CAI-NJ March 2017

It Can Happen By Chris Frederick, CPA Wilkin & Guttenplan, P.C.

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W hen the average person hears “fraud” they immediately think of huge schemes that play out over years and result in the misappropriation of thousands or millions of dollars. Those schemes eventually become huge stories played out in the news. We may hear stories of how senators had illegal kickbacks, or someone like Bernie Madoff embezzling millions from his clients. What you don’t typically hear often, is how the association down the street lost hundreds or thousands of dollars through theft or fraud. Although it is highly unlikely that fraud opportunities will ever be 100% removed from any organization, it is the responsibility of every board member to ensure their associa- tion’s risk of fraud be minimized. The best and easiest way to minimize fraud risks are through an adequately designed and properly implemented set of internal controls. As auditors, we typically conduct various tests and certain interviews during our standard audit which could uncover fraud, however, the standard annual audit’s objec- tive is not to detect fraud within an organization. Rather the main objective is to declare those specific statements free of material misstatement, which includes material fraud. Below are just a few of the many situations we have encountered over the years including the manner in which the fraud was detected. Additionally, the steps the board could have taken to remove the fraud risk are also outlined.

As a note, the situations have been altered slightly as to not reveal the associations they effected. “Don’t Be So Controlling” Situation: Property manager has majority control over the finances of the association, as a result, the property manag- er cut and paid for services that were never performed at the association. This could be done through a related enti- ty, like cleaning or maintenance, the related entity would provide invoices for services that were never completed at the association and the property manager would cut and sign the check and pay the bill. How the Fraud was Perpetrated: The property manager was providing factious invoices in order to divert the asso- ciation’s cash with what, on the surface, appeared to be legitimate invoices. Clue: The association had multiple service contracts in place including pest control, with unrelated third parties. At the same time, the property manager created a factious company with an appropriate sounding name, for example, “Vermin-X”, and submitted monthly bills for pest control services which were performed under the terms of the valid third party contract. Detection Method: As we reviewed invoices and contracts during our expense testing, we noted that multiple vendors

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