Management won’t let new treasurer
look at the books. At what point should the board consider hiring a
forensic
accountant?
Los Angles Times
Donie Vanitzian
29 October 2016
Question:
I just got elected to our association’s board of directors
and was shocked that the management company would not let me look at
our books and records after being appointed treasurer. I suspect that
this might be due to some financial hanky-panky.
The past treasurer has given me some documents and said, “You must look
into these and find out what’s going on.” The documents showed that the
management company made a withdrawal of around $75,000 from our reserve
account for everyday expenses. And then right before the annual
meeting, during which our annual budget is discussed, the money was
deposited back into our account.
There’s a lot of money being taken out for essentially petty cash
needs, which don’t require receipts. That makes it difficult to figure
out exactly how much money is being spent. We have other bookkeeping
issues too. There are also no receipts for credit card invoices, we
have laundry room revenues that don’t seem to be accounted for, and, I
suspect, some double-billing by management.
Understanding what is going on has been made doubly difficult because
management changed our banks five times in one year. The banks would
not speak with me because the manager and a representative of the
management company are the only people on the bank signature cards.
We don’t know how to fix this and management is not cooperating.
Something is definitely wrong and this accounting looks very
suspicious. At what point should the board consider hiring a forensic
accountant? How does the board choose one?
Answer:
Boards should never ever lose control of the association’s bank
accounts by allowing a company or manager to be the sole signatory.
Even if a management company is handling the association’s finances,
the board still needs access and control of everything to verify
vendors’ actions. Frequent oversight and spot checks seem tedious but
they can avoid larger expenses of time and money for things like
forensic audits.
Still, if a board believes that it needs a thorough review of an
association’s books, Hank Kahrs, a partner at RGL Forensics, a
worldwide forensic accounting firm with offices in Los Angeles and
Orange County, says, “It is better to meet with a forensic accountant
when you first suspect a problem rather than wait until it’s too late.
The forensic accountant can assist in implementing controls to help
curtail illicit opportunity.”
Forensic accounting is an in-depth procedure that digs beneath the
surface of recorded transactions. Forensic accountants are alert to the
fact that documents and accounting records can be falsified. The audit
looks for items that are missing and dissects bank accounts, revenue,
cash, laundry and recreation revenue, assessments and more. It compares
invoices and accounts payable and receivables.
For example, forensic accountants follow invoices back to the canceled
checks, look for fake entries into the accounting system itself and
look for checks written to persons that may have been responsible for
controlling or auditing the accounts – payments that at first glance
may look like they are satisfying a third-party invoice.
A forensic accountant also looks at trends in the financial statements
of an association more so than a tax accountant or auditor. Changing
banks multiple times, especially over a short period of time, can be a
red flag. A forensic accountant can uncover money that may have been
borrowed from the association and returned.
“Borrowed and returned money should have been used for the benefit of
the homeowner association and working for the owners. If management
borrowed the money it could be an indicator they have cash flow
problems,” Kahrs said.
When choosing a forensic accountant, make sure that the person is a CPA
and has a related CFF, a certification in financial forensics. Also
look for a CFE, or certified fraud examiner, which is issued by the
American Assn. of Certified Forensic Examiners. During the interview,
gauge the candidate’s experience and suggestions on an audit plan.
In order to have a forensic audit conducted, you will need to have
three to five years of data for these records:
> Financial statements and tax returns
> Bank statements
> Canceled checks and check registers, and credentials to access the
general
ledger (preferably online)
> Invoices and bills to residents
> Credit card details, including name of persons who have access
There are different statutes of limitation for bringing actions against
wrongdoers to recover funds. The bottom line is don’t wait until it is
too late to uncover what, if anything, is wrong. If impropriety is
discovered, the board will need to consult with an attorney to explore
if money can be recovered from the management company.
To avoid problems, Kahrs advises boards to reconcile the association’s
bank statements every month and not leave it to management, which has
the authority to pay the association’s bills.
“People write checks to themselves all the time, and then they get
access to the bank accounts and reconcile those same bank accounts, so
no one catches it,” he said. “They think everything is fine.”
Zachary Levine, a partner at Wolk & Levine, a business and
intellectual property law firm, co-wrote this column. Vanitzian is an
arbitrator and mediator.
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