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Spotting Financial Irregularities Red Flags Every Board Member Should Know About

While it's pretty much impossible for a condo board, HOA or an employee thereof to commit fraud on the scale of a Bernie Madoff or any one of the greed-driven shysters who have made headlines in recent years, building boards and managers certainly aren’t above scrutiny when it comes to shady business practices. Building administrators are in positions of authority and handle large sums of money—often without a lot of supervision or oversight. Fraud and financial mismanagement in a residential building community can have devastating effects on residents and property alike, but it’s more than just money; the dishonesty creates a breach of trust that can be very hard to repair.

One of the advantages of multifamily housing is that by pooling resources, a group of people has orders of magnitude more purchasing power than they would individually. Only the mega-rich could buy a condominium or townhouse building outright. A potential downside of this arrangement is that the aforementioned pool of resources may be very deep. The notorious bank robber Willie Sutton, asked why he robbed banks, said, “That’s where the money is.” Well, that’s true of condos and HOAs, too. 

Fraud tends to happen when one player amid a larger community acquires a disproportional amount of power. “A common sign is when authority is concentrated in one person with no oversight,” says Frank A. Lombardi, Esq., a partner with the law firm of Goodman, Shapiro & Lombardi LLC in Lincoln, Rhode Island. “This can result in skimming off the top, wherein that person takes a piece of the action directly from the vendor for themselves.”

How can you spot financial shenanigans—or just plain, honest mistakes? And what should you do if you suspect someone of shady dealings? Let’s take a look.

Kickback, But Don't Relax

Say a vendor puts in a bid to win a job installing new windows in your high-rise co-op building. It’s a lucrative contract, so to sweeten the pot and make sure the job gets sent his way, said vendor pads his bid by $2,000—and promises to kick that sum back to the board president once the ink has dried on the contract. This scenario is known as a ‘kickback,’ and it’s among the more popular forms of malfeasance.

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