While it's pretty much impossible for an association board or employee to commit fraud on the scale of a Bernie Madoff or any one of the herd of shysters who have tromped through the news in recent years, building boards and managers certainly aren't above scrutiny when it comes to shady business practices. Building administrators are in positions of authority and handle large sums of money—often without a lot of supervision or oversight. Fraud and financial mismanagement in a residential building can have devastating effects on residents and building alike, but it’s more than just money; the dishonesty creates a breach of trust that can be very hard to repair.
One of the advantages of association or multifamily housing is that by pooling resources, a group of people has orders of magnitude more purchasing power than they would individually. Only the mega-rich could buy an apartment building outright. A potential downside of this arrangement is that the aforementioned pool of resources may be very deep. The notorious bank robber Willie Sutton, asked why he robbed banks, said, “That’s where the money is.” Well, that’s true of community associations and HOAs, too.
“There’s a lot of money that flows back and forth from shareholders and owners through the management companies, who then pay it to the vendors,” says Jayson Prisand, a CPA with the accounting firm of Prisand, Mellina, Unterlack & Co., LLP in Plainview, New York. “The amount depends on the size of the entities, but it’s a significant amount of money in checks and electronic deposits.” And wherever there are large sums of money, says Sutton, there will be temptation.
How can you spot financial shenanigans—or just plain, honest mistakes? And what should you do if you suspect someone of shady dealings? Let’s take a look.
Kickback, But Don't Relax
Say a vendor puts in a bid to win a job installing new windows in your building. It's a lucrative contract, so to sweeten the pot and make sure the job gets sent his way, said vendor pads his bid by $2,000—and promises to kick that sum back to board president once the ink has dried on the contract. This scenario is known as a 'kickback,' and it’s among the more popular forms of malfeasance.