When condo fraud occurs signals have been missed. There are enough people involved in the management of a condo corporation – directors, owners, manager and management company – that someone should be able to identify signs something is amiss.
Manipulating financial records, accepting kickbacks and fraud cannot be undertaken without leaving evidence. Failure to recognize this evidence is the result of improper oversight, lack of transparency and/or inadequate vigilance.
Indicators of potential condo fraud may be noted during an annual audit or through monitoring of daily activities.
- A condo corporation should consistently cover its operational expenses and add to its reserve fund – failure indicates a problem with the budgeting process
- Reluctance to provide information or documents relating to condo finances
- Delay in providing details about financial transactions
- Consistent shortfalls without a clear explanation
- Major projects consistently over budget
- Close relationships between directors, managers and vendors
- Accounts that don’t balance possibly because of missing cash
- Expenses that have increased dramatically without a known reason
- Multiple repairs for the same item may indicate overbilling
- Missing supplies may indicate the corporation is paying for items delivered elsewhere
- Unexplained adjustments to bank reconciliations that don’t balance
- Vendors unwilling to provide services due to non-payment
- Unanticipated transfers between reserve and operations accounts
Cash accounts can be siphoned off by presenting fraudulent transactions and improper disbursements. Both operations and reserve fund accounts have significant funds and should be monitored. Avoid giving complete control over disbursements to management. Requiring at least one director to sign checks after reviewing submitted invoices deters criminal activity. For larger transactions requiring signatures of two directors is advisable. Understanding the cash flow process and monitoring anticipated cash balances provides an early warning about potentially improper transactions.
The annual audit of condo corporation records is not intended to identify fraud. A financial audit, time consuming and costly as it may be, offers an opportunity to have records and processes reviewed with an eye toward detecting fraud or criminal acts.
Separation of duties can be one of the more effective ways to deter fraud. The individual arranging services and recording bills should not be the same person who pays these bills. Have cheques signed by a third individual who first reviews bills and invoices.
When fraud is suspected, a forensic audit can help identify fraud and provide evidence of wrongdoing.
While it may be impossible to stop fraud, it is certainly possible to quickly identify and deal with it. This discourages future attempts at fraud and protects condo corporation assets.