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.
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.
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.
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.
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:
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.
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.
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.
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.