Checks and Balances – Prevent Fraud
More board involvement can help prevent fraud.
Dec. 27, 2012
Featured in Habitat Weekly – Authored By Mindy Stark
Easy money is an equal-opportunity temptress, and with a lot of hands in the corporate cookie jar, co-op and condo boards need to be on the lookout for fraud.
Fraud takes many forms. Anyone can be implicated: managers, professionals, contractors, even board members. You can be more vigilant against double-dealers and thieves by familiarizing themselves with the ways people can lie, cheat, and steal to snag a few extra bucks from your budget.
Secretive practices by managers or board members are cause for alarm. Oversight by diligent boards can help protect against the various flavors of fraud that can be perpetrated by bad-apple board members and managers.
- Some of the most common schemes and their antidotes include:
Checks payable to cash: Get copies of all checks along with your monthly bank statement. - Invoices from nonexistent companies: Inspect every paid invoice; if you have doubts, Google and call the company to make sure it exists. Kickbacks from legitimate vendors: Enlist your engineer to help compare bids to invoices, and get documentation for all cost overruns.
- Phantom employees: Keep an up-to-date list and call regular employee meetings to count noses.
- Bid-rigging: Make sure all bids are opened by a board representative, not by the managing agent, and rotate bids to different vendors. Check references. Make sure bidders exist.
- If your precautions fail to catch a thief and you discover that your co-op or condo has been defrauded, there are several steps the board should take.
- Protect the evidence. Collect all bank records, computer files – checkbooks and other relevant records.
- Inspect the crime scene. Have a forensic accounting conducted by a CPA who is a certified fraud examiner.
Decide how to proceed. You might try to recoup the loss directly from the thief, but this rarely works and can even be risky. You should probably get ready to go to court.
At this point, the board must decide if it wants to pursue the matter in civil or criminal court. A lawyer with fraud experience should be able to advise you, but there are a few simple things to keep in mind.
In civil court, your lawyer works for you at your expense. You make the decisions, while your lawyer collects evidence and talks to the defendant. If you win, you will receive a money judgment.
In criminal court, a prosecutor works the case without charging legal fees, but may decide not to pursue your case at all. The more egregious or compelling the details, the more likely they’ll take your case. You make no decisions, and the defendant may refuse to talk. If convicted, the defendant will be sentenced and you will probably receive a monetary judgment. Whether or not you ever receive any money is another matter.