Preventing Unintentional Fraud: A Guide for Condo Officers

As stewards of your community, condo and HOA board members hold a position of trust and responsibility. That trust quickly erodes when there is an ethical breach, and there is nothing more devastating than the accusation of fraud. Even when you have the best of intentions, it’s important to recognize that if you’re not careful your actions could inadvertently lead to fraudulent behavior. 

Whether a board member commits deliberate fraud, such as embezzlement and forgery, or unintentional fraud, such as unknowingly violating ethical or legal standards, the results are the same. Fraud in the community erodes the trust and confidence that members have in the organization and the board. This can result in charged board meetings, overturning the association’s leadership, civil lawsuits and even criminal cases.

4 Examples of unintentional fraud, and how to prevent them

Let’s look at some of the ways Florida condo association board members might be committing fraud without even knowing it:

1. Misleading or deceiving the association for personal gain

When a board member provides false or misleading information, withholds critical facts from other members of the association, or otherwise misleads the group in order to gain a personal advantage, that’s fraud.

For example, a board member has a close personal relationship with a vendor or contractor that the association does business with and uses their position on the board to steer contracts to their friend’s company. Even if the company does the highest quality work and offers the most competitive rates, the actions of the board member could be perceived as a conflict of interest or as using their position for personal gain.

The fix? Disclose and recuse yourself.

The actions of the board member may be unintentional or accidental, but can still have serious consequences for the association and its members. It’s important for board members to take steps to avoid even the appearance of impropriety. This includes disclosing any potential conflicts of interest and removing yourself from situations where your personal interests may create a perception of personal gain, even if it’s the best choice for your community.

2. Failing to properly bid out jobs, or accepting incentives from vendors

When the board of directors improperly awards contracts to vendors without a competitive bidding process, or accepts kickbacks or incentives from vendors in exchange for awarding them contracts, that’s fraud.

The state of Florida requires community associations to seek at least 2 competitive bids for goods and services that exceed 5% of the association’sbudget, including reserves. Additionally, Florida law expressly forbids directors, or even immediate family members from accepting ‘any thing or service of value’ from ‘any person providing or proposing to provide goods or services to the association.’

The fix? Use a blind bidding process, conducted by a third party.

In blind bidding, a third party (like the community’s manager) gathers bids from various contractors for a project and then distributes them to the board without providing identifying information about the bidders. This process is designed to discourage bias or corruption (or unintentional fraud!) to ensure a fair evaluation of the provided bids.

3. Misusing, falsifying, or improperly accounting for association funds

When a board member uses association funds for personal expenses, or fails to keep accurate records of the association’s financial transactions, or causes the association to be liable for an unapproved expense as a result of their actions, that’s fraud.

For example, a board treasurer is tasked with managing the association’s finances and paying bills on behalf of the association. Due to a busy schedule, the treasurer fails to pay the association’s bills on time, leading to late fees and fines being assessed. In an attempt to correct the issue, they falsify the records to make it appear that the vendor issued another invoice, or modified an existing one.

The fix? Own your mistakes and hire a professional.

Making a mistake is understandable. But trying to cover up your mistakes and deceive the board and membership is fraud. If the accounting is overwhelming for your self-managed association, consider hiring a professional management company to manage the books on the association’s behalf. The board and the treasurer retain full oversight and decision control over the association’s funds, but you gain a separation of power, which provides a check and balance over how funds are being managed.

4. Negligence leading to injury or death

When the board is aware of a hazardous condition on association property that poses a risk to residents or guests, but fails to take action to correct the problem, or chooses to defer maintenance over an extended period of time, that’s fraud.

In 2019, a California HOA was found liable for $15 million in damages after a balcony collapsed at a party, resulting in six deaths and seven injuries. The lawsuit alleged that the board was aware of the dangerous condition but had failed to repair the building’s balconies, leading to the tragedy.

For Florida condo associations, extreme deferred maintenance is a particular problem due to the state’s laws that allowed condo owners to vote to lower or waive the collection of reserves.  This was only exacerbated by the fact that the State did not require a reserve study. A new law passed in June of 2022 seeks to address these issues, but still allows associations a few loopholes.

The fix? Get a reserve study performed by a qualified reserve specialist and budget for repairs and replacements.

Even if you’re legally able to waive or lower reserves, your board and your association can still be held liable in civil court if people get hurt. A lawsuit does nothing to improve your community, so if this should happen, not only would your association be on the hook for any damages awarded (and all the legal fees), the association would still need to pay for the repairs. It’s essential to address deferred maintenance issues to prevent catastrophic incidents and ensure the safety of all residents and guests, but it also can save a lot on your association’s bottom line.

What to do if you suspect fraud in your Florida community association

Clearly there is a difference in the threat to the association between major fraud (like embezzlement) and unintentional fraud like we’ve described above. But no matter how well-intentioned a fraudulent act may be, it still needs to be corrected. Here are some steps you should follow if you suspect a member of the board may be committing fraud:

1. Bring the issue to the attention of the full board – talk it out and see if it is an issue you can resolve on your own. If you cannot, 
2. Speak to the professionals – your manager and your attorney – seek the advice of a professional to learn what your liability is, and what remediation options are available to you. 
3. Request a special addition to the board’s agenda – if you are not on the board, a group of members representing at least 20% of the membership can usually petition to force an item onto the board’s agenda within 60 days. If speaking to the full membership still doesn’t resolve the issue, 
4. Submit a complaint to the DBPR – Florida’s Department of Business Regulations is the body that governs administrative law for Florida corporations, which includes community associations.

 

As a board member, it’s crucial for you to understand your legal obligations and the potential consequences of your actions. If you suspect fraudulent behavior, it’s more than just a moral obligation, it’s your fiduciary duty to take action to stop it. Ignorance of the law is not a defense, and you can be held liable for any fraudulent or illegal activities that occur under your watch. 

By educating yourself and seeking the guidance of professionals when necessary, you can save your community from costly legal battles and save yourself from committing unintentional fraud.

Trident Management believes in operating community associations in an ethical and fair manner. Our professional managers will advise your board of any red flags that might affect you and your community. Contact us today to request a free proposal.