Tuesday, May 30, 2017

Would you know if financial fraud is taking place in your community?

I was recently contacted by a condominium client to discuss a growing distrust which had taken hold amongst the board members
and management related to financial functions, particularly with regard to the reconciliation of bank statements I asked my friend and national insurance expert, Joel Meskin, to weigh in on the best way to implement a system of checks and balances to deter and detect fraud. Joel is a fellow attorney, the Managing Director of Community Association Products for McGowan and a fellow member of the prestigious College of Community Association Lawyers (CCAL).


The following is an edited version of our conversation.


DB:    Is awareness of the potential for fraud in a private residential community more important for boards today?


JM:    With the current hyper scrutiny being directed at condominium associations, community association managers and boards of directors in Florida, it is imperative that all involved be very sensitive to the heightened demand and need for transparency.  This should particularly be the case with respect to financial records.


DB:    How do financial crimes occur in community associations?


JM:    Crime in community associations manifests in many ways.  Associations are soft targets and are often lulled into a false sense of security.  Most often, associations are victims of crimes of opportunity due to the failure to use simple checks and balances.  Whether committed by directors or officers, employees or community association managers, even the best can take advantage of unchecked opportunities.  As you know, we provide director and officers' liability insurance and fidelity/crime insurance to community associations around the country, including Florida. With respect to fidelity/crime insurance, it is all about the "Checks and Balances".


DB:    Do you have any recommendations for communities regardless of their size, their budget or their location?


JM:    One thing we have found to be absent from association governance and management is conducting a standard background check on all those who will be handling, managing or involved with financial transactions.  I do not believe that it will be a prohibitive cost and I believe it will be worth its weight in gold to help instill a sense of trust and transparency at this time.  Community associations are often lulled into a false sense of security and informality when it comes to those volunteers who help manage their association. Safeguarding against this false sense of security is simple and inexpensive.


As far as checks and balances go, it is imperative that no single person has control of protocols from beginning to end, especially those who reconcile should not be making deposits.  Many of us have friends or family members who work at banks and we know that they are required to take vacations for specific periods of time to run through oversight cycles. These checks and balances are deterrents more than anything.


DB:    What kind of first party insurance coverage should an association consider when crafting a solid anti-fraud policy?


JM:    You insure the money you have.  You add up all the operating and reserve accounts, add three to six months of operating expenses and that is the limit you need. A Board also needs to make sure it ahs the following coverage:


  • Forgery and Alteration
  • Inside the Premises, Theft of Money & Securities
  • Inside the Premises, Robbery & Safe Burglary
  • Outside the Premises
  • Computer Fraud
  • Funds Transfer Fraud-this is the biggest threat these days as this is when someone hacks into the association's account and then transfers money to another account without authorization.
  • Social Engineering and False Pretense
In my client's case, Joel recommended that the association engage its CPA firm to handle the bank reconciliations for the association rather than having a board member or the manager perform that function. He also recommended an annual audit even if not currently required by statute.


A big thank you to Joel Meskin for his insight and tips on how to prevent fraud in your community association.



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