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Shell Company - Fraud Scheme

February 20, 2014

PROTECTING YOUR ASSOCIATION FROM FRAUD – SHELL COMPANY SCHEME

By: John H. Stroemer, CPA, CFST, CAM, GRI – Managing Partner

They say “if you’re not happy with it, fix it” so when you are not happy with your Association, you join the Board.  You have now volunteered to play contractor, lawyer, and accountant...oh my.  With this comes great responsibility, protecting your Association and all the homeowners.  With that being said, each Association needs an astute well-rounded Board.    

One of the first steps is hiring a reputable management company.  Not all management companies are the same.  A quality company is vital in overseeing the finances and economics of the Association.   One of the major reasons Associations are subject to high fraudulent activity is inadequate checks and balances, meaning less segregation of duties, and fewer basic accounting controls.  Although no one wants to believe they employ deceitful people, sometimes temptation or personal financial pressures can push even the hardest working, most trusted employee into perpetrating fraud.  There is little control over employees’ motives to commit fraud, but it’s the management company’s job to limit the opportunities.

Through these tough economic times, we have seen the number of fraud cases we are involved with rise substantially.  The most common are accounting related, one being the “Shell Company Scheme”.  In this situation an employee sets up a shell company and begins billing the Association for goods or services it does not receive.  We have seen this first hand.  An Accounts Payable clerk, with the Association’s management company, set up a corporation, which is very simple to do, online at myflorida.com.  He created a name that was very similar to one of the Associations largest vendor.  He then purchased QuickBooks and installed on his home computer.  He began creating false invoices and mailing to the management company.  The receptionist of the management company would check the mail, open the invoices and put in the accounts payable inbox.  The mischievous AP clerk would then process the invoices and cut the checks, and give to management to sign off.  Management trusting this AP clerk, who had been with them for years, never even looked at the checks, he signed and gave back to the receptionist to mail out.  A couple days later the clever AP clerk checked his mail and to no surprise he had a nice check to take to the bank. 

We were able to discover this while performing the Association’s annual audit.  However, audits are not intended to uncover fraud.  If you believe fraud is occurring in your Association, we would be engaged to conduct Agreed Upon Procedures (forensic work), where we would (dissect the books and records of the Association to discover misappropriations.  There are patterns to every fraud case, although each one varies from case to case, all fraud has the same indicators that raise a red flag.  Again the best way to protect your Association is to surround yourself with reputable vendors, starting with a respectable management company. 

Remember it’s your Association and your responsibility to protect it.  For more information on preventing or identifying fraud feel free to contact Stroemer & Company at 1-855-STROEMER.

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