CAI-NJ March 2017

M A R C H , 2 0 1 7

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

It Can Happen

By Chris Frederick, CPA

Wilkin & Guttenplan, P.C.

CONT I NU E S ON PAGE 30