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Q&A: When management hanky-panky is suspected, should a board hire a forensic auditor?

When management hanky panky is suspected, should a board hire a forensic auditor?
When management hanky-panky is suspected, should a board hire a forensic auditor?
(iStockphoto / Getty Images)

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.

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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.

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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)

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> 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. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com


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