Each year condominium corporation financial statements are audited. One misconception is that this audit is intended to detect financial fraud.
The annual audit can be used to detect fraud. Some condo directors, and owners, presume this and infer that a clean audit means there is no fraud. This is not the case.
The annual audit of corporation financial statements is to identify the risk of material misstatement in these documents. Misstatement can occur when expenditures are improperly classified which is unrelated to fraud. Internal financial controls can help detect fraud. While internal controls may be considered as part of the audit, no opinion on the effectiveness of these controls is presented.
The annual audit can be used to detect fraud. Some condo directors, and owners, presume this and infer that a clean audit means there is no fraud.
This is not the case.
The most effective way to detect, and deter, condo fraud is not through an annual audit. It requires proper oversight and financial controls maintained throughout the year.
- One condominium manager created invoices for a company called “American”. Cheques to “American” would be changed to “American Express” and used to pay personal American Express bills.
- A condominium manager was directing a large amount of work to one vendor. When poor work caused flooding and damage, it was found that the company was owned by the manager’s spouse. The non-arms-length transactions were never disclosed.
- A condominium manager stole $3 million from 13 condo corporations. Payments were received by the condominium manager for work done at other buildings. Funds to be invested in GICs were misdirected.
- A 15-unit condo corporation was defrauded of $400,000. The management company was provided with signing authority on accounts. Blank cheques were signed with a forged signature.
Some condo boards are heavily involved in financial oversight. They implement controls, monitor invoices and sign cheques. Detailed monthly reports are reviewed. Cash balances are continuously monitored. Questions are asked when something is unclear or looks suspicious. Other condo boards assume everything is being handled and fail to monitor the financial assets of the corporation. It is in these communities where fraud is most likely to occur.