Protect your condominium community against fraud
The following guest post is by Athena Mailloux, a fraud examiner at ZAP Consulting Limited. Athena shares some practical solutions to help condo directors keep their new years’ resolution to be vigilant against fraud.
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Whether you are a large business corporation or a sole proprietorship you can never be too cautious when it comes to protecting against fraud. Condominium corporations have no less of a responsibility in protecting against fraud than a publicly traded company. In fact, condo corporations are often relatively small, close-knit communities that may lack stringent internal controls and thus be more susceptible to fraud.
Organizations such as condo corporations need to be even more vigilant for deception and fraud in the wake of the recent economic downturn. A Google search for “condo fraud” returns an almost endless list of fraud instances in condo communities, many of which could have been prevented by simple due diligence and good corporate governance. The fraud instances listed range from fabricating invoices for maintenance and repair work to illegally selling parking spaces and misappropriating trust funds. Frauds were committed by employees, members of the board of directors as well as vendors taking advantage of an opportunity to defraud the condo corporation.
It is important to remember that the cost of protecting against fraud often outweighs the damage resulting from it. For example, it typically costs less than $100 to obtain a background check (with consent) on a potential employee, member of the board of directors or vendor, whereas the damage done by a fraudulent employee, director or vendor may far exceed that amount.
The following simple, cost-effective internal controls can go a long way in protecting your condo community from fraud.
Accounting and Finance
1. Use a secure, password-protected accounting system to track transactions. This type of software can be purchased off the shelf at any retail office supply store. The corporate auditor should be the only one with the “accountant” password.
2. Set up all corporate financial accounts to require two signatures for all transactions including cheques. Often it is wise to have one of the signing authorities be a board member and the other the property manager.
3. Cheques used by the corporation should be of the pre-numbered variety. Cheques should be locked away when not in use.
4. Wherever possible expenses should be paid for by cheque.
5. Avoid issuing corporate credit cards. If corporate credit cards are in use, carefully scrutinize each transaction on credit card statements.
6. Depending on how active your condo corporation is, set up a policy that all cash transactions (no matter how small) must be recorded daily and deposited either daily or weekly.
7. Keep a petty cash amount on hand for emergencies. Often less than $50 is sufficient. Track all usage of these funds through “petty cash slips”.
8. Any investments of corporate funds should be made through a reputable and licensed broker. All investments should be purchased in the name and address of the condo corporation only and no other names should appear on the instrument.
9. Financial statements should be presented to the board of directors on a monthly basis. It is the responsibility of the board to satisfy themselves that the statements accurately reflect the condo corporation’s financial status.
Hiring and Contracting Process
Ensure that you have a competitive hiring process in place. Interview or invite bids from at least three separate people or corporations. Once you have narrowed down the selection process to the three top candidates, get their consent (in writing) to perform a due diligence check, which may include any or all of the following:
- Criminal background check
- Credit check
- Previous work experience
- Reference(s)
- Driver’s License Verification
- Any other type of due diligence that may be required.
Insurance
The condo corporation and its manager should have adequate fidelity insurance policies in place that cover all employees, management and the board of directors. What counts as adequate insurance may be debatable, but a good rule of thumb is to insure at least up to the value of all funds and assets that could be at risk. Obtain legal and financial advice to make sure the condo corporation has proper coverage.
Be Proactive
Adequate measures to prevent and protect against fraud are essential for every organization, including condo corporations. Failure to have such measures in place can lead to disastrous consequences and potentially huge losses for your condo community. The benefits of adequate protection against fraud far outweigh the costs.
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Mr. Payne then provides some simple but essential suggestions to help minimize fraud and recommends that all associations vigilantly protect against director conflicts of interest and carry fidelity insurance to ensure recovery in cases of theft. These are all good suggestions and are worth revisiting during these difficult times. Read the entire blog entry 
Members of the committee that drafted these guidelines include the most prominent auditors on the local condo scene. Most have audited the books of hundreds of condo corporations and face the unit owners at dozens and dozens of annual general meetings each year. These folks know their stuff. 