What condominium directors need to know about preventing fraud.

On Thursday 29 January 2015 the Yonge Corridor Condominium Association
hosted a presentation: Fraud, Corporate Governance for Condominium Boards that was jointly presented by Regan Ruslim of Dunsmore Wearing LLP and Alan Mak of Feruson + Mak LLP.

Approximately three dozen condo directors were in attendance for this excellent 90 minute presentation.

Condo fraud is rampant
Ann-Marie Ambert is correct to say that the Yonge corridor strip is prone to fraud because there are a large number of condominiums along this strip.

Why fraud is rampant?
There are several reasons. Condos are often managed by well-meaning volunteer boards that lack business experience. The Condo Act has a lot of holes in it and there are lots of players involved in a condo corporation

As an example, we were told of a condo corporation that hired a resident to be the engineer for a project. He then hired other residents to be the contractors. They then worked together to gain control of the board of directors. A friend of this group got the cleaning contract.

While the directors got their units repaired and upgraded for free, the Reserve Fund dropped by $500,000 and the banks stopped providing mortgages for the corporation. One unit sold for $40,000.

Fraud triangle
Fraud starts with:
Pressure One or more people hunger for more money.
Opportunity The condo has lax controls so it is easy to steal money, services or goods.
Rationalization The perpetrators rationalize why it is acceptable to steal from the condo corporation.

Ways fraud occurs
Diversion of cash transactions Someone rents the party room and pays cash. Someone else pays to rent a parking spot. This cash does not go to the condo but into someone's pocket.

One manager was in charge of three condo buildings, each with over 500 units and he stole from all three of them. Cash can be paid for the use of guest suites, paying monthly fees or to pay off chargebacks.
Defalcation of property Items are purchased and they disappear. No one knows where they went.

At one building refrigerators were ordered for a few units. One frig was sent from the store straight to the manager's house. The new manager never found out where the other refrigerators went but they were not delivered to the corporation.
Incompetence Sometimes it is not stealing but incompetence on the part of a director, employee or a manager. There are lax controls, a failure to maintain records and a failure to collect arrears.

The board's duties
The board's responsibility is to limit the opportunities for fraud by having rigorous internal financial controls.
Key risks Identify the areas where the corporation may be at risk and put in processes to eliminate these risks. There can be collusion, inadequate separation of duties and/or inadequate segregation of control authority.

One manager was hiding the amounts that certain vendors were receiving by submitting huge numbers of invoices for small amounts. It is a good idea for the treasurer to ask for a list of cheques by vendor.
Operation controls Put in a set of controls that will detect any missing funds or goods.

Allow owners to attend board meetings. (They can observe but must remain silent.) Allow the owners to examine all the corporation's records that are not restricted for legitimate reasons.

One manager was asking all the contractors submitting quotes on a job to pad the quotes by a given amount because he wanted his house painted.

If the directors are using contractors that work for the board to do work in their units, disclose this at a board meeting and have it recorded in the minutes.

The best controls is to allow owners to attend board meetings.
Share information Talk to the directors at nearby condos and compare the costs they are paying for similar contracts and hourly rates.

Reaction after fraud is detected
Immediately inform the corporation's lawyers and look at hiring an expert in fraud investigations. There needs to be an investigation by persons who know the rules of evidence.

Don't let the office computer files get compromised. Immediately copy everything to a second hard drive. (You may want to disconnect that computer from the Internet so no one offsite can tamper with the files.)

Do not expect much success in filing criminal charges with the police. The police are not helpful. Expect intimidation by the suspects including threats of counter-claims.

The condo corporation may be able to sue the fraudsters and their employers as they may have insurance.

External auditors
The corporation is not paying them to discover fraud. They are paid to look for errors in the statements and are not paid to examine your internal controls.

Good, fast, cheap
You can have any two of the three. Condos look for low bids and they do not pay enough for the external auditors to do a proper job.

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