Have you noticed that your property manager traded in his old Honda for a brand-new BMW? Perhaps your property manager’s house was recently renovated? Did a member of the Board of Directors suddenly upsize to a larger condo or purchase a vacation home? If you notice any of these lifestyle changes, or if something just doesn’t feel right, it’s probably time to act. Property management fraud is a viable threat to all property owners, making it critical to ensure forensic audit procedures are implemented regularly.
Cash mismanagement or fraud may occur on many levels of the corporation and often goes undetected for a long period of time, which is why hiring a forensic accounting is invaluable. Supplemental to any investigation, a forensic accountant can assess potential internal control gaps that threaten or compromise the financial wellbeing of your condominium corporation. A skilled forensic accountant may not only detect weaknesses in controls; they also assist in implementing effective controls to mitigate the risk of fraud. For this reason, it is important to undergo a forensic audit of your condominium corporation regularly.
The following are a few key factors to investigate during a forensic audit of your condominium corporation:
Board of Directors’ Independence
Reviewing the Board of Directors’ independence is equally as important as reviewing that of management. Trustworthy independent board members not only bring fresh ideas, but rather their motives are for the benefit of all homeowners and not self-serving. A lack of independence can lead to unfair hiring of contractors, inconsistencies in procedure application and ulterior profit motives. As a property owner, you want a Board member that is going to bring forward the best tradesman to fix a ceiling leak rather than his cousin, John Smith, who just opened a new company because he heard about the leak. Board members need to maintain their independence to act in the best interest of the corporation and all property owners.
Similar to evaluating the Board of Directors’ independence, a review of the meeting minutes is also invaluable. The meeting minutes will provide a detailed list of all discussions and ultimately decisions passed at the Board of Directors meeting. Also, minutes can disclose unusual approvals of substantial investments or patterns of approval of non-necessary or necessary work often awarded to the same contractor. Minutes may document for example, uncommon distribution of significant bonuses to property managers or board members, which may indicate money mismanagement and the misappropriation of corporate funds.
Proper Bidding Policies and Procedures
With the direction of the Board of Directors, property management is responsible for ensuring necessary repairs and maintenance of the property and for hiring service companies and contractors. It is leading practice to ensure that the decision-making authority for the board and the corporation does not rest solely on one member of the board. Further, the board and the property manager are responsible for implementing policies and procedures and other controls when dealing with services procurement.
While the Board of Directors should set a threshold as a maximum spending amount prior to requiring multiple bids and often closed bids for a specific job, this is not always the case and there could be a risk of noncompliance. Assessments of contracts above the specified threshold should take place on a regular basis. While there could be reasons surrounding sole-sourcing for a specific contract, the justification should be inline within implemented policies and procedures and proper approval should be obtained. Investigations into deviations from the internal controls may expose improper activity taking place during procurement.
Regular review of meeting minutes by an independent third-party should occur to validate those contracting decisions are in line with proper bidding practices. Moreover, all bids should be discussed openly with the Board of Directors and only board majority decisions should be executed.
Contractor Due Diligence
Proper due diligence is an extremely important step in the procurement process that is often overlooked by the property management company and/or Board of Directors. Contractors should not be hired unless the proper due diligence has been undertaken in order to mitigate the risk of fraud and avoid future liability for the corporation. For example, in the same example above with the leak, proper due diligence should have identified a company that was recently formed. Further, ownership details may provide connections between the contractor and a Board member and/or the property manager.
A forensic accountant will analyze transactions and recognize trends to identify high-risk contractors. Forensic audits will also assist in determining whether contractors are being hired at arm’s length, if the contract value is in line with market value, the legitimacy of specific transactions, and if adequate segregation of duties exists, amongst others.
Property management fraud is a growing and common reality for many property owners, calling on the urgent need to implement a purposeful forensic audit either routinely or at the first sign of potential fraud activity.
A forensic accountant has the unique skills and knowledge to validate the effectiveness of existing controls and weakness of the same. In this growing environment of fraud risk, a proactive approach can save homeowners extraordinary sums of money lost to fraudulent activities and financial discrepancies otherwise undetected by regular audits.