Protecting The Association
PROTECTING YOUR ASSOCIATION – SHELL COMPANY SCHEME
By John H. Stroemer, CPA, CFST, CAM, GRI Managing Partner, Stroemer & Company
They say “if you’re not happy with it, fix it,” so when you are not happy with your Association, you join the Board. You have now volunteered to play contractor, lawyer, and accountant…oh my. With this comes great responsibility, protecting your Association and all the homeowners.
One of the first steps is hiring a reputable management company. Not all management companies are the same. A quality company is vital in overseeing the finances and economics of the Association. One of the major reasons Associations are subject to high fraudulent activity is inadequate checks and balances, meaningless segregation of duties, and fewer basic accounting controls. Although no one wants to believe they employ deceitful people, sometimes temptation or personal financial pressures can push even the most trusted employee into perpetrating fraud. There is little control over employees’ motives to commit fraud, but it’s the management company’s job to limit the opportunities.
We have seen the number of fraud cases rise substantially. The most common are accounting related, one being the “Shell Company Scheme.” An employee sets up a shell company and bills the Association for goods or services it does not receive. We have seen this first hand. An accounts Payable clerk set up a corporation online. He created a name that was very similar to one of the Association’s largest vendors. He then installed QuickBooks on his home computer, created false invoices and mailed them to the management company. The receptionist would check the mail, open the invoices, and put them in the accounts payable inbox. The mischievous AP clerk would then process the invoices, cut the checks and give them to management to sign off. Management, trusting this AP clerk who had been with them for years, never even looked at the checks. He signed them and gave them back to mail out. A couple days later, the clever AP clerk had a nice check.
We discovered this fraud while performing the Association’s annual audit. However, audits are not intended to uncover fraud. If you believe fraud is occurring in your Association, we would be engaged to conduct Agreed Upon Procedures (forensic work), where we would dissect the books and records to discover misappropriations. There are patterns to every fraud case. The best way to protect your Association is to surround yourself with reputable vendors, starting with a respectable management company. For more information on preventing or identifying fraud, contact Stroemer & Company at 1-855-STROEMER.