 And welcome to condo insider, our weekly show every Thursday at 3pm for board members and homeowners to understand about association living not just condo but homeowner associations as well. And we've been doing this show for about three years now, and have gotten great reviews and it's quite an interesting time to try to educate volunteers because certainly they have other things in their life and a lot of people just rely on their management company or or wing it, which can cause problems. Anyway, today I have a very good friend that exists, a guest whose name is David Levy, and David is a certified public accountant. And, you know, I keep telling everybody I'm a CPA, but that's because my wife said I'm a certified pain and well the Akoli, but I guess that doesn't count. But anyway, the reality of it is that I know from Hawaii and David will tell you from his mainland experience that associations have the potential of fraud or embezzlement in the sense that people can get a hold of your money and steal it. And then you may be left holding the bag which wouldn't be good for the homeowner association. So let me begin by welcome David David welcome to the show. Thank you Richard. Thank you for inviting me to Hawaii's premier educational program on television. Well you. I don't want to say from the mainland because you retired from your CPA firm in California moved here now. So what you just tell us about your background, how you got in the industry I think your firm did the audits for over 4000. Your association or associations and, in addition, you're a fraud examiner for the FBI so tell us about how you got into all this mess. Sure. Well my family moved to California for Missouri in 1960 when my father took a job with Lockheed Missiles and Space Corporation. I went to school in Northern California, graduated with a degree in accounting from University of California at Berkeley, and I worked for some large national CPA firms for about 10 years before I started my own practice in the mid 1980s. I moved into the homeowners association industry well in the late 1970s when I purchased my first condominium. I received a knock on the door from the president of the association, who actually happened to be the developer and lived in our 42 unit townhouse project. He found out what I did at work for CPA firm. So he invited me to join the board and become the treasurer. And my first experience in the industry was a real eye opener. When I went to the first annual meeting as treasurer and I had proposed a special assessment to help fund the reserves. One of the former board members in the audience got up and indignantly told me that when the former board members and owners felt that they needed to have a special assessment. They would let me know. So that was my introduction to the industry. Fortunately, over the years subsequent. We've had many clients, more than 4000 that have listened to our advice. I give you credit because after that welcome I'm not sure I would have got into the industry should have should have been foretelling it's not an easy industry to get to deal with these kinds of things you know, that's true. Now, does California they have requirements that you have to do an audit for a association or is it really a board's choice. That's a good question. California statute currently does require a CPA review or a CPA audit. If revenues in any given year exceed $75,000. However, that law is trumped by the Association's governing documents, which sometimes do call for an audit. However, there is a legal requirement for either review or an audit. In Hawaii just so you know, the law requires associations condo associations to do an audit. If you have more 20 units or more. So a 20 unit condominium has to do an audit. If there are less than 20 units in the association 19 or less. They don't have to do an audit unless at their annual meeting, they vote not to do an audit, then they don't have to do it. But maybe just briefly tell us just between an audit and a review and a compilation because Hawaii's got very strict standards and says it's an audit. And so they can't do a review and compilation so maybe just take a minute and explain what the differences. So a compilation would be the CPA putting the financial data received from management or the treasure into a format that looks like a review or audit. But the CPA is not taking any responsibility for the numbers at all. So a review, it's more or less like the term that we all think of when you talk about reviewing a document the CPA will look at certain things, financial documents. If it's a good CPA this he'll also he or she will also be reading board minutes to see what's going on, maybe management reports. Propose some adjusting journal entries, such as accruing additional accounts payable or other other things. However, in a review, unlike an audit, the CPA is not actually looking at invoices and canceled checks. In an audit, however, the CPA is responsible for verification of cash balances, as well as doing at least a statistical sampling of transactions, primarily disbursements, looking at canceled checks and invoices to make sure that they're in California, at least in our practice, if let's say a review was a $2,000 job, then an audit might be about 50% more in terms of cost, call it $3,000. So many, many associations would opt for an audit because the CPA is responsible for doing a lot more work than in a review. Well, just for a review in Hawaii, as I said a moment ago, the Hawaii statute for 20 units or more requires the association to do an audit for a condo association. It's not optional, it's part of the annual financial obligations that are born to make sure it's done. And certainly that audits used to prepare their federal and state income taxes with respect to that. But if you're 19 units or less, you still must do an audit. I see this often misunderstood, well, we're less than 20, we don't have to do an audit. That's not what the statute says. The statute says the owners at an annual meeting have to approve not doing the audit for units of 19 or less. So that's kind of what the Hawaii standard is. So I'm going to hope, David, you're not going to ruin my day and tell me that you've seen fraud and embezzlement in condo associations. Well, I'm afraid Richard a half an hour wouldn't be enough time for me to go through all of my stories. But I thought I might start with a small story having to do with the self managed association, because I know management companies get knocked a lot in this area. In a smaller self managed association, one of our early fraud or investment cases, involved a board treasurer who happened to be an interior designer, and the associations clubhouse needed to be remodeled. So the board said, Oh, well, our treasurer has a business will let her do it. So they gave her a budget, and she exceeded the budget by a substantial amount of money. And it was actually only caught the theft of funds was only caught by an outside bookkeeping company that was doing the books for the association. It was quite an embarrassment to the other board members because they weren't looking at the check register, which would easily have shown them that the treasurer was taking advantage. And from a CPA standpoint, the lack of internal controls here is very distressing because the board never should have let the contractor that they hired the treasurer also be the person who has the ability to pay herself. It was unfortunate. There's a similar situation here at Hawaii and with one of our major management companies where the president of the management company was also the treasurer of her condo association, and was also the property manager for that property, and was also on the board of directors of the association. And she basically she went to jail for this, basically used association funds to pay for her roof on her home and other things along the line and basically coated the invoices so it looked like it was an insurance receivable that they were doing this work because it was a claim for insurance, right? So it didn't kind of show up on the income statement side, more of a balance sheet entry about due from insurance company. So that particular thing was caught actually by the property manager who turned the company president in. And that resulted in an investigation and not only the termination of the president, but she went to jail for a year and a half, I think. But the reality of it is in that case the management company paid at its expense for an auditor of the association's choice to come in and audit the books, and then wrote them a check for whatever the amount the auditor felt was in dispute. So they didn't end up in bad situation, but from my experience that's a rare experience. Yeah, well the lesson that we're putting forth just from our two little examples here is that the ability to spend the money and the accounting for the money need to be separated. If those two functions are not kept separate, you're in a perfect situation for somebody to take advantage of the association financially. One of the scariest cases that we have worked on with the FBI has to do with a management company owner who also performed the bookkeeping, who was able to take money simply by taking signed checks from the association properly signed by the board to a legitimate vendor, turning the check over and saying deposit to her personal bank account. You know, in the old days, most of us thought, well the bank would turn the check over and look at who's endorsing it. But in today's world, that is not the case. And when I checked with my contact at the FBI, he said, oh yeah, that went out the door a long time ago. Now the obvious question is, well, you know, isn't the person who was supposed to get paid going to complain about it. Yeah, I'm sure I'm sure that they will but then again the manager has the ability to push away vendors that she didn't want. What's changed, I can tell you from my own analysis and discussion with banks is that we've become a very electronic world. So they don't have the ability to read restrictive endorsements on the back of a check. In fact, from a banking point of view, you may do this as an internal control process. But from a banking point of view. If you say you have to have two signatures on a check, they don't monitor that because these checks go through these high speed processors very quickly. And they're taking if it's got one valid signature on the account, they're processing their check. And if they're leaving up to you to look at your bank statement and see if there's any mistakes with regard to that so we become a very, very electronic world. And so those types of protections aren't available to us anymore. And believe it or not, we're at the halfway point David. And so we're going to take a one minute break and come back and talk about another couple of your examples and look for some recommendations of what to do. So we'll be right back in one minute. I'm Joshua Cooper and welcome to Cooper Union. We look at what's happening with human rights around the world. And we invite you to tune in every Tuesday where we feature the voices of the people from the front lines, sharing the struggles for self determination for the importance of sustainability and solidarity with one another to make the world a better place for all of humanity. And if you want to get it live, you can also look at think tech Hawaii calm, as well as on Vimeo, and many other places to catch the amazing shows where we hear from authors, activists, academics, analysts, and artists, we're contributing to positive social change around the planet. Thank you for joining us for justice. Welcome back to condo insider I'm with my good friend David Levy, a certified public accountant who is from California has practiced having handled more than 4000 associations and a fraud examiner for the FBI, but happily has moved to Honolulu and is a good friend and I've asked him to talk about embezzlement and fraud. Before the break we were talking about banking and the fact that it's important you have controls on who can write the checks and who can sign them and who can approve the invoices they probably shouldn't be the same person so you have some checks and balances. So what most larger associations, their declaration requires them the board the association to hire what is legally called a managing agent under Hawaii law, and that managing agent has the obligation and usually processes to obtain bills, and the ones that are kind of out of the ordinary takes to the board puts it in the board minutes to be approved so we have that layer of, of protection if you have a managing agent. But let me show you managing agents are not free from doing something illegal as well, although it would be a rare occurrence. And I want to add one more thing is under Hawaii, the association and the managing agents separately are required to buy a fidelity bond or crime policy to cover misappropriation by the association employees and managing agents employees. So the problem with that law is that the, the requirements for them, the level of insurance is quite low. That's like $500 a unit so if you have 25 unit you have only a $12,500 requirement for a limit of liability although most management companies and the bigger ones carry $12 to cover themselves for that. But anyway, David back to you and you were telling us about the example. Give us another example of your experience with with bad guys. Another case we worked on with the FBI. Again, a property management company owner, and some of his staff, where funds were being taken by altering not only the financial statements, but also the bank statements. Now in the old days, people would say well, you know, you get out your typewriter and you're a little white out and you, you make an adjustment and you think well it's going to be visible. So, in this particular case I went to a computer expert, my niece, who told me she says well Uncle David you know today you get this particular computer program which I will not mention on this broadcast. And you simply scan the original bank statement, and you can alter the numbers printed out, and you can't tell the difference from the original bank statement. And that's exactly what was happening. In this particular case, you might say well why is the FBI involved in something like this well it turned out that the first victim got their money back, and was unwilling to file a police report. And even though the local district attorney San Francisco was more than willing to take the case. They said they couldn't without a complaint. And from my prior experience with the FBI, that they did not have to have a complaint and per se. And so the FBI did investigate this case. And this was the second case that I was involved with them or it in fact went to federal court. The FBI spent three, three years investigating US Attorney's Office sat on the case for about two years. It went to court. And unfortunately, the perpetrator did not get any jail time. However, because the perpetrator also managed about 100 apartment buildings. You might say well let's see if he's stealing from homeowners associations what's he doing with for instance the security deposits on all these apartment buildings well. We got the state of California to take a look at it and sure enough, he had taken about a million dollars worth of tenant deposits. Here's the lesson here for board members though the main the main lesson here is the necessity to review financial statements. While it's a rare instance that somebody would go to the extent of actually altering bank statements. It could happen. The easy solution to that is to have the banks send a copy of the bank statement directly to the treasure. I don't know how feasible that is in Hawaii, but it would take care of the problem with somebody altering the statements. And another instance which Richard you may want to comment on as well before the show we talked about the fact that even even for board members who are not accountants. Everybody can read a check register. And in fact in California only a few years ago. The state legislature made a list of financial documents that all board members are supposed to look at on a monthly basis including the check registers basic financial statements and something called the general ledger. For those who are not accountants. The general ledger is, is a basic accounting document for which all transactions are entered. So, from the general ledger you could get a printout for instance of all the expenditures in other areas of office expense for any period of time that you asked for, and CPAs routinely look at the year to date general ledger at the end of the year, because it's easy to spot miscodings, or on occasion, or transactions that might even be fraudulent. So, the check register to minimum, I think is important. But most of the condo clients and boards who don't have a lot of accounting experience that the number one document if you're concerned about fraud or theft is the general or is the check register, because you should be able to go through the check register or chronological number of the checks or issue, and be able to say oh that's the electric company that makes sense, or that's the ABC main is I've never heard of them but every week we're running a check that may BC maintenance for $100. So, to me for a simplified accountant, the check register is probably the most important document I mean, certainly there's died all the documents but I tell everybody always, you're worried about who's spending the money which you're spending it on, get the check register. That'll give you the best handle on things. You agree. I definitely agree. I definitely agree. And another another situation that Russia and I both had examples of, unfortunately, this this case did not involve the FBI because the perpetrator was dead when they fraud was discovered, had to do with a property manager who managed a couple of dozen accounts in California and invented a fictitious maintenance company. And because he had a great degree of influence over the payment of bills. He would direct payments on a regular basis to the small maintenance company, usually odd amounts, less than $1,000 and over a period of a couple of decades appears to have gotten away with a couple of million dollars. Yeah, even though the management company he worked for was a very good one and had a good accounting department. Even once the investment was discovered. You know the people in the accounting department said look, we deal with thousands of vendors. We don't necessarily know every one of them. Once again, the board of directors, as we were just saying needs to look at check registers and if you don't recognize a vendor, ask questions, you know, don't don't just accept a piece of paper as being correct because it was handed to you. One of the other things that was interesting you said earlier you talked about with the software you can take a bank statement and alter it so it looks like a real bank statement. In Hawaii just so listeners know, in addition to the annual audit, you have a requirement by the CPA you hired to do an annual surprise cash verification. So that is they come in without any announcement to the management company or the onsite manager whoever's keeping your books and does a litmus test that the amount he's reporting on the financial statements and a company's reporting the financial statement matches the money in the bank account. So, if in fact that that's done properly you probably mitigate the ability to, to fudge the bank statements that keeps somebody from running in and moving money from one association to another at that they cover the shortfall, because it's a surprise verification unannounced, where they come into the office so. So what's your, we were down the last two minutes here so what's your number word of advice through to your volunteer board members out there, I would I would say this. So when you keep board minutes, or you review board minutes, make sure you're leaving a good trail for your auditor as to what expenditures you approve to who for what, and how much, and if it's a very large contract that involves change orders. Make sure that you put that into the board minutes as well. The minutes act is a good trail for anyone looking over the financial activities of the association after the fact. Well, I want to thank you for being here today. I think, as fiduciary board members need to understand their financial statements, and they surely needed to be in the lookout for any misuse of the funds that would harm the association and, and the things we've given you the tips we've given you today may cause you to think but get the check register, look at the checks, make sure your minutes are accurate and comprehensive, and hire a good CPA that you can rely on and depend on bounce questions off of. So on that note, I want to thank David leave me for being here today. Thank you for your host, and we look forward to next week. And I think our next week are our host is either Jane Sugimura or Raylene Tenno, who will do the show on condo insider. Thanks for watching.