HOAs: A Ticking Time Bomb

Previously, we wrote about some of the reasons why the construction industry is vulnerable to corruption. We viewed the industry through the lens of compliance, pointing out its environment and how the lack of transparency, inflation of bills, and bribery lends itself to corruption. Put it this way: think about someone trying to eat clean and exercise regularly. Despite their commitment, this person’s spouse fills the house with cake, cookies, and every type of fantastic chip on the planet. At some point, the person attempting to eat better will cave. Environment matters. 

Why are we talking about food? Because it’s a pattern, it doesn’t matter the roots or the environment, when the mindset lends itself to a kind of inappropriate behavior, it tempts addicted, weak or unethical people. For this reason, we are talking (again) about HOAs (Homeowners Associations) because of how much money they handle and how propitious the environment they are submitted to is for fraud. When there is a lack of oversight (i.e., internal controls, education, training, monitoring), you create a situation that could easily lead to corruption, embezzlement, and theft. 

The Laissez-Faire Style

Years ago, as the newly elected President of the HOA’s BOD (Board of Directors) I was told once by a former director that I should not ask too many questions nor put some controls in place as the HOA had been very well managed in the past in a laissez-faire management style. Needless to say that as a former compliance officer, that prompted me to find out more about how things were handled by the property management company.

For those who are not familiar with it, the term “laissez-faire” is of French origin and translates to “letting people do as they choose.” The laissez-faire leadership is a style in which leaders are hands-off and allow their team to make its own decisions and manage its own desks. It’s known that this type of leadership can also have benefits. Yet in some scenarios, such as HOAs’, it can result in poor management and bring lots of headache to a community.

What You Need To Look Out For 

The people who work for property management companies and the BOD who runs HOAs may need to gain the background or experience to handle the job’s responsibilities. The community has to be sure that these folks are familiar with the basics of property management, laws and regulations, ethics and compliance. Both, a property manager and a director on the Board should be able to raise red flags and to whistle the blow if something suspicious rises. Are they attending TRAINING SESSIONS?

Consider a beautiful condominium that is built along a small lake. If there are 75 units, you have a significant amount of land to upkeep, including the water line. Should the annual budget require that each unit contribute $320 a month, you’ll have $288,000 within a year. Though there are taxes, special assessments, and scheduled maintenance to account for, that is a lot of money. How many of the residents know where that money is going and/or are making sure that it is really being used to pay for the right companies and at the appropriate prices? HOAs with annual revenues of $288,000 are required to have compiled but not audited financial statements. That means an auditor is required to present financial statements based on the information submitted by the HOA, with no need for verification. Are there INTERNAL CONTROLS in place to prevent any kind of fraud or suspicious activities?

Even if your HOA manager and BOD publish its financial records each month, that doesn’t guarantee accuracy. For instance, you may read that you’re spending $10,000 a month in landscaping fees. However it doesn’t mean that the landscaping company is not giving a “kickback” to someone on the HOA management team or board, and it doesn’t eliminate the possibility that the landscaping company is only receiving $9000 a month as the remainder is being deposited in a separate account (i.e., slush fund).

Monitoring Vs Micromanaging 

It is called micromanagement when an individual controls specific deadlines, reviews work closely, and dictates every detail of how exactly to do tasks. That’s not a Board member’s and resident’s intent. Frankly, who does have time for or want to do that? A property management company is hired and very well paid for performing it accordingly.

On the other hand, monitoring is a continuous process to ensure that affected people (property managers and BOD) are following all policies and procedures that were put in place. Monitoring systems happen throughout the year and spot compliance risk issues in activities, operations and transactions.

Compliance Programs for HOAs

HOAs management needs to maintain standards. Successful compliance programs are built on the premise of prevention, detection, and correction, regardless of the industry. How they differ, stem what the types of risks an activity is exposed to. 

In terms of an HOA, members should be looking for a code of conduct and ethics, policies, procedures, communication, education and training, internal controls, reporting and monitoring.

For example, checking bank statements and comparing them to balance sheets: Does everyone know how to do this? Additionally, people need to know to whom they can report issues to when they are discovered: Is there any COMMUNICATION CHANNEL available to residents, directors and property managers?

The damages can be especially costly when there’s no preventive measures in place

Speak with Prae Venire about Compliance Programs

Prae Venire offers corporate compliance programs tailored to each industry needs. To learn more about how we can support your corporate compliance goals, contact us to schedule a consultation.