Steps to Take If You Suspect Fraudulent Activity Within the HOA Board

August 12, 2022 / by HOA Manager

Groups that are run by volunteers that handle money are particularly vulnerable to fraud, embezzlement, illegal activities, and scams. HOA boards are no exception. Access to funds is a temptation that some cannot resist.

Dishonest board members can exploit the fact that most volunteers don't know the details on how to financially manage the HOA's funds.

They also know other board members are busy with family life, jobs and hobbies and may not have the time to scrutinize every transaction.

HOA board members with a bit of financial savvy can “cook the books” to embezzle money or collude with outsiders to collect kickbacks.

HOA Board Roles & Responsibilities

It's important to be clear on the roles and responsibilities of board members. First and foremost, they are a fiduciary of the homeowners association.

Being a fiduciary means they are entrusted to manage property or money (association funds) on behalf of members in the homeowners association.

Board members must act with homeowners best interests in mind.

For many board members this often means having to make tough decisions when it's required.

This doesn’t just doesn't just have to do with approving the budget or other financial decisions, but also developing and enforcing policies.

It's often wrongly thought that these decisions are just left up to the HOA board president or HOA vice president, but other board members have a role too.

What are the Duties of an HOA Secretary & Treasurer?

The board secretary oversees giving notice of board meetings and membership meetings, ensures that meeting minutes are taken and approved, co-signs checks and maintains association record keeping.

The HOA treasurer review and understands the association's financials, reports financial status at meetings, oversees operating and reserve funds, keeps and maintains financial documents, oversees deposits, investments and preparation of budgets, ensures bills are paid, and co-signs with the president or secretary.

Each board role act as a check and balance for the others, but even still, fraud does happen.

Common Types of HOA Board Fraud

  • Embezzlement - California embezzlement laws define embezzlement as the act of someone fraudulently taking property that has been entrusted to him or her by someone else. This would mean an HOA board member covertly takes the HOA's funds for himself or herself.

  • Violating Corporation Law - Deceit, Exaggeration, “Cooking the Books”: Another type of HOA fraud is related to violating California corporate law.
    HOAs are typically California nonprofit corporations called mutual benefit corporations.
    Directors of a mutual benefit corporation can be charged with a crime if they commit certain misconduct offenses within the HOA.

    This includes:
    • Lying about the HOA's finances
    • Exaggerating information about the HOA's operations or finances
    • Taking possession of any property of the corporation and not making an entry of this in the HOA's records
    • Destroying or fabricating HOA records with the intention to defraud
  • Kickbacks - An HOA board member or group within the board conspires to steer contracts to vendors who have promised kickbacks in return for the business they'll receive. Since the kickback money is a portion of the monies paid to the contractor, it's a form of HOA fraud.

  • Election Rigging - A more complex form of HOA fraud is rigging elections to the HOA board. Individuals band together to get their friends and associates elected to the board.
    Once elected, those HOA board members use their power to steer contracts to companies they own, contractors who promise kickbacks, or to skim funds from the HOA.
    People who participate in election rigging can be prosecuted for mail/wire fraud and forgery crimes depending on the circumstances.

What Can You do to Investigate HOA Board Fraud or Illegal Activity?

Homeowners who question or make accusations to whether the board's using the funds of the association correctly, can request an external audit.

An external audit brings in an outside company or accounting firm that specializes in HOA accounting, to do a comprehensive review of the books.

If you suspect fraudulent activity within your HOA board, it's important to gather as many documents as you can to support your suspicions. This may be difficult to do if you're not a member of the board.

How Do You Approach the HOA Board to Request a Review of Records?

If you aren't an HOA board member and want access to the board's records, Civil Code sections 5200-5240 allows you access to the association's records.

You can review or request copies of the following:

  • Financial documents pertaining to reserves, budgets, financial statements, and audits
  • Executed contracts
  • Written board approval of vendor or contractor proposals or invoices
  • Tax returns
  • Agendas and minutes of member meetings
  • Membership lists
  • Check registers, invoices, cancelled checks, purchase orders, credit card purchases and statements, statements for services rendered and reimbursement requests
  • Governing documents

You can also attend a board meeting and ask the Board for an audit. The HOA board members will then decide whether or not they will do an audit or just depend on their CPA's financial review on an annual basis.

HOA Board Member or Homeowner? You Can Call a Special Meeting

If you're a member of the board, and you've reviewed the association's records and suspect fraud, you can call a special meeting of members as specified in the bylaws.

If you're a homeowner, you can gather support of five percent of the membership to hold a special meeting.

If the special meeting is not held, it is a violation of California law under Corp. Code, Section 7510(e) and you can file a complaint with the Attorney General.

At the meeting, you can discuss your suspicions and any supporting documentation you may have. Call for an independent CPA to review the HOA's financials.

If no meaningful discussion takes place, or you're ignored, your next step may be to take your suspicions to law enforcement.

Steps to Getting Law Enforcement Involved

The California Attorney General's Office recommends that if you believe fraud, theft or embezzlement by your HOA board or any of its individual members is present, report it to the police or sheriff's department.

Once law enforcement investigates the crime, the case may be sent to the county district attorney's office for prosecution.

The county district attorney will then decide whether it's appropriate or not to file criminal charges.

How do you run an HOA board successfully?

The job of the board of directors is to protect, maintain and enhance the association. A trustworthy management company can help a board run the association successfully, especially when navigating a situation like fraud.

It could be that an HOA board member simply made a mistake, but if you believe there's intent to defraud, that's another matter. Steps need to be taken where intention to steal or defraud takes place.

Many HOA board frauds are perpetrated because there's no third party oversight. You can make a motion at the special meeting to hire a professional HOA manager so that a neutral third party can assist.

A reputable HOA management company can oversee finances, uncover or allay fears about fraudulent activity, as well as provide full professional management services to HOA boards.

Your HOA board is made up of a group of diverse individuals with a variety of backgrounds and expertise.

You may be fortunate to have some board members who have an understanding of the legal, financial and human resource areas of managing an association, but chances are you have some gaps.

Hignell HOA management company is here to help you fill in those gaps and gain outside perspective and clarity.

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Topics: HOA Board, HOA Accounting, HOA Law