FORENSIC ACCOUNTING FOR FRAUD DETECTION

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2 FORENSIC ACCOUNTING FOR FRAUD DETECTION THE INTEGRATION OF ACCOUNTING, AUDITING AND INVESTIGATIVE SKILLS

3 What is Forensic Accounting? The integration of accounting, auditing and investigative skills yields the specialty known as forensic accounting. "Forensic", according to the Webster's Dictionary means, "Belonging to, used in or suitable to courts of judicature or to public discussion and debate."

4 Common Fraud Tactics against HOAs: Bank statements falsified Petty cash account falsified Reporting falsified Owner Activity falsified Accounts Payable falsified

5 Bank statements falsified? IS THE BANK RECONCILIATION DONE EVERY MONTH? ACCOUNTING>RECONCILE CHECKS DOES THE BANK STATEMENT TIE TO THE G/L CASH BALANCE? REPORTS>GENERAL LEDGER> BALANCE SHEET ARE THERE OLD OUTSTANDING ITEMS NOT RECONCILED? REPORTS>BANKING>PRINT BANK REC

6 Petty cash account falsified WHO HAS ACCESS? WHO RECORDS THE TRANSACTIONS? DEBIT OR CREDIT CARD BEING USED FOR PERSONAL USE?

7 Reporting Falsified Do the Subsidiary Reports tie out to the balance sheet?

8 Owner Activity Falsified? ARE THERE A LOT OF ADJUSTMENTS TO THE OWNERS ACCOUNTS? ACCOUNTING>OWNER BALANCES HISTORY DO YOU SEE ADJUSTMENTS TO THE ASSESSMENTS MULTIPLE TIMES? ACCOUNTING>OWNER BALANCES HISTORY DO YOU SEE JOURNAL ENTRIES POSTED TO CASH ACCOUNT, WHAT ARE THEY FOR? ACCOUNTING>GENERAL LEDGER VIEW ACCOUNTS

9 Verify the General Ledger Detail for A/P Do you see a lot of entries posted and backed out? Accounting>Vendor>History Does a vendor or individual have many manual checks entered vs system check? Accounting>Vendor>History

10 Yearly Income Statement detail Reports>General Ledger>Income Statement EXCESSIVE OR UNNECESSARY REPAIRS? VENDOR PAYMENTS SEEM A LITTLE TOO HIGH VERSUS WHAT THEY USED TO BE? IS THE MANAGER TAKING A KICKBACK FROM THE VENDOR AND THE VENDOR ADDING THE COST TO THE BILL?

11 Checks & Balances on transactions By setting up and using a system where one individual never has complete responsibility for the intake or dispersal of money, the association will be protected from the most devastating types of fraud. Maintaining the Checks and Balances Check to see if they have the correct association s name? Has the work been authorized and completed satisfactorily? Is this a reasonable amount for the service or purchase? Make sure the transaction is not a duplicate billing or payment? Require Two Signatures

12 Internal controls 1. Cash Receipt Safeguards 2. Use the lockbox for collection of assessments 3. Place Execute Controls on Bank accounts 4. Compare the Budget to Actual Expenses 5. Produce Reports in a timely manner 6. Cross reference accounting reports 7. Check Documents when audits 8. Monitor community investments 9. Review the HOA s Insurance Policies for coverage

13 Cash Receipt Safeguards (one person to input cash receipts and one to verify deposit and make deposit) Accounting Center>Cash Receipts>Cash Receipts Accounting Center>Cash Receipts>Make Deposits

14 Use the lockbox for collection of assessments (owners send payment to bank and a file is returned from the bank to post and deposit)

15 Lockbox Setup File>Setup>AR Setup

16 Monitor community Bank Accounts Place Execute Controls on Bank accounts (Civil Code Section 5500 requires the board of directors to review the bank reconciliations for all accounts at least quarterly. Consider having the bank statement mailed directly to a board member who would open and examine it before giving it to the management company, bookkeeper, or board treasurer for reconciliation

17 Compare the Budget to Actual Expenses Reports>General Ledger>Income/Expense Statement

18 Produce Reports in a timely manner Timely reports promote proper vigilance, which in turn can help the board can catch fraud before too much damage has occurred. Reconcile Bank Accounts Accounting Center>Banking>Reconcile Checks Run Print Report Default to pull a quick financial for review Reports>Default>Report Defaults>Print Report Defaults Add additional information Bank Statements CC&R reports WO reports

19 Cross Reference subsidiary ledgers to the Balance Sheet Subsidiary Reports to tie back to the Balance Sheet in Accrual Accounting Aged Owners Balances Prepaid Balances Aged Open A/P balances Income statement

20 Check to See if the Balance Sheet is in Balance Reports>General Ledger>Balance Sheet NOTE: If the Balance Sheet is out of balance a paragraph will appear at the end of the report stating the amount out of balance.

21 In Accrual Accounting make sure the AR sub ledger ties out to the Balance Sheet Reports>Accounts Receivable>Owner Balance Summary Report

22 Accounts Payable in Accrual accounting matches to the AP on the Balance Sheet Reports>Accounts Payable>Aged Open Items

23 Income/Expense Statement matches the Net Income/Loss on the Balance Sheet Reports>General Ledger>Income Statement

24 Reserve Bank account match to Reserve Equity on the Balance Sheet

25 Check Documents after CPA audits Reports>General Ledger>General Ledger Audits should be done annually NOTE: January is the beginning of a new fiscal year for some HOAs and management will be closing the books, once everything clears, and then turn the Detail Trial Balance Report over to the CPA for an audit which is usually completed around April for a January December fiscal year. The HOA should get bids from local CPAs who have experience in doing audits for HOAs.

26 Monitor Community Investments Are the investments reflected in the minutes?

27 Review the HOA s Insurance Policies for coverage For easy access you can save a copy in the Fact Sheet Attachments

28 The HOA s obligation to provide documentation to owners A homeowner in a HOA can Make a formal request in writing to review the community expenses. The HOA should be happy to provide the information requested, during reasonable working hours. The homeowner may request specifically the budget, and compare budgeted items to actual item cost.

29 NOTE: IMPLEMENTING PROCEDURES TO PREVENT FRAUD By implementing fraud prevention procedures, monitoring association financial accounts, acquiring sufficient insurance, and just generally having an active board performing their duties and responsibilities, your HOA management can work together to prevent fraud.

30 Questions? Thank You! Diana Kral