We put this story together by interviewing two of the people that were involved in the process. Though it actually occurred more than 20 years ago, it could have happened yesterday, or it could happen tomorrow. It is really a heartbreaking story of sorts. There were half a dozen associations involved, and while it is a board’s responsibility to protect Association assets, only one took that responsibility seriously. As a result, only one avoided the fraud.
The situation existed because the owner of a management company needed money. Motive and opportunity are two of the cornerstones of fraud, and both were present in this particular case.
Motive - Why did the manager need money? Because her daughter had contracted cancer and without expensive medical treatment, would probably die. And of course the young lady was uninsured.
Opportunity - The manager performed all accounting services for her association clients. She collected and deposited funds, wrote checks, and prepared bank reconciliations and monthly financial statements. The manager did insist that the board sign all checks “for the safety of the Association.” Because of this one fact, the associations thought they were safe.
If the board members signed all checks, how was the manager able to divert Association funds for her own personal use? The answer is a simple scam. Each time a new board was elected, the manager would make sure that new signature cards were prepared for the bank, and that those signature cards included only the signatures of board members. The manager would later obtain a second signature card from the bank, stating that the first one had been lost, and would place only her own signature on that second signature card. Only this second signature card was actually presented to the bank. The manager would dutifully have a board member sign all regular operating and reserve checks every month. To keep the scam alive and to make sure that the bank was properly recognizing checks drawn on the Association accounts, the manager would add her own signature above the board member’s signature after she had received the signed checks back from the board members. She also controlled the mailing of all checks.
The bank didn't have a problem with this because every check contained the proper signature, the manager’s signature. What the manager didn't tell the board was that she was writing additional checks made out to her company that contained only her signature. These checks were disguised in the accounting records by assigning these checks to various different accounts and using the names of actual vendors to hide the fact that the checks were in fact made out to the management company. As an example, some of the checks might have been coded as landscape extras and contained the landscape company’s name. Others might have been charged to repair or reserve general ledger accounts and would bear the name of the appropriate contractor for those activities.
If the board members didn't question too closely, these bogus checks would appear to be appropriate expenditures. Further, none of the checks individually were large enough to cause alarm. The manager also insisted that no audit or review of the financial statements was necessary since the accounting was so transparent and those services were too costly. As a result, there was never anyone to double-check the work of the manager and review the appropriateness of the underlying transactions.
There were several ways that this fraud could easily have been stopped:
- 1.Bank statements could have been sent directly to the treasurer rather than to the management company. By doing so, the treasurer would have noted the fraudulent checks.
- 2.The board could have insisted upon on annual review or audit. While there’s no guarantee that a review or audit would catch such activity, there is a strong possibility that it could.
- 3.The board could have carefully reviewed the financial statements and the budget, making actual comparisons, and questioned why there were additional unbudgeted expenditures.
- 4.The board could have reviewed bank reconciliations and examined bank statements and canceled checks. By doing so, the fraudulent checks could have been discovered.
Unfortunately, most of the associations had board members that were either apathetic, did not understand their duties and responsibilities, or did not possess the skills necessary to review and analyze the financial records. Only one Association escaped this fraud. They did it simply by having a strong treasurer who demanded monthly financial statements and bank reconciliations along with bank statements, and he looked at them every single month. The manager took no funds from this Association, for she could not have done so without being discovered.
This manager was able to steal approximately $160,000 over a two-year period. Upon discovery, she admitted to the scheme and provided details. All of the monies stolen were in fact used for her daughter's medical bills, and none were used to benefit the manager personally. That is what makes this such a heart-wrenching story. The manager ultimately was sent to prison for her crime.
One Association that suffered a relatively small loss at the hands of this manager did make a claim against their insurance company for the funds stolen under the terms of their crimes policy. The insurance agent had already been in contact with the insurance company and notified the Association that the insurance company was denying the claim. Their reasoning was that the Association had made certain representations in their insurance application regarding their practices and procedures to protect Association funds, which included reviewing financial statements and bank reconciliations and signing checks. As the insurance company pointed out, the Association had failed to perform its duties; therefore, the insurance company would not be liable for the loss. The Association’s attorney advised the insurance agent that if the insurance company would not pay under the crime policy, then a claim would be made under the board errors and omissions policy. As he said, “One way or the other, you will pay, or it will be a bad faith claim.” The insurance company paid the claim.
There are probably dozens or even hundreds of such stories similar to this one throughout the industry. This one was particularly touching simply because of the motive of the person stealing the Association funds. From the Association’s perspective, however, the lesson to be learned is that the Board of Directors needs to do its job to make sure the Association funds are safeguarded.
We put this story together by interviewing two of the people that were involved in the process. Though it actually occurred more than 20 years ago, it could have happened yesterday, or it could happen tomorrow. It is really a heartbreaking story of sorts. There were half a dozen associations involved, and while it is a board’s responsibility to protect Association assets, only one took that responsibility seriously. As a result, only one avoided the fraud.
The situation existed because the owner of a management company needed money. Motive and opportunity are two of the cornerstones of fraud, and both were present in this particular case.
Motive - Why did the manager need money? Because her daughter had contracted cancer and without expensive medical treatment, would probably die. And of course the young lady was uninsured.
Opportunity - The manager performed all accounting services for her association clients. She collected and deposited funds, wrote checks, and prepared bank reconciliations and monthly financial statements. The manager did insist that the board sign all checks “for the safety of the Association.” Because of this one fact, the associations thought they were safe.
If the board members signed all checks, how was the manager able to divert Association funds for her own personal use? The answer is a simple scam. Each time a new board was elected, the manager would make sure that new signature cards were prepared for the bank, and that those signature cards included only the signatures of board members. The manager would later obtain a second signature card from the bank, stating that the first one had been lost, and would place only her own signature on that second signature card. Only this second signature card was actually presented to the bank. The manager would dutifully have a board member sign all regular operating and reserve checks every month. To keep the scam alive and to make sure that the bank was properly recognizing checks drawn on the Association accounts, the manager would add her own signature above the board member’s signature after she had received the signed checks back from the board members. She also controlled the mailing of all checks.
The bank didn't have a problem with this because every check contained the proper signature, the manager’s signature. What the manager didn't tell the board was that she was writing additional checks made out to her company that contained only her signature. These checks were disguised in the accounting records by assigning these checks to various different accounts and using the names of actual vendors to hide the fact that the checks were in fact made out to the management company. As an example, some of the checks might have been coded as landscape extras and contained the landscape company’s name. Others might have been charged to repair or reserve general ledger accounts and would bear the name of the appropriate contractor for those activities.
If the board members didn't question too closely, these bogus checks would appear to be appropriate expenditures. Further, none of the checks individually were large enough to cause alarm. The manager also insisted that no audit or review of the financial statements was necessary since the accounting was so transparent and those services were too costly. As a result, there was never anyone to double-check the work of the manager and review the appropriateness of the underlying transactions.
There were several ways that this fraud could easily have been stopped:
- 1.Bank statements could have been sent directly to the treasurer rather than to the management company. By doing so, the treasurer would have noted the fraudulent checks.
- 2.The board could have insisted upon on annual review or audit. While there’s no guarantee that a review or audit would catch such activity, there is a strong possibility that it could.
- 3.The board could have carefully reviewed the financial statements and the budget, making actual comparisons, and questioned why there were additional unbudgeted expenditures.
- 4.The board could have reviewed bank reconciliations and examined bank statements and canceled checks. By doing so, the fraudulent checks could have been discovered.
Unfortunately, most of the associations had board members that were either apathetic, did not understand their duties and responsibilities, or did not possess the skills necessary to review and analyze the financial records. Only one Association escaped this fraud. They did it simply by having a strong treasurer who demanded monthly financial statements and bank reconciliations along with bank statements, and he looked at them every single month. The manager took no funds from this Association, for she could not have done so without being discovered.
This manager was able to steal approximately $160,000 over a two-year period. Upon discovery, she admitted to the scheme and provided details. All of the monies stolen were in fact used for her daughter's medical bills, and none were used to benefit the manager personally. That is what makes this such a heart-wrenching story. The manager ultimately was sent to prison for her crime.
One Association that suffered a relatively small loss at the hands of this manager did make a claim against their insurance company for the funds stolen under the terms of their crimes policy. The insurance agent had already been in contact with the insurance company and notified the Association that the insurance company was denying the claim. Their reasoning was that the Association had made certain representations in their insurance application regarding their practices and procedures to protect Association funds, which included reviewing financial statements and bank reconciliations and signing checks. As the insurance company pointed out, the Association had failed to perform its duties; therefore, the insurance company would not be liable for the loss. The Association’s attorney advised the insurance agent that if the insurance company would not pay under the crime policy, then a claim would be made under the board errors and omissions policy. As he said, “One way or the other, you will pay, or it will be a bad faith claim.” The insurance company paid the claim.
There are probably dozens or even hundreds of such stories similar to this one throughout the industry. This one was particularly touching simply because of the motive of the person stealing the Association funds. From the Association’s perspective, however, the lesson to be learned is that the Board of Directors needs to do its job to make sure the Association funds are safeguarded.
