Is Fraud Occurring in Your HOA Community?

At a glance:

• The main takeaway: HOA fraud poses a serious threat to the financial health and overall well-being of a community.
• Impact on your organization: HOA fraud could drain the community’s resources, cultivate distrust and resentment among neighbors, and potentially lead to a decline in property value.
• Next steps: Reach out to Aprio’s Forensic Services team if you have any concerns about potential fraud conducted by anyone from your HOA community.

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The full story:

Many people dream of acquiring their dream home someday, and it is a devastating fact that sometimes your HOA community can ruin it for you. Since most HOA Boards are comprised of volunteers, often lack of oversight and dependence on goodwill among those involved with the HOA community can potentially motivate wrongdoers to commit fraud. What’s more, fraud issues can also arise when a third party gets involved, such as an HOA management company. Fraud happens anywhere: even in associations established to help their communities, where you expect them to always have the community’s best interests at heart. Here are a few individual steps you can take to reduce the risk of HOA fraud in your community.

What is HOA fraud?

Homeowners Association (HOA) fraud is the misuse of HOA funds, assets, or power for the benefit of an individual. It happens when someone abuses their position for personal gain. Unfortunately, this type of fraud is sometimes hard to detect — from sudden changes in monthly dues to missing financial statements to suspicious checks.

HOA fraud can take many forms such as embezzlement, rigged elections, bribery & kickbacks, and dishonesty on financial documents. Let’s break it down:

• Embezzlement: the act of secretly stealing money in small amounts for a particular period. For example, an HOA employee or a Board member with access to funds could be intentionally keeping petty cash for their own personal gain or using an HOA credit card to purchase personal goods.
• Rigged elections: illegally interfering with the process of an HOA election, usually by tampering the counting of votes for each candidate.
• Bribery & kickbacks: bribery means giving someone a monetary gift to influence them to do something bad or illegal. A kickback is a sum of money paid to someone after doing something illegal. For example, this often occurs when specific vendors are chosen to complete work for the HOA community that may not have gone through the full due diligence process.
• Dishonesty on financial documents: the act of altering financial documents for personal gain. In HOA communities, this often occurs when a Board member may want to conceal stolen assets.

These illicit actions hurt the entire community. Fraud could drain the community’s resources, cultivate distrust and resentment among neighbors, and possibly lead to a decline in property value.

HOA fraud prevention best practices

The whole community must work together to prevent fraud. Here are some best practices you could use to prevent HOA fraud:

• Reduce the lack of oversight and dependence on goodwill by imposing strict rules and procedures to prevent members, employees, or vendors from taking advantage of an opportunity.
• Segregate duties within the HOA Board. Different persons should be responsible for different steps in the processing of financial transactions. For example, the individual who approves the purchase of a good or service should not be the same individual signing the check or completing the transaction. Control who has access to HOA bank accounts and credit cards.
• Organize fraud-related trainings for the community; awareness, detection, and prevention are for everyone’s benefit.
• Always perform multiple reviews for each invoice that comes in and out; thoroughly check all invoice details and supporting documentation by at least two different individuals.
• Invest in basic automation software that can mitigate the risk of human error. Leverage two-factor or multifactor authentication on any electronic system that you use.
• Allow homeowners access to financial records when requested. Foster an environment of transparency and accountability in the community.
• Consider hiring an HOA management company to help streamline the community’s operation. Keep in mind that strict rules and procedures for oversite should still be in place when working with an HOA management company.

What to do if you suspect HOA fraud in your community

If you are a homeowner, try to ask for support from your neighbors and request a special meeting to discuss the bylaws. On the other hand, if you are a Board member, present and discuss evidence internally first before relaying the information to the community to decide next steps.

Remember to always keep a paper or an online trail of every instance. Gather evidence such as copies of financial documents, look for any inconsistencies, and review the HOA’s governing documents to understand your right to access information.

Finally, call a forensic accountant to investigate and quantify the alleged fraud. Should the HOA organization decide to press charges, an investigation conducted by a forensic accountant can assist law enforcement in understanding the details of the alleged fraud.

An additional note to consider for HOAs: Corporate Transparency Act (CTA)

Aside from fraud prevention best practices, there is an important federal regulation that HOAs must be aware of.

HOAs must comply with the Corporate Transparency Act (CTA) regarding beneficial ownership. On January 1, 2024, the federal CTA took effect. It aims to combat financial crimes by increasing transparency around company ownership. HOAs must report their beneficial owners (and decision makers such as the Board) to FinCEN on a yearly basis.

Failure to comply with the CTA could cost HOAs a civil fine of $500 per day up to $10,000, adding criminal fines or prison time due to failure to submit requirements.

On October 1, 2023, the House Bill 919, or the “Homeowners’ Association Bill of Rights,” provided a comprehensive guide to the changes and new requirements concerning HOAs. 

The bottom line

Prevention is always the best defense. If you suspect fraudulent activity committed by someone involved with your HOA community, make sure to gather all the necessary information and prepare all the documents that can support your claim. 

Aprio’s Forensic Services team has the expertise to thoroughly assess and support your organization in the most challenging fraud cases. Our team can assist HOA organizations with:

• Investigating the alleged fraud.
• Quantifying the damage completed by the alleged wrongdoing.
• Creating a report that can help the HOA organization with next steps, whether that is updating HOA bylaws or pressing charges with law enforcement.

Have any suspicions on potentially fraudulent activity in your HOA community? Click here to schedule a consultation.

Related Resources

Steps to Take if You Suspect Fraud Within Your HOA

HOA Fraud Prevention: Red Flags Roadmap

The Federal Corporate Transparency Act Requires Homeowner Associations to Comply

A Comprehensive Guide to Key Changes and Impacts Under the Homeowners’ Association Bill of Rights

CS/CS/HB 919: Homeowners’ Associations