HOAs Should Proactively Implement Measures to Protect Against Insider Fraud

Internal frauds committed by officers, directors, managers, and other employees in a position of trust are common threats that homeowners associations must contend with. These threats are generally a product of a permissive environment or misplaced trust. If an association lacks internal controls, or if they exist but are not enforced, temptation beckons those with the opportunity to go astray. Studies have shown that the common factors that lead to the commission of this type of fraudulent conduct are:

• Motive- The person has some pressing financial need such as a family illness, excessive debt, or a gambling problem.
• Means- The person has skills that qualify him or her for a job working with cash or other employer assets.
• Opportunity- The association’s lack of internal controls or enforcement thereof, or just misplaced trust, create an environment conducive to fraud.
• Rationalization- The person has developed a belief that they are entitled to something such as higher pay or more appreciation, thus justifying committing the fraud. Or, “I’m really only borrowing it; I’ll replace it later.”