Thursday, January 28, 2010

Recognizing the Fraud Triangle.

One of the areas I cover in my educational programs is teaching boards and managers to recognize the "Fraud Triangle" and what it can do in their communities if left unchecked.

The Fraud Triangle consists of: Opportunity, Pressure and Rationalization.
Opportunity presents itself when a person sits in a position of trust in a community. That trust allows the potential fraudster access which is shut to outsiders.

Pressure presents itself when outside forces wreak havoc on the potential fraudster. This pressure is almost always economic and usually arises in the form of a job loss, divorce, death or illness of a family member, gambling or other addiction problem.

Rationalization allows the fraudster to not see himself or herself as a criminal stealing money from people but rather as someone simply righting the wrongs of the universe. The typical fraudster thinking in this regard usually falls along these lines: "I am overworked and underpaid so this balances things out." "I am just borrowing these funds and will return them at a later date." "They'll never notice, they have so much money."

By the time you become suspicious of a potential fraud, it has usually been going on for quite a while. The typical fraud lasts for 2 years; at that point the fraudster starts getting weary or sloppy. So what can your community do to pick up on these signs and discourage fraud in the first place?

We could discuss this topic over many blogs but for now, here are some easy and preliminary steps you can take:

1. Always have a system of checks and balances in place. Dual signatures on checks, more than one set of eyes on the books, proper advance screening of employees;

2. Make sure you request that your bank provide duplicate statements directly to someone else other than the person handling your books. Why do this? A case out of Michigan dealt with a bookkeeper who received the bank statements and then cooked up a duplicate set on her home computer to present to the board. Having dual statements sent out would have prevented this fraud.

3. If you have an association credit card, keep the limits very low. Always check receipts against the statement and scrutinize receipts submitted for reimbursement to see if any personal or odd items are included in the reimbursement request.

4. Proper fidelity bonding is a must. Fannie Mae guidelines suggest carrying bonding in the amount of 3 months' of assessments plus any reserves on hand. Speaking of reserves, check those accounts religiously. If you've been told you have $50,000 in the painting reserve, make sure that it really true.

5. Not every Employee Practices policy is created equal. Some require that you successfully prosecute the fraud before you can recover under the policy. It is also important to remember that board and committee members are not considered employees of the association so you will need endorsements to your policy to cover that loophole.

If someone wants to steal from you, they usually can do it, at least for a while. However, with some advance planning and foresight, you can make your community a much more difficult target for a potential fraudster!


  1. [...] Increase your vigilance. Florida condo lawyer Donna Berger highlights some telltale signs of fraud and how to spot them [...]

  2. Thanks for this very important information. However how do you catch 3 women that hold a seat in the HOA Presidency, and have heard or seen suspicious activity going on with these 3 women, who either 1 don't hold down full time poisitions, other then being Mother's and 2 if their husband's aren't seen holding down or seemingly to hold down a full time position? And you or the community suspect fraudulent behavior of HOA funds being used to fixing up the insides of these 3 women who hold the Presidency seat. They are now wanting to giving it up to other's within the community, but not willing to asking those of us who have experience, only asking those who hold the same or similiar belief system or religion?
    This is what is seemingly happening currently in our neighborhood and no one is able to affording a lawer to doing the leg work to checking out these 3 women to seeing if they have been on the up and up for the years that they've all been in the Presidency. What can one do at this point? As the deeds have already been done.