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[Music] this isn't a kawaii community matters here Aloha it's Thursday again 3 p.m. time for another condo insider show Hawaii show about living in a condo association or homeowner association and we hope you find our show interesting as we talk about industry related topics trying to educate our board members and owners about making their Association better all over the press were reading today about problems with embezzlement fraud theft internet issues and so I have had the pleasure to have a great friend of mine Dave levy from San Francisco who's visiting us right now who was going to talk to us about embezzlement and fraud and let me tell you Dave has huge amounts of experience as a CPA with the relative issues on this matter and we certainly want every association to be protected today welcome to the show thank you I know you have an impressive resume but let's talk about you first tell me a little about your background and your credentials sure I've been involved in the homeowners association industry for more than 30 years in Northern California our office does work for more than 2,000 homeowners associations and as part of our practice we occasionally have run into fraud and embezzlement and today's show we hope to provide some answers for boards to help them avoid some of the problems that other associations have encountered and you also do reserve studies right you're one of the few accounting firms that I know of it may be the only I know that actually is engaged in the reserve study side of the business we we do we do part in California there's a requirement to make disclosures about reserves we don't do the actual cost estimating but we do the financial calculations for funding the reserves and what method you do is there a method you use for funding calculations it's essentially a cash flow methodology which is similar to out here interesting enough under Hawaii law that they under the statute two choices once called percent funded and ones called cash flow under the statute anyway and I would tell you about 99 percent of the association's used cash flow method funding which is an under Hawaii law is a 20-year projection of your needs and your expenses income and inflation shirk California is somewhat similar we we have to disclose what the percent funded is at a current point in time and our funding goes over a 30-year horizon you know most people who have the software knows that the software itself kind of calculates out to infinity and you just select on the report how many years you want to show but that's all kind of a repeating type thing well tell me about your firm no tell me some of the things you do is in your firm I besides audits and tax before tax filing sure besides audits and tax returns we do a lot of the disclosures involving reserves and what we call pro forma operating budgets in California essentially at least in Northern California and throughout the state one of the biggest financial problems for homeowners associations is in fact funding reserves on average in California reserves are only about sixty percent funded so larger larger and newer associations tend to do a little bit better but smaller and older and to be worse yeah in California there is no specific requirement for funding reserves it's just a disclosure statute so you could be 0% funded and so long as you disclose that you've done what you're supposed to do that is correct yes Hawaii is interesting in the sense that says you have to be either 50 percent funded or I hate to use word a hundred percent funny because the percentages are going to be the right terminology have a cash flow plan that produces positive balances for 20 years and that's your choices sure Cal California has struggled with the funding terminology and the statutes because some people in the reserve industry will play games but the current law simply requires that you disclose what your funding plan is and what your percent funded is today not not that you're going to be a hundred percent funded tomorrow but where do you stand today and then you present what your plan is it's interesting under hawaii that i say this comically the our legislature figured out how to solve that problem we have these national standards or reserves in this national language so they invented all their own new language so if you read the hawaii statute you can't figure out how that relates to the national reserve study language so we all end up confused yeah it's very confusing for a lot of homeowners most homeowners do not like the word special assessment and unfortunately for many associations as they get older if they don't have a good funding plan that's what most of them are going to face kind of Association a California borrow money yes they can't borrow money but the way the bank's look at an association before they will loan the money they want to see an approved special assessment to repay the bank loan so there's no easy way out for the Association at least they can get the money immediately to fix the roof for instance but they have to already approve the special assessment and the security for most banks for their loans is the right to step into the shoes of the board of directors and and enforce a special assessment if necessary to repay their loan that's pretty much the same in Hawaii because you can't have a lien on the common elements it's a it's not like a mortgage you know and you can't mortgage the common elements here you say there were only rights or to the cash flow from the repayment of the loan as far as collateral but let's get into the meat of the show today and that's fraud and embezzlement short answer do you see fraud and embezzlement what you do yes how often because we deal with so many associations we probably see it more often than some people do usually it's not obvious at first glance some of the fraud cases we've been involved in were discovered by board members and brought to our attention there's a common misperception by the public that when a CPA does an audit that they're looking at absolutely everything and that's not what not it is an audit is is a sampling type of an approach to looking at financial transactions and there's no guarantee that an audit will under cover fraud CPAs are schooled to be attentive to the potential for fraud but an audit is no guarantee that you will uncover fraud I know the word audit under the American Institute of Certified Public Accounts is a very specific protocol versus like a review or compilation which would be a lower ATO keys were not a review of the financial condition right then not it what what what are the basic parts of an audit in simple terms in simple terms what an accountant a CPA will do when he's doing an audit is look closely at cash accounts confirm or inspect invoices and canceled checks to see that disbursements are appropriate reed board minutes do a more detailed analytic review of transactions so there's there's more work involved than than a review unlike Hawaii in California there's a legal requirement to review or audit if revenues exceed $75,000 for any given year so therefore most associations in our experience get a review not not it because a review is cheaper than an audit and so Hawaii may be a little bit ahead of California by requiring audits for associations larger than 20 units let me share with you the common misunderstanding about that in Hawaii our statute requires every Association every single one of the associations to annually do an audit with a CPA accept any Association 20 units or less by vote of the membership the owners can waive doing an audit and then do something lower or nothing at all and a lot of associations so why I think because they're 20 years or less that they don't have to do a lot it well that's true if that the membership meeting the annual meeting or some special owners meaning there's a motion that say I move that we don't do an audit for the year 2017 and if that was approved then they wouldn't have to do an audit and a lot of people just think was you know he says you have to do an audit if you have more than 20 units it doesn't say that the statute says that everybody has to do an audit unless you have an affirmative vote by the members at a meeting to not do not at that year and that's that's that's kind of how our law is for the benefit of the audience then I will point out that two of the cases of embezzlement that we're working on currently both with the FBI both in progress at the moment involve a predominance of associations that are under 20 units so just because the Association is small doesn't mean that they cannot be ripped off over a period of time and I can go into some of the detail if you would like look at that a minute because what I want to talk about first is that we had kind of headlines here and in the last six months we're a Association which was self-managed so they had their own local banking relationship and their employee general manager had a desktop or a notebook and he would do all the association's banking over the internet I don't know about their internal best practices and protocol but that's what they did and they suddenly decided or found out that they were missing a quarter million dollars so I'm sure it both can agree but maybe just comment on the fact of this I'm gonna call it internet fraud this electronic banking fraud that the scope of under risk with it well I'll give the audience a personal experience of my own occasionally people might have to pay their credit card statement or credit card bill at the last minute and so I was in that position recently so I take out my credit card I look at the back I get the phone number to call and because I hadn't done this before I was surprised to get an automated voice and the automated voice only asked for two pieces of information my bank routing number in my bank account number and after that I hung up the phone and the money was transferred out of my bank account to the credit card company bank account the same general thing can work for a homeowner's associations bank account it electronically it is not that difficult to gain access to bank accounts and that's why you know historically we've always been taught you know if you're like check stock is stolen or compromised close the account and get get a new account number and this is one of the reasons why and kind of what you're leading into is that if you did that all this kosher and then someone hacked the credit card come into account and got your routing number and your bank account number they could go into a multitude of ways and use your money without you knowing about it until you catch up with it true in in one of the fraud cases were involved with now the management agent who has also got an accounting background is able to steal money simply by taking a sign check and turning the check over and endorsing it for deposit only to her account and you would think well isn't somebody looking at the endorsement on the check the answer is no nobody's looking at it I checked this out with my FBI agent contact and he says well you can even make deposits with your cellphone today there's nobody looking at the endorsement on the back of the check well the only thing I want to share with our audience that is a very common misunderstood issue in Hawaii is we all know that under Hawaii law that both the associations board of directors or the Association and the management company if you have professional management have to have a crime policy or a fidelity bond and everybody thinks that that covers theft and the answer is yes it covers theft by association employees or board members or the management company in the case of the management company's policy this third party theft over the internet was someone's hacked your device and has stolen your money by rerouting it or whatever they do and to this the smaran country is not covered under the crime infidelity policy unless you purchase third party theft coverage under the insurance policy which is about two hundred dollars a year and with all this internet quote fraud electronic fraud today I would think that every board member out there ought to be asking their agent do we have third party theft cover for electronic theft and if they don't they ought to buy it because that's probably one of the major potential risks in the future with respect to at that it sounds like a good thing to look into yeah most people don't seem to realize that well tell us about one of these FBI cases what are the things you can say about kind of what the common thread is about what the claim is what the issue is okay in another case that is currently going on it involves about two thousand smaller associations under 20 units for the most part and you know what I'm gonna do them with I'm gonna stop you for one second because we're gonna take a one-minute break and I don't want to interrupt us in the middle so I apologize for that but to our audience here we're gonna be back in one minute we're talking about Dave Levy about fraud and embezzlement and and now we're gonna get into the really good stuff [Music] nothing is making sense me and you baby we can find away there's gotta be single shot how to make a brighter day oh hi guys it's RV Kelly I'm your host of out of the comfort zone where I find cool people with cool solutions to problems that all of us face now the thing is we're really cool and I only invite really cool people but the thing is I think you're kind of cool too so I think you should come and watch that Thursdays at 11 a.m. you're on OC 16 television with think tech Hawaii I'm RV Kelly host of out of the comfort zone and I will see you next Thursday we're back we hope you went and got your popcorn and either a cold beverage I prefer a beer myself but anyway we're talking with Dave levy with respect to fraud and embezzlement and before I kind of interrupted him because we're going to talk about some specific cases we were talking I asked him to tell us about an FBI case and kind of the general circumstances and so let's go back to that okay great yeah there are two to specific FBI cases that I have in mind to talk about one was about 15 to 20 years ago it involved a property management agent who would add his name to the bank signature card before the bank signature card would go to the bank this gave him the ability to access the funds of all of his bank accounts of all of his associations and by doing this he was able to steal from one association at a time and every time he would get caught which happened frequently he would steal money from a different Association to pay the money back and in the accounting world we call that a kiting scheme and it involved a large National Bank not a homeowner's association bank so they weren't very familiar with how homeowners associations worked and they were not really savvy to the fact that this manager in California should not necessarily have been signing on all the different bank accounts I know Hawaii is a little bit different yes true in Hawaii it is a little bit different in the sense that we certainly have the statute that requires a management company to keep separate accounts in the associations name but typically in Hawaii because it's run by a real-estate broker who has insurance on this and bonding on this particular transaction they limit who can sign to the managing agents principal broker because they wouldn't want a board member to be going able to go sign a check that the matters were coming didn't know about because then you lose kind of a control of that particular operating accountant money accounts so a little different what was kind of humorous about this this first case with that the FBI in fact took on was the National Bank when they found out about the fraud they closed down all the accounts and opened up brand-new accounts so I found out later from one of the board members that when a board would question why why was a new bank account being opened up the fraudsters simply told the board well there had been a fraud in the bank and that's why the account had to be closed and yet he was still operating as the management agent in a more dealing more with the technology technological issues and people breaking into accounts elect
onically a current case that is in progress right now involves a management company that had been taking funds from their associations for a number of years and once again he had access to the funds because he was on the bank's signature card but the way he was stealing the money was he was providing only limited information to the words of directors so he would give the boards an income and expense statement each month and he would give them a falsified bank statement now when I was growing up a falsified bank statement meant getting out the white out you know and writing out the numbers and changing things well in today's world it's a little different when the issue came up I checked with a technological consultant one of my nieces and she said Uncle David in today's world you just get Adobe a certain kind of software and you can change the the bank statements electronically print them out and you can't tell the original correct one from the falsified one and that's exactly what's happened in this current case the management agent was simply providing an income and expense statement and a falsified bank statement to the board's each month he was not giving them any bank reconciliations or any balance sheets so there was no way to connect the financial statements and this was going on for a number of years and the amount of money taken exceeds a million dollars easily how do they catch it the first victim the unemployed wife of the board president was a young lady who was an accountant and she started raising questions and she was the first to discover that there was a problem we were then engaged to do further inquiries and determined that yes in fact money was being stolen not only from this one association account but from others as well so in a situation like that okay we've just to say we've caught them and they're guilty and the money is missing in California they have insurance they protect it as or is there a recovery partner in some cases yes we know that one victim had a $25,000 policy with a $10,000 deductible and the insurance person contacted the FBI because the case is still going on and was convinced that yes the money had been stolen and that one association did get their money got 15 out of 25,000 back I don't know that whether there's a crime policy in California is similar to what is available in Hawaii but if there is I'm definitely going to be taking that information back to my clients it's a good idea well you know it's interesting you could have a 25,000 now our policy as you describe if you have a million dollar loss because you haven't bought enough insurance you have a you have a you have a bigger problem that that is true you know one of the things that's extremely important for boards is to be asking questions in looking at financial information on a regular basis for instance in this last case if if the board had gotten a copy of the bank statement directly from the bank some of this problem could have been avoided in California and probably in Hawaii as well there's no law that says that the bank has to send a bank statement directly to the board number and my personal opinion I think perhaps legislation might help in that regard if it's at all possible you know I get the legislation I would then one pass is that making a law that the board member has to read the bank statement and the financial statement because a lot of people just don't put any attention to it you know and I don't care what you wrote and might come on a piece of toilet paper or they they wouldn't really notice well that's true and I think for purposes of the viewing audience here because it is not that difficult to commit fraud or embezzlement it's extremely important that the board follows certain procedures to look at financial documents to look at bank reconciliations to look at bank statements and to take the issue very seriously because there's only so much that can be done legislatively to protect an association against fraud one of the things I've been in the industry 25 years that I want to share this it's not it's on point in a way to what you're talking about but there's been in my 25 years five or six thefts embezzlement fraud with management companies that I'm aware of and the most common thing that was used that's what I'm going to call the fake vendor where somebody property manager resident manager set up a fake vendor and would charge like $38 this week one hundred and ten dollars next week if you're a portfolio manager many ten projects that's like $1,000 a week you see and because people would say it's a small amount no there's a twenty eight dollar bills I'm not going to look into that they never really put much attention to what was being paid and the validity so comments yes one of the basic accounting internal controls that CPAs are taught is that when a check is signed let's say by the board that the check should go directly into the mail what can happen if it doesn't go directly into the mail if it goes back to the preparer a sign check the payee could be altered by simply adding another word to the name of the payee and if a bank account is open the name of that altered payee the monies can come out and we've seen frauds happen in that way in the past as well you bring up a good point about fictitious vendors we often suggest to management company owners that they on a surprise basis go back into the accounts payable records and ask for a printout of all the vendors and see if they recognize all the names or if there's vendors that don't make any sense there's a lot of little things that can be done board members as well when they when they sign the form authorizing that a check be issued they should be looking at the invoice and looking to see does it make sense you know in some of the frauds that we've seen now where cash is being taken because bookkeeping is double entry if you take the cash out you have to kind of cover it up somehow and the somehow is often reserve expenses or miscellaneous maintenance expenses things that are not predictable so if the board's looking at their financials and comparing to budget on a monthly basis if they see fluctuations that don't make sense they should be asking question we're getting near the end of this show so let me ask you if you're gonna give boards two or three recommendations of simple things they can do to protect themselves what would you recommend I would say look at and understand how the financials are put together make sure that your income statement ties into your balance sheet make sure that the cash balances on the balance sheet I enter the bank reconciliation you're looking at the bank reconciliation that the balance per bank matches the bank statement it all fits together and the board with the assistance of their CPA can be schooled on how to recognize these things it's it's it's not that difficult but board members need to understand how it's all supposed to fit together and then look at it on a monthly basis I always recommended the boards especially the smaller boards that maybe don't have much sophistication in accounting if you simply every month look at the check register yes good idea you know and you can say well here's a check we wrote and here's the amount does that make sense to me if not can you get me the invoice to support this absolutely looking at the check register both operating and reserves it's important but it's not looking at one thing you have to understand how the whole process it's together and if the board is uncomfortable with it look ask the CPA that they're using probably at least to do a tax return to help them I don't know if it's the law or just general operating practice in Hawaii but we have a single operating account and any disbursement has to be through the single operating accounts so if you had a reserve expense you would have to transfer the money to the operating account and then write the check so the check register has a great value to everybody with respect to doing that any final comments No thank you very much for inviting me to speak today yeah I think we should all recognize that our volunteer we're members and our management companies we're talking about the exception you know but as a fiduciary you as a board member have an obligation to protect the Association and carefully look and be responsible about really reviewing the monthly financial statement and you have a better chance than of nipping this in the bud and catching it and not opening your financials that they have the board meeting or not having a designated director who's taking a closer look at that at that point next week our show is gonna be about Aging in Place for seniors my co-host Jane sugimura will be back I'd like to take this opportunity to wish you a very Merry Christmas and Happy Holidays and tune in next week Aloha [Music] you [Music] [Music]
