks. Store checks in a locked safe, and take regularly inventory to ensure that all check numbers are accounted for. Parties committing will often take a check from further back in the checkbook to avoid being caught quickly.
  • Invest in training for board members. Many board members are volunteers and are not well-versed in bookkeeping. Invest in training classes for board members that cover accounting procedures and checks and balances to give them better insight on their roles in the process.
  • Conduct audits randomly. Some states or associations require periodic audits by a CPA, but it’s also a good idea to initiate your own audits on a more random basis. Situations where it may be beneficial to look over records include; following a change in management, after a board member leaves the board, after a major renovation or remodel or after recovering from a natural disaster.
  • Ensure your community associate has the right amount of fidelity insurance. This type of insurance policy protects your association from financial loss in the event of a crime such as insider theft, embezzlement, or fraud. Ideally, the insured amount should be enough to cover the maximum amount of funds the association has in their accounts.

When fraud occurs in a community association, board members are left to try and recover the losses. But with the implementation of fraud prevention procedures and comprehensive insurance protection, associations can protect their community from suffering a major financial hardship.

About Kevin Davis Insurance Services

For over 35 years, Kevin Davis Insurance Services has built an impressive reputation as a strong wholesale broker offering insurance products for the community association industry. Our President Kevin Davis and his team take pride in offering committed services to the community association market and providing them with unparalleled access to high-quality coverage, competitive premiums, superior markets, and detailed customer service. To learn more about the coverage we offer, contact us toll-free at (877) 807-8708 to speak with one of our representatives.