January, 17 2023 Published by South Alberta Chapter - By Stephen Chesney
Uptick in Fraud a Wake-Up Call for Condos
From the Winter 2023 issue of the CCI South Alberta CCI Review
What property managers, boards and financial advisors should do about it
In these economically trying times, as one would expect, fraud has been rearing its ugly head. Unfortunately, condominium corporations have increasingly become an easy target.
The reason condos have a metaphorical bullseye on them is likely due to the widespread knowledge of legislation that requires them to maintain large amounts of money in their reserve funds. This, in conjunction with board of directors who often do not have extensive education and experience on corporate governance issues, results in a recipe for disaster.
Types of fraud
Many years ago, there had been some major condominium frauds. While these large-scale schemes have obtained significant public attention, these swindlers are consistently developing new types of frauds on a smaller scale, which are preventable and can be detected in a timely manner. The following three examples are types of fraud that could easily transpire.
Example One: A condominium corporation pays its suppliers by way of physical cheques. Suppliers can deposit the cheque from the condominium corporation by using a feature offered by its financial institution wherein it can simply take a picture of the cheque with their phone, thereby never actually visiting a bank branch or depositing the cheque by way of an ATM. A fraudster intercepts the cheque by somehow obtaining the envelope mailed to the supplier with the cheque in it (possibly from the Canada Post box). They change the payee and the amount and deposit the cheque either on their phone or at the bank into their own account. If the condominium corporation does not reconcile its bank statement in a timely manner, the fraud remains undetected for an extended period of time.
Example Two: A fraudster obtains the branch and bank account number of a condominium’s bank account. The fraudster sets up an automatic payment or electronic transfer out of the condominium’s bank account to their account (possibly a shell company used to redirect funds). Despite this charge appearing on the condominium corporation’s bank statement, it goes undetected as the monthly bank statements are not reconciled in a timely manner.
Example Three: The board of directors decides to invest the corporation’s reserve monies into a GIC or term deposit with a financial institution. Due diligence is not conducted on the financial institution with whom the condominium intends to invest and the funds are transferred electronically to the account number provided. Unfortunately, the financial institution is not legitimate, and the money is actually transferred into a fraudulent bank account.
Given this real and impending threat, it is imperative that every person involved with the financial administration of condo corporations do their part to prevent or at least reduce the risk of a financial crime being perpetrated. The management company, financial advisors (brokers) and the board of directors should develop, enforce and continually tighten internal controls to ensure that there is an efficient system in place to prevent fraudulent activity such as the ones described above.
The role of management
Given the extensive involvement of the management in the financial administration of a condominium corporation, it is crucial they develop a set of controls and ensure that those controls are consistently followed. The most vulnerable processes that require protection include the collection of revenues (mainly common elements assessments), the payment of all invoices, and the investing of the reserve funds.
Management should implement a procedure that requires all revenue be deposited to the corporation’s bank account only, and not deposited to any other individual or company’s bank account.
Management should ensure that review processes are in place to confirm that invoices are legitimate before paying them and that payments are actually received by the intended vendor.
Bank accounts need to be reconciled at a minimum each month upon receipt of bank statements, but ideally more frequently. Any discrepancies or suspicious activity needs to be investigated immediately. If fraud is suspected, the bank and/or the police should be notified immediately. The longer it takes to report, the less likely it is that stolen funds will be recovered.
Management should ensure they receive and review relevant documentation from financial advisors (as outlined further below).
Management should conduct due diligence on all institutions with whom the corporation is investing. Even if directed by the board of directors, management should ensure the integrity of the financial institution before making any transfers. A thorough investigation should be conducted of the financial advisor and financial institution, especially if a higher than market value rate of return has been offered.
The role of financial advisors
Financial advisors, such as investment brokers, often provide guidance and subsequently facilitate a condominium’s investments, resulting in a flow of funds that is susceptible to fraud. It follows that safeguards at each stage of the investment process will decrease the likelihood of misadventure or, at worst, limit the extent of the wrongdoing.
First, there is the decision of where to invest. Part of the reason that there are legislative restrictions on the use of condominium funds is to protect the corporation. As such, it is important in the context of mitigating risk that financial advisors to condominiums are educated and assist the condominium with complying with the applicable laws. Once a decision is made as to where to invest funds, there needs to be a process in place to ensure that the investment is legitimate and that the money is properly received by the financial institution facilitating the investment.
Financial advisors should then provide written confirmation for each investment in a timely manner and send monthly statements to the management or to the board of directors (if self-managed).
The board of directors’ role
The board may be in the best position to protect the corporation as they can oversee all of the processes and insist that controls be enforced. It would be ill-advised for the board of directors to simply rely on management, instead of using their mandate to affect corporate governance and to ensure the implementation of appropriate safeguards. For example, the board should endeavor to:
- Review the full financial statement package provided by management each month and ensure the bank accounts are reconciled and that the reconciling items are accurate and understandable.
- Review the payment process and ensure that payments are made to legitimate suppliers and cheques are only signed with proper support.
- Consistently monitor management to ensure all controls are followed.
An auditor’s role
An auditor cannot and should not be relied on to uncover fraud. Moreover, financial audits are not designed or intended to detect fraud.
Since condo auditors only begin their work after the end of every fiscal year, waiting for the auditor to detect fraud is not reasonable and will simply be too late. Pro-active conduct and vigilance throughout the year by the above-noted personnel can mitigate the damage of a fraud.
There is really no excuse for stakeholders in the condominium industry to be complacent. Use this opportunity to assess your condominium’s processes and ensure the appropriate checks and balances are in place at all levels to ensure that the hardearned money of the condominium’s owners remain where it is supposed to be, in the corporation’s bank accounts.
Reprinted with permission from: Stephen Chesney, F.C.P.A , F.C.A., Partner, Yale PGC, LLP Chartered Professional Accountants
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