Fraud Alert Spotting & Stopping Financial Mismanagement

Fraud Alert

Given recent headlines, cooperative and condominium associations could be forgiven for thinking they need to put an armed guard and razor wire around the petty cash box. A wave of fraud appears to be hitting properties from New York to Florida and beyond.

In New York last December, a Rockland County treasurer pleaded guilty to taking more than $130,000 from an association and a managing agent last August was ordered to pay more than $628,201 to a Manhattan co-op he allegedly defrauded. A bookkeeper in Maine recently was charged with stealing $30,000 from two different condo associations. In Connecticut, a former business manager—whom police allege had a gambling problem—pleaded not guilty to stealing $226,000 from a condo association in Ledyard, home of an Indian casino. In March, a New Jersey condo association president pleaded guilty to embezzling more than $50,000 from her association, and another business manager in Florida allegedly stole more than $856,000 from five area homeowners associations.

Perhaps the largest case of fraud reported in recent months is that of a New York managing agent, who allegedly siphoned off $1.3 million in property taxes from six co-ops.

The vast majority of all of the folks managing the day-to-day operations of a co-op or condo are honest and dedicated to their tasks. But, as in any line of work, you’ll have a few bad apples who aren’t and who have little compunction about ripping off their building and community. And with the current recession grinding on, and people in all situations finding themselves in financial trouble, some may be more tempted to do wrong. So how do you keep your own building safe? What are some of the hallmarks of fraud, and how can you put a stop to it if it's unearthed in your community?

Crimes of Opportunity

If you’re a board member, there are a number of common types of fraud to be on the lookout for.

One type, says attorney Marc J. Luxemburg of Snow Becker Krauss PC in Manhattan, is bookkeeping fraud. “People who keep the financial records may write inappropriate checks. A variation is where the treasurer is enriching himself or herself at the building’s expense.”

He also mentions the possibilities of construction-related fraud. “Several types go on there,” he said. “One is for work that is supposed to be done but is not and then gets billed for; one is for work that is supposed to be done right but is done shoddily and gets billed for; and three, buildings are subject to being told they need to have work done that doesn’t need to be done.”

Carl M. Cesarano, CPA, a principal of the accounting firm of Cesarano & Khan, CPAs, PC in Floral Park, talked about several other types of “questionable activity” that dishonest employees could execute. One, he says, involves transactions that originate through wire transfers. For example, it could start with certain types of “non-recurring revenue,” such as a refund for an overpayment, an insurance refund or worker’s comp. Sometimes in these situations, he says, “the auditor is not even expecting a refund.” And in these situations, there’s a danger that the money isn’t properly processed back into the operating account, but ends up in someone’s personal account.

To cover up his or her tracks, Cesarano adds, a dishonest management employee may start to do an online transaction, such as make a deposit, but stop just short of the final “click,” then print out a screen that makes it appear that this transaction has been finished. Needless to say, it isn’t.

In some situations, he continues, the dishonest employee or manager, when asked where a certain amount of money is, could answer, “Oh, I bought a CD account with it.” But the CD doesn’t exist. The dishonest employee may take a photo of a valid CD account, then, through a computer program, “whites out” the CD number and puts in a fictitious number. “Then, when you call the bank, it doesn’t have a valid number.”

Why Do They Do It?

What would make a managing agent or contractor/vendor want to defraud a development, other than simple dishonesty? The experts we spoke to gave several possible reasons. Mindy Eisenberg Stark, CPA, CFE, of Scarsdale, says that often, the trigger is a “change in lifestyle,” such as a gambling or drug addiction.

Cesarano adds that the need for money often will lead dishonest employees to perpetuate a “lapping and kiting scam.” For example, he says, “Let’s say I manage 10 buildings. I have a problem in Building 1, I use the funds for Building 2 to cover Building 1. Then when the auditor comes, I use the funds from Building 3, and so on, using a wire transfer. Of course, at some point, it’s going to implode.”

Some buildings may be more vulnerable to fraud than others, of course. When a board pays attention to what’s going on, that cuts down on the building’s vulnerability substantially.

Often a lack of oversight and a larger bank account can combine to make fraud attractive to dishonest individuals. “A building that has a larger budget has more reserves,” says Stark. “Oversight is the key [to combatting these problems]. And internal control.”

Co-op and condo boards, Cesarano reminds us, “aren’t compensated. They’re trying to work their own jobs. When you rely too much on your agent without questioning things, without looking at these reports on a monthly basis, you kind of become a little lackadaisical. Make sure there are oversight people on the board who are looking at these things on a monthly basis, and that the managing agent has the proper infrastructure.”

`Red Flags’

There are several signs that could be considered “red flags” that a staff member, manager or service provider could be defrauding the development. One example might be vendors not being paid on a timely basis. Another could be expenses going up without an explanation. Yet another might be big-money transactions that you don’t expect.

In general, the board should pay attention to bills that are received and checks that are written. “When something comes in that doesn’t look right,” says Luxemburg, “it’s probably not right.”

So what happens if you come across evidence of fraud in your building community? Say, for example, the board, or a particular board member, investigates, and does indeed discover fraudulent practices? What should they do—and what should they NOT do?

According to the experts, one of the first steps, if not the first step, is to contact the board’s auditor and/or attorney. Cesarano says that if one board member is the one who finds out, he or she should inform the entire board. “A lot of boards have a finance committee, treasurer, assistant treasurer,” he says. “It should be brought up to the whole board.”

The board or board member should not, however, jump to conclusions. The matter has to be investigated. You wouldn’t want to prematurely broadcast your suspicions but then find out they’re not true—aside from the obvious embarrassment, such allegations could result in charges of defamation or libel.

After all, says Cesarano, somebody could have just made a mistake. “If you see something questionable, you should not just run to the DA—you should have a reason.”

In addition, says Stark, “[The board members] shouldn’t speak immediately to the target [suspect]. They need to develop a case first and find out the facts and the circumstances.”

Protecting Yourself

It's all very well to know what to do if fraud is suspected or uncovered in your building community. But how do you make your building or development less vulnerable to being ripped off to begin with?

There are several safeguards that can make fraud less likely. For example, in conjunction with its accounting professional, a board can set up a series of procedures that are designed to act as checks and balances. Oversight is key, says Stark. Board members should be looking at the monthly management reports, and as in many other fields of endeavor, “There should be no one person who could become too powerful.”

Cesarano adds that in addition to monthly management reports, cash receipt reports and bank reconciliations should be carefully monitored.

And if you have a contract with a service provider or vendor, parameters should be written into the contract to make sure that the board can monitor whether that contractor’s work and billing practices meet the building’s expectations.

“Probably the biggest unsuspected or concealed fraud goes on in the construction area, in my opinion—incomplete work, shoddy work, unnecessary work,” says Luxemburg. “The board’s check on that is to hire a reputable architect or engineer. The board should do their homework really carefully when they hire a design professional.” They should interview a number of people, not just rely on one recommendation or go with the lowest bidder on a given project.

Also be aware of the practice of “commingling” accounts, or putting funds belonging to several buildings into the same account. While it isn’t technically illegal, the practice is frowned upon by established managers and by accountants for co-ops and condos—because it makes it that much harder to keep track of the money.

What could boards learn by some of these cases? As we’ve already said, board members should read management reports, set up a system of checks and balances, make sure the proper monitoring is written into contracts, and be scrupulous when hiring professionals. Cesarano adds that “proper segregation of duties” for employees is important.

And if there’s any indication of improper activity, immediately notify your accountant and/or your lawyer.

Raanan Geberer is a freelance reporter and editor living in New York City.

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  • Our tennants assoc. Has been fighting this exact problem for years. We have recently hired our own lawyer as the corp. lawyer say he reps. the bod of dirs. only. Yet he will do business against the shareholders at the paid call. By passing all committees and checks. and balances. The tennants are truly exasperated.
  • I suspect that there are some embesselment going on in my condo association. The CPA admitted errors in his 2013 year end review.
  • The owners of our association has put there son as Manager and he does not do what needs to be done and I wonder how to handle this problem. There are only three free standing home and two duplex units. Our association is very small and it all could be handled with the proper manager. What can we do to get this done?
  • I've been a board member for 5 years.. I got elected as treasurer and we had a board president that's been president for several years doing all the boards duties and got reelected again. I was assuming to recover all records from him that has to do with the treasury. He has slowly given me some records because he comes back from work at times really late in the evening... now 5 years later I still don't get all the records from him and he has been doing my job as treasurer and after I told him to stop doing my job at a board meeting he got up and wanted to fight me. So I started to do a forensic audit of our books and found plenty of inappropriate transactions all the way back to 11 years. And as recently as the last four months of 2020 he has written close to $36,000 dollars made out to cash.. I need to know who I can report this problem too
  • I have been living in my coop for the past 34 years 0ct 1988 to date , I saved on my Coop Board during the 1990'S then my spouse got on the board for another few years. Now we have a dysfunctional board of director without a mandate for the past five years the coop lawyer was informed of the first year the president who hijacked the board was to run for another term and she failed to do so, The lawyer brough back and recommend to this dysfunctional board member a management company that was removed for poor service and corrupt practices back to our coop. I have been the main subject of attraction because I will not play ball with the current inept member of the board. We have a coop secretary whom for the past five years has yet to take any minutes of the board meeting and posted such for all to see , they even threatened me with actions of eviction because they are trying to silence me in my own home as the coop board refused to follow the governance of our coop and the coop lawyer knows it.During the pandemic on March 2020 the board had a meeting in which they did not even discussed on how to proceed with the process of making sure the building is kept clean to the maximum, I had to speak to the super to make sure he gets what was needed to protect shareholder in common areas. The agent of the building which was a former doorman in a building was an arrogant little thing that call the police on me living in my home because I asked the man a question he could not answered since he was talking to people inside our coop who are not shareholder nor does he bothered ever to rectify these issues of concerns.Our illegal since she hijacked our coop board hand picked two member to be her cronies securing vote for lack of quorum since she has taken over in 2016. we had one election since and the whole system is upside down thanks to the corporate lawyer who is too busy getting the illegal president on NY cooperator with fake news as she is using people without necessary knowledge to manipulate so she can collect her fee. Under the coop lawyer order they had refused to accept my maintenance last year they stop accepting my maintenance and then I hired an attorney, after few months they did accepted my maintenance check which is automatically don by my bank, then one month later they stopped again I am not in arrear has never been, they are playing politics and I am paying a lawyer which I want the Court to make me whole for the coop malicious intent of deceptive practices due to their failure to follow the coop bylaw as it is written ,now they are hoping for the NY State legislature to keep making changes to save their derriere ,the BCL is still the BCL contacting the Attorney general is another politic BS no one is able to help but the politician want people to vote for them while we are paying taxes as the criminal get away with murder time after time. The District Attorney Office has been contacted and waiting to hear from them ,Government do very little for the small people whom they expect to vote to be or remain in office but always give us the deaf ear.Before NY cooperator and NY Times wrote articles about bad leader in Coop they need to hear the full story on what they wrote, what about the other side they kept in the dark. during the pandemic the coop board and management had construction done in a small meeting room and to date no one ever explained how much it cost our coop too get that done in the dark we have no ideas of what is going on with or reserved yet the coop illegal president is on NY TIMES talking fake news.The leadership of my coop is like the Trump Presidency if not worse.We have illegal shareholder in our building and the board is silent one of the member of the call the illegal president to discuss about and illegal tenant six months ago she is waiting for her response ,what a shame!
  • remember I said ealier the managing agent working in our building was a doc man before becoming a building agent a job that was too much of this guy, Yet the coop illegal president accept him anyway to manage our building affairs like she did with the previous management company. what tis agent did was beyond the norm calling the police on me in these day as a black man living in my home, this could have end up any which way since NYPD have the best police officer in the nation they did not take the bait instead they were very professional and told me to stay away from this malicious guy. Just for asking this fool a simple question and the coop Board and their lawyer never condone his action, I stand for fairness to all but politic is more important for this coop board today. During the board search for management one of word other board member describe to me was the coop illegal president asked questions on whether management can handle certain shareholder behavior this was a low blow when this illegal has never participated inane annual meeting of the past therefore she had no ideas how coop board function and how shareholder have rights that a corrupt board cannot take away. ignorance is not an excuse. need to read the shareholder right and how to remain vigilant about management spending of our resources. In our coop today the illegal President and its vice president only sat down to discuss the coop bills where is the coop treasurer who need to do his duty they have no clue about their fiduciary duty they run the co-op like a bodega store. Neither one the illegal president or the illegal Vice president who told me he was no longer a member of the board since his term expired last year but still making decisions affecting our coop financially .Where are the other members who were elected to represent our investment ,where and who is the coop treasurer? I have been calling for an election for the past 5years and the coop lawyer refused to let the coop have an election are we in the Soviet Union or Iran.
  • This is the sign of a corrupt board member I suggest you contact the District Attorney office of your City economic crime bureau which has a new name now, with your documents on hand they will look into this matter give them copies, keep pursuing this president ,The late District attorney in manhattan few years went after coop management companies, board member and super including the vendors many went to jail and still to this date they are still doing the something when corruption make more sense than the shareholder value interest this is where you got to go. I was a my coop treasurer in the 1990 when I discovered fraud in my coop it was fight the president then was forced to resign and then she had 4 member of the board resign together with her that lady was a crook but in America fraud a is part of the business for some folks and these people some of them does not work they only relied on the coop funds to support their bad behavior.When you are active and seeking the truth on how the coop money is being spent you become the target of these monsters I am going thru that now as we speak ,my coop by law have been violating by this coop board with no election for the past 5 years they do things for each other on the board they never had a quorum but still have meeting and no minutes taken. They tried to use the Pandemic as an excuse for not have meeting or election yet we go out and vote for Mayor governor president and other government post . Corruption is a disease that must be eradicated but is part of the system ,if you steal,lie and Bs other people they gave you respect ,as we can see today people goes to jail once they hit the street they have them in our living room as they have no shame , so for some people crime pay it is good to commit fraud and being corrupt because the people enforcing the law does not care coop is for small people the government is looking for the billion dollars fraud million is to small as coop is in the million business standard.And we get hit hard for taxes. Also go to your community Board meeting to discuss these issues of concerns if they don't play politic you might get some assistance from them also.BUT the District Attorney economic Crime Bureau id the key they will look at it.