We are all susceptible to employee theft
In real estate management we deal with huge sums of money, handled in many locations by both front office and support staff. This presents seemingly countless opportunities for fraud and employee theft.
The best way to avoid fraud, according to Joseph Hanlon, CPA with Teal Becker & Chiaramonte in Albany, NY, is prevention. Real estate managers need to understand where fraud and theft weak points are, and address them with internal controls and preventive procedures.
In a typical property management office we have numerous processes where an ounce of prevention can be effective in reducing fraud opportunity.
A point of greatest risk is accepting cash for rent. Cash has a funny way of being able to disappear with out a trace. Prevention here is easy, don’t accept cash, period. Most people have checking accounts and everyone has access to money orders or bank checks. Even better from an internal control stand point is accepting credit or debit card payments.
Security deposits are another key area. Often these involve extra accounting and keeping funds to segregated accounts. The constant turnover in large apartment complexes can make keeping these accounts balanced a moving target. Keep things under control with regular proactive reconciliation of accounts and segregation of duties.
Vacancy and accounts receivable can also be targets. A rented unit shown as vacant or a move in that doesn’t make it into the computer until the second month can result in diverted funds and add up quickly. Write downs on accounts receivable and unresolved receivable items can mean dollars are being stolen. Keep things honest with weekly vacancy and move in reports and random inspections.
Reserve accounts which typically have large sums of money are possibly one of the scariest areas of potential fraud. These accounts get little action and usually are in CD’s or savings accounts that provide only quarterly or annual statements. Many a condo association has come up on the short end of this stick. Be sure to monitor and reconcile every Reserve Account statement.
And theft doesn’t happen only with funds. Most complexes keep some level of inventory for maintenance items and appliances. Look for out of the ordinary purchases and spikes in certain supplies. If you usually use 5 smoke detectors a month, how come all of a sudden you bought 25? It could be buying at a discount, but asking the questions will keep people on their toes. Regularly review inventory and supply reports, and let your staff know you are looking.
It is also important to provide owners and investors with accurate monthly financial reports. We have taken on many a client whose past property manager has failed to give them accurate or timely financial statements. These reports enable informed decisions and serve as a preventive control. If you are not preparing regular reports someone could be stealing you blind, and you would never know it.
While all this can be somewhat scary and daunting, a little effort and a few simple guidelines can help prevent fraud from happening to you.
Background Checks – know who you are hiring and doing business with
Internal Controls- controls keep honest people honest
Inspect what you Expect – the perception of detection is great deterrence
Set a good example – if you take things your staff will justify why they are entitled.
Watch for “red flags” – do things look like they should or is the story just not right
Watch the cash – Open all bank statements and check for unusual items, forged signatures and vendors you don’t do business with.
With preplanning and due diligence you can reduce fraud and theft opportunities and prevent potential losses.
