Cai spring 2015

Insight and Education for Community Associations Community Associations Institute / Central Arizona Chapter / www.cai-az.org

Spring 2015

Don’t be Duped: Tips for Fighting Fraud PLUS… President’s Message Myths and Misconceptions 2015 CAI CAC Event Calendar

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Are you fully covered if a weather or other natural disaster places a strain on your region’s local building supplies and labor force and prices dramatically inflate?

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And it doesn’t take a natural disaster to dramatically increase the cost of construction and repair. For Example, the Spotted Owl Protection Act of 1993 drove up the price of lumber 30% across the country.

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To find out how CAU can help your Association, give us a call at 800-228-1930 Robert Chandley – rchandley@cauinsure.com Scott McLaughlin – smclaughlin@cauinsure.com Audra Gambill – agambill@cauinsure.com

Community Association Underwriters of America

CARPENTER HAZLEWOOD PRESENTS...

* “FREE” COLLECTIONS $0 DUE FOR MORE INFORMATION CONTACT JAVIER DELGADO JAVIER @ CARPENTERHAZLEWOOD.COM

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*See full Agreement for details Spring 2015

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Don’t be Duped: Tips for Fighting Fraud Spring 2015

Community Associations Institute / Central Arizona Chapter / www.cai-az.org

Features 14

Departments From the Chapter Board President ....... 4

What Does Your RFP Process Say About You?

HOA Living – Are People Happy?

By Amy Roberts

From the Chapter Executive Director.... 5

16 Protecting the Integrity

Chapter Executive Director’s Letter

of the Election Process

By Kathe Barnes, PCAM

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21st Century Communities Need 21st Century Management

By Jake Hoffman, CMCA, AMS

18 Compilations, and Reviews, and Audits! Oh My! 19 High Fidelity –

Myths & Misconceptions ..................... 6

16

By Tim Nitti

Keeping the Association’s Money Safe

By Jeff Leane

20 Anatomy of a Fraud

By Lydia Peirce Linsmeier, Esq. and Mark Sahl, Esq.

21 Credit Card Fraud:

21 24 Security Savvy

By Chris Kelsey

26 Protecting Your

Tips for Action and Prevention

By Amber Welch

22 Identifying and

By Jeffrey Tirado

CAI Events ......................................... 10 Community Clean-up Project 2015 CAI Night Golf

Annual Sponsors ............................... 30 2015 Annual Sponsors

Congratulations Corner ..................... 32 Calendar of Events ............................ 34 2015 CAI CAC Event Calendar

Showcase of Top Sponsors

Working Through Conflicts of Interest

C E N T R A L A R I ZO N A C H A P T E R

By Erin E. McManis, Esq

While efforts to ensure accuracy are exercised, the publisher assumes no liability for the information contained in either editorial or advertising content.

By Chad M. Gallacher, Esq.

Liability Protection

Welcome to the Central Arizona Chapter!

Diamond Corner ................................ 35

Community From Theft and Embezzlement

28 Cyber Crime

New Members ..................................... 8

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Valhalla Community Magazines www.Valhalla360.com

For advertising and editorial information, please call Valhalla Community Magazines at (480) 634-1708.

Spring 2015

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From the president

HOA Living – Are People Happy?

By Mark L. Wade, CMCA, AMS, PCAM, LSM

I find this information provided by CAI to be very interesting, and hope you will too.

How do the more than 65 million Americans who live in homeowners associations and condominium communities feel about their own homeowners associations and condominium communities? Are they happy with their elected boards? How do they feel about the rules?

The Foundation for Community Association Research, an affiliate of Community Associations Institute (CAI), sponsored a recent national public opinion survey to answer these and other questions.

• • •

•

•

“for the most part” serve the best interests of their communities.

83% say they get along well with their immediate neighbors.

92% say they are on friendly terms with their association board members.

83% of residents say their community managers provide value and support to residents and their associations.

88% of residents who had direct contact with their community manager say it was a positive experience.

70% of residents say their association’s rules protect and enhance property value; only 4% say the rules harm property values.

Here are some of the key findings:

So, how are we doing?

• 90% of residents rate their overall community association experience as positive (64%) or neutral (26%).

• 90% of residents say association board members “absolutely” or

More national survey results, which include comparative data from similar surveys in 2005, 2007, 2009 and 2014, are available at http://www.caionline. org/2014survey.

From the Editor...

Community Associations Institute Central Arizona Chapter 2015 Board of Directors Chapter President Mark Wade CMCA, AMS, LSM, PCAM Leisure World Community Association 480-823-0003 • mwade@leisureworldarizona.com Chapter President-Elect Linda Van Gelder ALPHA Community Management 623-825-7777• linda@alphacommunitymanagement.com Chapter Vice-President Augustus Shaw, IV, Esq., CCAL Shaw & Lines, LLC 480-456-1500 • ashaw@shawlines.com Chapter Secretary Toni Rudolph First Citizens Bank 480-624-0949 • toni.rudolph@firstcitizens.com Chapter Treasurer Jeff Reynolds, CMCA, AMS Messina HOA 602-549-5369 • jjreyno@gmail.com Chapter Directors Milan Carnes Apache Wells HOA 937-477-8652 • milancarnes@hotmail.com Jenna Perkins, CMCA CCMC 480-905-2762 • jperkins@ccmcnet.com Mary Jo Edel, CMCA, AMS, PCAM PMG Services 480-829-7400 x202 • maryjo@pmg-service.com Josh Bolen, Esq. Carpenter, Hazlewood, Delgado & Bolen, PLC 480-427-2862 • josh.bolen@carpenterhazlewood.com CAI Central Arizona Staff Kayte Comes Executive Director 602-388-1159 • kayte@cai-az.org Chapter Office 11225 N. 28th Drive, Ste. B102 Phoenix, AZ 85029 Tel: 602-388-1159 • Fax: 602-388-1153 info@cai-az.org • www.cai-az.org Community Resource Committee

Our last publication of Community Resource focused on the “forces of nature,” and provided tips for protecting communities and property from the wrath of Mother Nature.

In this publication, we turn our focus to the storm that may be brewing within your community or business, yet will likely remain undetected until the damage is done. Like a severe flood or microburst, this storm can tear apart a community and cost an association untold amounts of money. However, unlike inclement weather, this particular storm can be prevented.

This “storm” of sorts is fraud. Fraud comes in many forms, and those who are intent on committing fraud may use various tools, technologies and tactics. The collection of articles in this publication provide expert insight into the many forms of fraud, along with practical tips to protect yourself, your community or your business from individuals who may seek to cause harm.

Jessica Maceyko, Esq., on behalf of the CAI-CAC Magazine Committee

Jessica Maceyko, Esq. Ekmark & Ekmark, LLC Jacob Marshall, CMCA CCMC Elaine Anghel, PCAM Tri-City Property Management Services Lindsey O’Connor, Esq. Carpenter Hazlewood Delgado & Bolen, PLC. Audra Gambill, CIRMS CAU Lydia Peirce Linsmeier, Esq. Shaw & Lines, LLC Sarah Sukta eUnify, Inc. John Kaye Our House Financial Services, LLC Magazine Editing Subcommittee Dawn Engel, CMCA, AMS Planned Development Services Kerry Lynn Goto, PCAM Great Boards, LLC

C E N T R A L A R I ZO N A C H A P T E R

Ursula Mancuso, CMCA, AMS PMG Services

Visit us online at… www.cai-az.org

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Kathe Barnes, PCAM Scottsdale Ranch Community Association

From the Director

Chapter Executive Director’s Letter

By Kayte Comes, Executive Director CAI – Central Arizona Chapter

The year is moving by rapidly and I want to remind all the members of the Chapter to visit our website and preview the calendar of events for the year. We have added some new educational classes for board members, homeowners and managers.

We brought back the “Best Practices” series from a few years ago. The idea is to break up some of the information from the “Guides for Association Practitioners” and have our expert members relay the information back in a classroom type setting, where we can go into more detail and the participants can asked more questions on the issues that matter to them.

We are also offering the ability for both members and non-members to purchase all 26 books at the member rate. The Education Committee’s goal is to try to offer at least half of all the Guides in 2015, and then continue into 2016. Once all classes are completed, we will then break them down into specific sections that the membership and participants want more information on. The Committee hopes by adding these classes it will help our membership receive more value and have a better understanding of how a homeowners association operates, and the responsibilities of a board member.

We are adding a new summer event this year, and have moved the Educational Luncheons back to the Phoenix area at the Hilton Phoenix Airport starting with the June luncheon. The idea of adding programs, changing venues, new committees and additional networking activities is to bring more

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value to everyone’s membership and to keep the Chapter relevant. I encourage all members if they have an idea to share it with me. I am always looking for new ways to engage our membership and have all the members have the best possible experience participating in the Central Arizona Chapter.

Kayte Comes Executive Director CAI-Central Arizona Chapter

Spring 2015

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Myths & Misconceptions

Myths and Misconceptions

By Lynn Krupnik, Esq., CCAL and Elaine Anghel, PCAM, AMS, CMCA

Myth: An association may choose the level of financial review and its corresponding expense, when hiring a CPA to conduct the annual review of the financial records.

Fact: Statutory requirements dictate that an association shall perform the level of review indicated in the governing documents. In other words, if the association’s bylaws state that the association shall conduct an annual audit, the association is required to conduct an annual audit.

If the documents are silent, the association would then have the right to choose any level: compilation, review, or audit. While it is not a statutory requirement to have an audit performed annually unless the governing documents require it, it is best practice to have a full audit done on a periodic basis. This will provide the association with peace of mind, in that the financial records underwent a heightened level of scrutiny by a qualified professional.

Myth: As long as board members recuse themselves from a vote whereby it is felt the matter may present a conflict of interest, the conflict is satisfied.

Fact: The Planned Community Act and Condominium Act require a board member with a conflict of interest to declare that conflict at an open meeting. The law states, “If any contract, decision or other action for compensation taken by or on behalf of the board of directors would benefit any member of the board of directors or any person who is a parent, grandparent, spouse, child or sibling of a member of the board of directors or a parent or spouse of any of those persons, that member of the board of directors shall declare a conflict of interest for that issue.

The member shall declare the conflict in an open meeting of the board before the board discusses or takes action on that issue and that member may then vote on that issue.

Any contract entered into in violation of this subsection is void and unenforceable.” A.R.S. 33-1243(C) and A.R.S. 33-1811. Therefore, if a board member has a conflict of interest as identified in the statute, the board member must follow the requirements of the statute. Although the law allows the board member to vote on the matter, the Arizona nonprofit corporation act contains additional provisions that state that a conflicting interest transaction will not be overturned if it is approved by a majority of the qualified

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?

directors (the ones without the conflict), so long as those directors number at least two. Therefore, to avoid the appearance of impropriety and to ensure that the minutes show that the action was approved by a majority of the qualified directors, it is often best for the board member to recuse himself or herself from voting on the matter.

Myth: We’re protected from the theft of our funds if our management company carries fidelity insurance.

Fact: Fidelity insurance carried by a management company typically does not cover the principals or owners of the management company. Therefore, if funds are taken by the principals or owners of the management company and the association was relying on the management company’s fidelity insurance to protect its assets, it may not have any recovery. Therefore, it is very important for an association to carry its own fidelity insurance policy and name the management company as an additional insured on the policy. An association should check with its insurance broker to make sure that it is carrying appropriate fidelity insurance to best protect itself from the theft of its funds, whether from board members, employees of the association’s management company, or principals and owners of the management company.

The information contained in these Myths & Misconceptions is for informational purposes only and is not specific legal advice or a substitute for specific legal counsel. Readers should not act upon this information without seeking professional counsel.

Lynn Krupnik is an attorney with the law firm of Ekmark & Ekmark, L.L.C., where she has been practicing in the area of community association law since 1997. Ms. Krupnik is a member of the CAI College of Community Association Lawyers, and speaks and writes often on topics that affect community associations.

Elaine Anghel is the Vice President of Management Services of Tri-City Property Management Services, Inc. and has been in the homeowner association industry since 1993.

Making a Difference is Our Mission.

As the Arizona division of North America’s community management industry leader, we know what it takes to create great communities that residents are proud to call home. We start by putting the right teams in place – local property experts who deliver our best-in-class solutions, along with genuinely helpful service, to enhance the property values and lifestyles of those we serve. That’s how we make a difference, every day, for great communities like yours.

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CAI MEMBERSHIP APPLICATION New Members

Welcome to the Central Arizona Chapter!

6402 Arlington Blvd., Ste 500 • Falls Church, VA 22042 Ph: 1-888-224-4321 • Fax: 1-703-970-9558 • Online: www.caionline.org/join MEMBERSHIP CONTACT: (where materials will be sent) Name: Title: Assoc./Company: Address: City/State/Zip:

The Central Arizona Chapter proudly presents and welcomes our new members from November & December 2014, January and February 2015.

Homeowner/Board Members: Ms. Ellen Babbitt Ms. Regina Marie Goodell

Individual Community Managers: Mr. Andrew F. Auteri Ms. Joanne Cobleigh Mr. Darwin Allen Abrecht Ms. Jessica Hudson Ms. Anna Bennett Mr. Alexander Derario Ms. Paula Ann Coudright

Mr. Zachary Crotty Mr. John Cuevas Ms. Marcia Johnson

CCMC CCMC HOAMCO Vision Community Management Golden Valley Property Management Vision Community Management Vision Community Management Recreation Centers of Sun City, Inc.

Management Companies: Mr. Ken Glazov

San Tan Management Group, LLC

Business Partners: Mr. Steven Sivik

Mr. Brad Johnson

Mr. Eric Dompierre Mr. Alex Baker Mr. Christopher A. Bridge Mr. Terry M. Curtis Mr. Brig Christensen Ms. Amy Naccari Mr. Scott McKeel

Phone: Fax: Email: Select your Chapter:

Central Arizona

Recruiter Name/Co. Name: TOTAL MEMBERSHIP DUES* Community Association Leaders & Homeowners q Individual Homeowner or Board Member $120 q 2 Member Board $225 q 3 Member Board $300 q 4 Member Board $390 q 5 Member Board $440 q 6 Member Board $495 q 7 Member Board $550 For 2-3 Board Member applications, please list the additional individuals who will receive materials.

For applications exceeding three, please contact CAI Customer Care at 1-888-224-4321.

Name: Address: City/State/Zip: Phone: Fax: Email: Name: Address: City/State/Zip: Phone:

Alliance Insurance Agency of Arizona Arizona Fire and Water Restoration, Inc. AZ Non-Slip Solutions, LLC Baker Law Officer CBP of Arizona, Inc. Foothills Insurance Agency, Inc. StormWater Pros Veterans Security VoteHOANow – Strateja-XL, Inc.

Fax: Email: Individual Managers Management Companies Business Partners q Accountant q Attorney q Builder/Developer q Insurance q Lender/Banker q Reserve Study q Supplier/Landscaper, etc.

Please Specify: q Technology Provider *Membership Dues above include $15 Advocacy Support Fee PAYMENT METHOD q Check Enclosed

q VISA

q MasterCard

$139 $430 $590

q AMEX

Account #: Name: Signature: CENT R A L AR I ZO N A C H A P T E R

Is your membership current?

Contact Kayte Comes at (602) 388-1159 or kayte@cai-az.org.

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IMPORTANT TAX INFORMATION: Under the provisions of section 1070(a) of the Revenue Act passed by Congress in 12/87, please note the following. Contributions or gifts to CAI are not tax-deductible as charitable contributions for federal income tax purposes. However, they may be deductible as ordinary and necessary business expenses subject to restrictions imposed as a result of association lobbying activities.

CAI estimates that the non-deductible portion of your dues is 17%. For specific guidelines concerning your particular tax situation, consult a tax professional. CAI’s Federal ID number is 23-7392984. $39 of annual membership dues is for your non-refundable subscription to Common Ground.

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Aligns the Association’s interest in recovery with the Firms Perfect for Non-Profit Corporations with Limited Cash Flow We collect our fees directly from the Delinquent Owner We do not take a percentage of the Assessments

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Visit our interactive website: http://www.azhoalaw.net

Spring 2015

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CAI Ev e n t s C ENTR AL ARIZO NA C H APTER

Community Clean-up Project

By Suzanne White

On Saturday, March 20, 2014 Community Association Institute- Central Arizona Chapter, in conjunction with Alpha Community Management hosted a successful clean-up project with the Board of Directors and homeowners at Villa Charme V in Phoenix Arizona. Residents, managers, and business partners came together to complete several projects throughout the property. Painting a total of 18 sheds, planting a total of 150 plants, and spreading a total of 125 tons of granite was a big task to complete in 4 hours. With the help of our management members and business partners we were able to complete the entire project. Thank you to everyone for your commitment and help on this project. It would not have been completed without you!

Blue Marble Landscape $100.00 monetary donation for granite

A special thank you to everyone that donated items for this event:

CAI Lunch

Pittsburg Paint-Paint for entire project, rollers and covers, frames, brushes, drop cloths, buckets and grids.

Pioneer Landscape Materials, Inc Granite donation/delivery of granite

Clean Cut Landscaping Laborers, BBQ grill, train and heavy equipment to move granite Holbrook Asphalt $1,000.00 monetary donation for granite Desert Classic Landscaping $400.00 monetary donation for granite Integrated Landscape Maintenance $300.00 monetary donation for granite, laborers RENCO Roofing $300.00 monetary donation for granite MK House Consulting Repairs on the sheds prior to painting – A $500 donation of labor CLC Painting Power washing the sheds prior to painting AS&A Management $250.00 monetary donation for granite Stillwater Landscape 50 lantana First Service Residential Cases of Water Back to Nature Laborers, heavy equipment to move granite, 20 lantana Alpha Community Management Breakfast

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Elite Landscaping 10 lantana and laborers Lawns by Les Heavy Equipment to move granite, laborers Republic Services Trash containers Paramount 911 Restoration and Construction ice, rollers, project coordination

Thank you to the CAI Community Clean up Committee: Mike Kuzmin- First Service Residential, Michael Boyce- Pittsburgh Paint and Suzanne White Paramount 911 Restoration and Construction

Spring 2015

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CAI Ev e n t s

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Suzanne White CMCA, AMS, CAAM is the Director of Business Development for Paramount Restoration and Construction and Paramount Roofing.

Suzanne has been in the industry for 13 years and is the chair of the CAI Family Community Clean-up Projects

2015 CAI Night Golf March 2015 again saw CAI-CAC’s darkest event, NIGHT GOLF! Returning to the Continental Golf Course in Scottsdale, much fun and mischief were had by all in this EVENT. Dinner and drinks kicked off the night, followed by a sunset shotgun start. Nine holes of glow in the dark best ball kept the golfers almost as busy as trying to remove the glow in the dark light sabers attached to all the pins. After golf celebrations included several raffle prizes and a 50/50 raffle!

I would personally like to thank all involved in making this event one of our funniest all year, but also a bright spot on all our calendars. Special thank you’ s to our event sponsors BELFOR Property Restoration and AlliedBarton Security as the Dinner Sponsors and the NIGHT GLOW Sponsor First Citizens Bank. Your support makes all the difference, THANK YOU!

Jenifer has been an involved CAI member for nearly 13 years and has chaired the Programs committee in the past and several events over the years. Recently celebrated a year as part of the team at Goodwill Commercial Maintenance and is excited to grow with Goodwill in their dedication to CAI.

Jenifer Meyers CMCA ~ Night Golf Lead Goodwill Commercial Maintenance Spring 2015

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What Does Your RFP Process Say About You?

By Amy Roberts

Smart community managers always start with the end in mind. If you want your contracted projects to turn out according to your expectations, invest in your Request for Proposal (“RFP”) process. Your time and detailed attention will produce “apples to apples” bids that are easily compared and evaluated.

Like any type of communication, RPFs should be written with your audience in mind. This requires you to think like your bidding contractors. What types of questions would you ask? What details would you need to know? What history is important to share? Have there been previous problems with this type of work? The more transparent and efficient you are, the more likely you are to get the job done right. In fact, we recently asked Ken Miceli of Advanced Painting and Contracting to share his thoughts on the subject. “The goal of the RFP process is not necessarily to find the lowest price,” he explains. “Instead, it is really to discover the highest value. If your RFP can clearly define this in terms of products, service and solutions, you will learn how to contract value and get the job done right.”

The best RFPs will always get the best results. To help you improve this process, we have compiled 10 pointers for conducting a seamless and successful RFP process.

1. Don’t rush.

2. Do your homework and consult licensed, bonded and insured experts.

3. Consider your audience.

4. Include specific details and images.

5. Ask for (and verify) references.

6. Provide a map of the service areas and detailed scope of work.

7. Clearly state your RFP response deadline.

8. Include a contract page in order to expedite the process

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and eliminate the need for a separate document. Ask your attorney to review contracts for inappropriate clauses or problematic snags.

9. Review and proofread multiple times. Ask a team member to proofread it as well.

10. Host a site meeting for bidding contractors to review the RFP, tour the service area, and clarify expectations. Make yourself available to bidders, acknowledge and appreciate their time.

Remember, your RFP process speaks volumes about your professionalism and integrity. This is particularly true once you have hired a contractor. Be sure to personally contact each vendor that was not chosen, and explain why they were not selected. This will help them improve future bids and encourage them to respond to new RFPs down the line.

When it comes to RFPs, success will always lie in investing in both the process and the people involved. Cutting corners with either will waste time, lose money, and risk your reputation.

Getting it right the first time will build trust, demonstrate your professionalism, and allow you to achieve the outcome you expected.

Amy Roberts currently serves as the CCMC Community Manager for Johnson Ranch in San Tan Valley, Arizona. She has been a member of the CCMC team since 2008.

Ken Miceli of Advanced Painting and Contracting can be reached at kenmiceli@ advancedpaintingaz.com.

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We focus on efficiency. By combining competence with innovation, we aim to provide superior legal services, more affordable prices and better results.

Advising Boards Collecting Assessments Attorneys

Enforcing Restrictions

Augustus H. Shaw IV, Esq., CCAL Member CAI-CAC Board of Directors Member, College of Community Association Lawyers ashaw@shawlines.com Mark E. Lines, Esq., CCAL Member, College of Community Association Lawyers mlines@shawlines.com Lydia P. Linsmeier, Esq. llinsmeier@shawlines.com

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For more information, contact Brook Silvestri at 630.450.0534 or visit acapbank.com

Spring 2015

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Protecting the Integrity of the Election Process

By Kathe Barnes, PCAM

Homeowner associations are a business. Taking those extra steps to safeguard your elections even before you have a problem is a good business practice. The board elections are a democratic process that requires some order to prevent anarchy amongst the members. If a board election is not done with integrity and control, the membership will lose confidence in the board and, ultimately, the association.

Many years ago, our association decided to take on the task of writing a detailed set of election rules which would define the powers of an owner and the limitations of the association.

This allowed us to provide control and order to such an important process. Of course, Arizona state statutes have also shaped the way elections are to be run.

Our board formed an election committee consisting of resident volunteers that would write the rules, as well as continue to oversee the election process. At that time, we were fortunate to have a member who belonged to the League of Women Voters providing valuable information.

The result was a 15-page document which would help to ensure a uniform, unbiased election process open to all eligible members of our association. One might think this is cumbersome and overkill, but it outlined everything, including: • • • • •

•

Committee charter Election timeline Application procedures/standard application form Teller committee procedures Ballot criteria to include type, eligibility, distribution, processing, invalid ballots, and retention Meet the Candidates Forum

One of the major changes that was made during this task of implementing new rules was to eliminate the nominating committee. This was done by amending our bylaws and was approved by our membership. The only criterion for a homeowner to be placed on the ballot was that they had to be a member in “good standing.” This helped to eliminate any reference to a “controlled” election or to the “good old boys” running the association. It was only up to the membership as a whole to decide. Another change was to go to a secret ballot system using a two-envelope system and ballots printed on security paper. This was obviously a more expensive and labor-intensive process but allowed for complete anonymity.

Lastly, the rules defined that the teller committee must be

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comprised of volunteer members who are not on the board or affiliated with a candidate in any way. The other important part was that managers can provide administrative assistance to the committee of volunteers but not with the actual vote counting. Managers could be perceived to have a vested interest in the outcome of the election and should be kept at arm’s length. All of these methods will help to avoid any appearance of impropriety.

Taking it a step further, whenever we have known it might be a “spirited” election, we have called in the League of Women Voters to assist our association with the election.

They have provided moderation services for our Meet the Candidates event as well as overseen the teller committee for the counting of the ballots. The cost is minimal but priceless when the association can bring in a neutral third party.

Finally, our association made a change a few years ago to encourage attendance at the annual meeting. Once the business portion of the meeting was concluded, a “celebration” of the association followed. Our staff created a video montage of all the accomplishments and highlights of the previous year, hosted trivia questions about the association, served refreshments and held raffles. Our philosophy was “We Succeed Together.”

The ultimate goal was to make our annual meeting and board election run smoothly, efficiently and, of course, free of drama!

Kathe M. Barnes, PCAM, Executive Director for Scottsdale Ranch Community Association, has over 30 years’ experience as a large scale manager at the same community. She is a current delegate for the Legislative Action Committee (LAC) and member of the PCAM Committee.

21st Century Communities Need 21st Century Management

By Jake Hoffman, CMCA, AMS

In the professional association management industry, those who are able to keep up with the rapidity of technological advances and hyper connectivity of our society become the difference-makers in the competitive marketplace. Too often the importance of the technology around us gets lost in the constant shuffle of catchy marketing names and product overload. Unfortunately, many homeowners, board members and professionals fail to realize the true value of those fancy sounding buzzwords like centralized accounting, automated accounts payable, optical character recognition (OCR) software, secure electronic voting and information privacy redundancy protocols. Understanding these service differentiators is precisely what will position them to survive and thrive in the changing economy, while protecting their homeowners from the financial and data related dangers that exist in our new interconnected society.

Industry leaders have invested millions of dollars to put in place the industry’s most secure financial and data management protocols in order to optimize the product delivery systems necessary to offer an unrivaled level of service. This kind of forward-thinking is precisely what will help bring about the industry-wide paradigm shift necessary to prevent fraud and unethical behavior. Below is a brief analysis of the benefits that have been pioneered over the last few years.

those days are long gone. The exponential increase in system efficiency alone is enough to justify the capital investment, not to mention the transparency factor for community association board members. Automated AP allows vendors to email invoices directly into an OCR inbox, which automatically reads and codes the invoice before sending it to the community manager for verification and approval.

Upon approval, a check is cut and sent directly to the vendor.

As mentioned earlier, the best part is that access can be granted to the board so they can view every invoice, note and approval in real time.

Secure Electronic Voting Secure electronic voting offers many benefits to an association. First, it allows homeowners the ability to vote any time during an election period from their desk or even mobile device. Second, electronic voting is inexpensive, especially when compared to mailing paper ballots to all eligible owners within a community. Finally, secure electronic voting does not preclude a paper option for those without access to a computer or those not particularly versed in online navigation. Of course, there is no one perfect solution alone that works to boost community involvement.

Secure electronic voting has proven effective in larger communities to reduce costs, limit the environmental impact and grow member participation.

Centralized Accounting Many of us assume that the people around us are honest, and most likely the majority of them are; however, it only takes one bad apple faced with hands-on access to thousands of dollars of homeowners’ funds to spoil the reputation of the industry at-large. Centralized accounting minimizes the risk of financial security breaches such as fraud or embezzlement by significantly reducing the number of human interactions with association’s funds.

These are just a few of the security and technology driven changes our industry has experienced in recent history.

Management companies willing to take these steps will not only gain a competitive advantage over those that lack the capital to make such investments, but they will gain the loyalty of client community board members for years to come.

Automated Accounts Payable Remember the good ole days of physical checks coming to and from the office? With automated accounts payable

Jake Hoffman CMCA® AMS®, is the Director of Client Relationships at Associa Arizona and supports both team members and clients with training and education, communication and strategic planning, media relations, business development and more.

Spring 2015

17

Compilations, and Reviews, and Audits! Oh My!

By Tim Nitti

In 2013, Arizona was home to an estimated 9,100 community associations, whose 1.8 million residents paid their respective associations approximately $1.8 billion1 in assessments.

That’s a formidable sum of money, and it’s a prime target for fraud. So how do you defend against fraud? How can you help prevent, detect, or deter fraud from targeting your association?

As you prepare your budgets this year, you may be wondering what level of financial reporting service your association needs. Arizona Revised Statutes require all associations to obtain an audit, review or compilation on an annual basis. Consult your association’s organizational documents, however, as they may specify if a certain level of service, like an audit, is required. If the level of service isn’t specified, then you’re free to choose whichever you feel is most prudent for your association.

Here are some of the differences:

So how do you determine which level of service is right for your community?

That depends, and the answer won’t necessarily be the same year after year. If your association is relatively small, has very little in the way of common areas, or you’re looking for more of a “bird’s eye view” into your financial information, then a compilation might be all that is required. If your association is a master planned community, has a large network of common areas, offers additional services or amenities, or you’re really just looking for the highest degree of professional assurance a Certified Public Accountant can give, then an audit might be the better choice.

If you’re not really sure, that’s fine too, that’s what your Certified Public Accountant or financial advisor is there for.

Comparison Snapshot

Level of Assurance

Compilation

Review

Audit

Accountant does not obtain or provide any assurance that the financial statements are free of material misstatements

Accountant obtains limited assurance that the financial statements are free of material misstatements

Auditor obtains high, but not absolute, assurance that the financial statements are free of material misstatements

Yes – Assessments are recalculated, contracts are reviewed, etc.

Yes – Assessments are recalculated, contracts are reviewed, etc.

Are inquiry and analytical procedures required?

Is the accountant required to obtain an understanding of internal controls and assess fraud risk?

Is the accountant required to perform verification and substantiation procedures?

No

No

No

No

Yes – Accounting department is physically observed, staff is interviewed, fraud risk areas are identified

No

Yes – Asset accounts are verified, invoices are reviewed, selected transactions are tested in detail

Tim Nitti is a Senior Auditor with Butler Hansen, P.C. Butler Hansen has been specializing in providing services to homeowners associations for more than 45 years. Please visit us at www.butlerhansen.com.

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Estimates obtained from the Foundation for Community Association Research, 2013 Community Association Fact Book for Arizona.

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High Fidelity – Keeping the Association’s Money Safe

By Jeff Leane

One of the most significant fraud risks facing community associations is the theft of money by those who routinely handle association funds. Most commonly, those who steal are board members, direct employees of the association, and management company employees and owners. Every association can take steps to implement safeguards to help prevent the theft of money and also purchase insurance that will replace money if it is stolen.

Unscrupulous directors, managers or employees can take advantage of volunteers’ trust, minimal financial knowledge and their lack of time to vigilantly monitor receipts and disbursements. Sometimes a theft will be part of an organized plan to defraud the association, but often it will be a crime of opportunity and the board of directors should take steps to minimize that opportunity.

Procedural Controls to Safeguard Your Money • Don’t accept cash payments for assessments, fines or fees.

Payments should be made by check, ACH direct debit, and in some cases, credit card.

• Avoid petty cash accounts and association credit cards, if possible. Place low limits on accounts if they are needed.

• Require countersignatures on all association checks.

• Stamp all invoices and supporting records as “PAID” when checks are signed.

• Bank accounts should be reconciled by someone not authorized to deposit or withdraw money.

• The Board should review bank statements in addition to the monthly financial statements and query checks to unfamiliar vendors.

• All investment and bank accounts should be in the association’s name.

• Keep financial and accounting procedures in writing.

• Contract with a professional management company who will implement these controls.

• Have an independent CPA conduct an annual audit to uncover irregularities and to deter those who might steal.

An audit is more thorough and detailed than a simple review of the financials.

Insurance to Protect Your Money We all purchase insurance to protect our physical assets, and so we should similarly insure our monetary assets.

Most associations have some requirement in their CC&Rs to purchase some level of fidelity protection. FHA-backed mortgage lenders will verify that an association carries fidelity insurance before approving a loan to a buyer in that community. The amount of insurance they will require is

equal to three months’ assessment income plus the amount held in reserves, although some CC&Rs may require a limit of insurance that is higher than this amount.

A fidelity bond (also called crime insurance) is not a “bond” in the traditional sense of the word, but it is an insurance policy that will protect the money, securities and some types of other property of the association. Common fidelity bonds can be made up of different “insuring agreements” covering different types of theft. The most common insuring agreement that should be carried by every association is “employee dishonesty” coverage.

Employee Dishonesty Coverage protects against theft and embezzlement of money, securities (securities could be tokens, tickets or even postage) or merchandise by board members and other volunteers who handle money, employees of the management company and direct employees of the association.

Even if the association has no direct employees, for the purposes of the fidelity bond, an insurer will classify persons who have a role in the financial process and are subject to the control and direction of the association as an “employee.”

Other insuring agreements than can be part of a fidelity bond: Forgery or Alteration Coverage protects against forged or altered checks, drafts, notes, etc. by an outsider. Forgery by a board member, manager or employee is commonly covered by employee dishonesty.

Inside the Premises – Theft or Robbery protects your money that is stolen by an outsider from an association office, safe, clubhouse or store.

Outside the Premises will protect money stolen from a messenger, courier service, or employee going to the bank.

Computer Fraud/Funds Transfer Fraud will protect association money against a fraudulent transaction resulting from a computer or other type of fraudulent authorization to transfer, pay or otherwise deliver funds from the association’s account.

If you are unsure which insuring agreements you should have, always discuss your specific insurance needs with an insurance professional specializing in community association insurance.

Jeff Leane is a licensed Community Association Insurance Specialist with LaBarre Oksnee Insurance in Scottsdale, AZ and has served the community association industry for over 23 years.

Spring 2015

19

Anatomy of a Fraud

By Lydia Peirce Linsmeier, Esq. and Mark Sahl, Esq.

Nobody would defraud a nonprofit community association that exists solely to provide services to its community members, right? Wrong. Over the past several years, hundreds of community associations have been defrauded across the nation. Dozens of those community associations are located here in Arizona. Fraud can have deleterious effects on an association, including the loss of substantial assets and the loss of the most important community asset: trust.

HOW IT HAPPENS: Community associations may encounter financial fraud in a variety of situations. Fraud could arise from the acts of a board member, an employee, a homeowner, or a vendor.

Anyone who has access to a community association’s funds has the ability to embezzle those funds. This could come in the form of fabricated invoices, overcharging for services, funneling funds for unapproved purchases, or simply taking money from the association’s bank accounts. Depending on the level of sophistication, financial fraud can wreak havoc for years without the association discovering the problem.

After an association’s funds are taken, it can be difficult to recoup the funds. The association must determine whether funds were taken, the amount of the funds taken, and how the funds were taken. In order for the proper authorities to open an investigation, the association must first provide them with substantial documents and information. This may necessitate an expensive forensic audit, time-consuming record pulls, or even legal action by association counsel.

Of course, the easiest way to protect the association is to prevent the fraud from occurring in the first place.

HOW TO PREVENT FRAUD: While it may not be possible to prevent financial fraud from ever occurring, there are a number of “best practices” that should be followed to protect an association’s finances.

Follow the Law and the Association’s Governing Documents Pursuant to A.R.S. 33-1810 (for planned communities) and A.R.S. 33-1243 (for condominiums), a community association is required to have a compilation, review, or audit performed each year. Furthermore, many association governing documents (typically CC&Rs or Bylaws) require the preparation of an annual audit. While an audit is not necessarily designed to detect fraud (it is primarily designed to determine if the financial statements are free from material misstatements), an audit will significantly increase the chances of finding material errors whether due to fraud or other irregularities. For added security, the auditor should use account statements provided directly by the financial institution.

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Enlist the Services of a Certified Public Accountant While the above statutes do not specifically require that a Certified Public Accountant (“CPA”) perform the annual compilation, review, or audit (unless the governing documents require the use of a CPA), community associations should strongly consider using a CPA to perform this work. It is also preferable that the CPA selected specializes in the community association industry. CPAs are experts in their field and know what to look for when performing the above engagements. A properly qualified CPA is more likely to find any fraud or other malfeasance occurring within the association finances.

Promote an Active and Informed Board of Directors Association directors are typically lay people selected from within the community, not accountants and attorneys. A community association’s board of directors hires professionals and is entitled to rely on the advice of those professionals.

Before selecting any professional who will perform work on behalf of the association, the board should conduct the necessary research, obtain referrals from trusted partners, and ensure that the professionals hired are experienced and respected in their field. Ultimately, the board of directors is responsible for the financial affairs of the association.

Directors must take an active role and obtain qualified help to protect the funds contributed by the association’s members.

Carry the Necessary Insurance All community associations must ensure that they are meeting the insurance requirements contained in the association’s governing documents. Furthermore, while fidelity bonds may not be required in all instances, every community association should strongly consider obtaining this type of insurance, which may protect the association in the event a board member, employee, or vendor defrauds the association.

No practice can be 100% effective at preventing financial fraud. However, if the above best practices are followed, the likelihood that a fraud will occur is greatly diminished.

If a community association has reason to believe that it has been the victim of fraud, the association should immediately consult with its professionals (such as the management company, attorney, and CPA), and contact the local authorities as soon as possible.

Lydia Peirce Linsmeier, Esq. is a senior associate with Shaw & Lines, LLC. Her practice focuses on civil litigation, insurance defense, fair housing, and assessment collection.

Mark Sahl, Esq. is a partner with Carpenter, Hazlewood, Delgado & Bolen, PLC. He is also a Certified Public Accountant. Mark focuses his practice on litigation, CC&R enforcement, fair housing issues, liquor law, and collections issues.

Credit Card Fraud: Tips for Action and Prevention

By Amber Welch

It’s a typical Saturday morning. You sit down in your home office, collect your stack of mail and get ready to pay some bills. With the click of a few keys, you access your online banking site and your usual morning ritual is quickly put to a halt. $200 charge from Target, $350 charge from Nordstrom and another $500 from Best Buy? You didn’t go on a shopping spree…. you’re feeling sick, anxious, scared, and realize you have just been the victim of credit card fraud.

Unfortunately, credit card fraud is a growing problem, and with continual advances in technology, it’s becoming easier and easier for thieves to gain access to your information.

In fact, thieves don’t even need your physical credit card to access your account. So, what should you do if you are a victim of credit card fraud?

• Contact your Bank: First and foremost, if you notice fraudulent activity on your account, contact your bank or credit card provider. A good rule of thumb is the sooner you talk to your bank, the better. Financial institutions are required to have an identity theft protection plan in place.

They can help flag your account to prevent additional fraud charges, reissue a new credit card, contact the credit bureaus and proceed with recouping your funds. If necessary, they may also suggest closing your account and transferring to a new account.

• Check your Credit Report: Checking your credit report is always a good idea to make sure nothing unauthorized has been opened in your name. You are entitled to a free annual credit report and can do so through www. annualcreditreport.com. Once you receive your credit report, look for unfamiliar credit inquiries.

• Keep all Documentation: Keep a log or file of all documentation related to your fraud case. This might include a copy of your bank statement and a log of any support representatives you have worked with. Store all information in a secure location such as a locked filing cabinet.

Now that you have reported suspicious activity on your account, you will want to take some additional steps to prevent credit card fraud from happening to you again.

• Keep Information Secure and Destroy Properly: Store all financial information in a secure location. This would include bank statements, banking login information and account numbers. Better yet, if available, enroll your accounts in e-statements. Not only are you helping out the environment by going green, but you are also limiting the paper trail that a thief may obtain. When you are ready to destroy paper documentation, make sure to do so properly through a shredder.

• Use a “Good” Password: It sounds simple, but you may

• •

•

• •

be surprised how many people use pet names, anniversary dates and birthdays for their online banking passwords. A good practice is to create a password with 6-8 alphanumeric characters which contain both upper and lower case letters.

Even better, incorporate a special character!

Visit Secure Sites: Visit and shop on secure sites only.

Secure sites include an “https:” prefix.

Update, Update, Update: Keep your computer up to date on antivirus software and regular system updates. In addition, make sure your bank and/or credit card provider is updated with your current contact information. This would include phone numbers, addresses and email addresses.

Sharing is Not Caring: Forget the “sharing is caring” rule that your parents taught - at least when it comes to your banking information. Never share your password, pin or account numbers. Thieves use a technique called “phishing”, which involves sending out emails requesting sensitive information. Some have gotten so good they actually look like an email from your bank! Don’t be duped; your bank should never ask for this information. As a good practice, always use secure email if you are contacting your bank directly.

Keep your Eyes Open: Check your accounts often and monitor activity. If you see something suspicious, contact your bank right away.

Lock it Down: Companies such as LifeLock help safeguard your identity and monitor credit card fraud. Also don’t forget to request your free annual credit reports through www.annualcreditreport.com. However, be leery of other sites with free offers; some may ask for credit card information, which later may charge you a membership fee. You are entitled to a FREE annual credit report from the three major credit bureaus: Equifax, Experian and TransUnion.

Credit card fraud can be a scary thing, but following a few prevention steps can save lots of time, energy and frustration.

The good news is, in combination with a prevention plan and your bank’s support, you will limit your chances of fraud and know how to attack if you are a victim.

Amber Welch, Specialty Accounts Relationship Manager at Metro Phoenix Bank is a 2013 CAI Rising Star Award Recipient, 2014 Business Hall of Fame Award Recipient, and a member of the CAI Events Committee and Business Partner Committee.

Spring 2015

21

Identifying and Working Through Conflicts of Interest

By Erin E. McManis, Esq

Many board members will be faced with a conflict of interest while serving on a board of directors. Sometimes the conflict of interest is obvious and the board member takes appropriate action; however, the more common scenario is when the conflict is not obvious. It is imperative that board members identify conflicts of interest so board members can uphold their obligations to their association, as well as follow statutory requirements. Additionally, it is important for board members to be cognizant of perceived conflicts of interest. Many times a disgruntled owner erroneously thinks a conflict exists; if a board can identify and address perceived conflicts, the board can hopefully build rapport within the community and help keep the association running smoothly. This article will address some common conflicts of interest, and steps board members can take to protect their association.

Simply put, a conflict of interest is a situation that can undermine a person due to self-interest. While conflicts of interest can take many forms, this article limits itself to the following two conflicts: when a board member is personally vested in an outcome of a board decision; and when a board member has a personal relationship with a prospective vendor.

BOARD MEMBER PERSONALLY VESTED IN OUTCOME OF DECISION Hopefully, all board members are personally invested in the association and want to see the association thrive. Board members have an obligation to the association to act in a manner they reasonably believe is in the best interest of the association. The problem arises when a board member has a personal interest in the outcome of a board decision that is perhaps unique to that individual board member. When this happens, the board member must decide whether it is appropriate to vote on the issue. This conflict is highlighted 22

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in the following scenario: In this fictional association, a highly debated topic is whether the board of directors should enact dog breed restrictions, which would prohibit certain types of dogs.

In this association, there are aggressive dogs, and the board believes the problem can be curbed by enacting breed restrictions. The board is considering the issue at its next meeting; this particular association’s CC&Rs allows for the board of directors to adopt breed restrictions. The Treasurer of the association owns one of the breeds the board will vote on restricting. Should the Treasurer vote on this issue? Should the Treasurer disclose that he owns the type of dog the association is considering restricting?

Like most issues, the answer turns on individualized facts; however, most likely there is not a conflict of interest in this scenario. The Treasurer can likely vote on the issue, so long as the Treasurer is acting in the best interest of the association, and not acting on his own personal interest.

Most likely, if the association is considering prohibiting certain dog breeds, there are several individuals in the community that would be impacted, so the issue does not just impact the Treasurer. However, in this instance I recommend the Treasurer disclose at an open meeting that he owns a breed of dog the board is considering restricting.

Full disclosure upfront will help prevent an owner from later asserting there was a conflict of interest—because whenever there is the perception that the board is hiding something, that perception will create discontent within the association.

However, what if the facts in this scenario change slightly?

Suppose the Treasurer not only owns a breed the board is considering restricting, but the Treasurer owns a dog that exhibits aggressive behavior. In this scenario the board is also voting on whether to take legal action against

owners that have aggressive dogs, as owning an aggressive dog is in direct violation of this association’s governing documents. Can the Treasurer truly be impartial in his decision making, and act in the best interest of the association? In this case, the Treasurer is in direct conflict with the governing documents, and the board is considering taking legal action against the Treasurer.

Given the circumstances, it seems unlikely the Treasurer could act in the best interest of the association, considering his personal interests are in direct conflict with the association. Most likely, this would be a scenario where the Treasurer should disclose the conflict and abstain from voting, although the law does not require the Treasurer to abstain from voting.

the board member may vote on the issue ONLY if the board member FIRST discloses the conflict at an open board meeting BEFORE the board discusses or takes action on the issue.

PROSPECTIVE VENDER CONTRACTS Entering into vender contracts is another area where conflicts may arise. Typically, the conflict occurs when a board member has a relationship with the prospective vender, and the board member (or certain members of the board member’s family) stands to benefit financially from entering into the contract. In this fictional example, the association is looking for a new landscaper, and the board is about to vote on hiring a company owned by the Secretary’s husband. May the Secretary vote? Does the situation change if the company is owned by the Secretary’s daughter, mother, or friend?

However, the original scenario asked if the situation would change if the owner of the landscape company was the Secretary’s friend. Arizona Statute does not require the Secretary to disclose the relationship if the owner of the landscape company is the Secretary’s friend. However, as a practice tip, it is generally best to err on the side of disclosure when it comes to a potential conflict of interest.

If the owner of the landscape company is a close friend, it would be prudent for the board member to disclose the relationship at an open board meeting. I also recommend the board member abstain from voting, even though the member is not prohibited from doing so by Statute.

Arizona’s Planned Community and Condominium Acts specifically address this situation, and provide clear direction for when a board member (or certain family members) stands to obtain a financial benefit by entering into a contract with the association. Arizona Revised Statute Section 33-1811 of the Planned Community Act and Section 33-1243 of the Condominium Act sets forth the following: “If any contract, decision or other action for compensation taken by or on behalf of the board of directors would benefit any member of the board of directors or any person who is a parent, grandparent, spouse, child or sibling of a member of the board of directors or a parent or spouse of any of those persons, that member of the board of directors shall declare a conflict of interest for that issue.

The member shall declare the conflict in an open meeting of the board before the board discusses or takes action on that issue and that member may then vote on that issue.

Any contract entered into in violation of this section is void and unenforceable.”

As set forth herein, board members must act in the best interest of the association. Board members must always put the interest of the association above their individual interests. Just because the Secretary is permitted to vote on the landscape contract if she discloses the owner of the company is her husband, does not mean the Secretary should necessarily vote on whether to enter into the contract. If the Secretary cannot put the needs of the association first, the Secretary should abstain from voting.

If the contract financially benefits the board member (or parent, grandparent, spouse, child or sibling of the board member, or a parent or spouse of any of those persons),

In the above example, if the owner of the landscape company is the Secretary’s husband, daughter or mother, the Secretary must first disclose the relationship at an open board meeting. If the board member discloses the relationship, the board member is then permitted to vote on the issue. However, as a practical matter, I believe it is better if the board member abstains from voting, even though the member is not prohibited from doing so by Statute.

CONCLUSION During the course of serving on the board, many board members will face a conflict of interest similar to the scenarios discussed in this article. Depending in the specific circumstances, a board member may be permitted to vote on the issue. However, if there is any doubt as to whether a board member may (or should) vote on the issue, it is best to seek the advice of the association’s legal counsel. A quick phone call or email to your attorney will undoubtedly be less expensive than the legal fees needed to defend the board against a legal challenge brought by a homeowner.

Erin McManis is an associate with Maxwell & Morgan, P.C. Ms. McManis has exclusively represented community associations since 2010, and joined Maxwell & Morgan in October 2014.

Spring 2015

23

Security Savvy

By Chris Kelsey

The need for convenience and efficiency in accomplishing core management functions should not come at the price of security. No one wants to be the next “big box� chain to compromise client data. Consider these points to keep your association and client data safe when making a software purchase: 24

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In the Cloud

Online Payments

It might seem counterintuitive, but statistics show cloudbased computing is actually safer than traditional IT systems. We tend to equate control with security, but when it comes to cybersecurity, cloud-based systems are better equipped to offer enterpriseclass security protocols than in-house systems.

When offering homeowners the convenience of making online payments, security should be the primary concern.

The major payment brands, AMEX, Discover, MasterCard, Visa, and JCB formed the Payment Card Industry Security Standards Council (PCI SSC) as a self-regulatory body to prevent fraud. The payment brands require that all servicers and merchants accepting payments are compliant with their data and procedural standards.

PCI compliance is the most important factor when selecting an online payment processor.

Imagine the expense of replicating Amazon’s security systems, or how your in-house firewall would fare in a cyberattack compared to Amazon’s systems. The focus of security should be more on access and less on location. Using hosted solutions could also mean serious IT savings for your company, which could be used to help grow the business.

Encryption If you choose to adopt a web application or hosted solution, be sure to ask about encryption. The U.S. National Institute of Standards and Technology (NIST) established 128-bit encryption as standard in 2001, and this level of encryption is still sufficient for most types of data2. The National Security Agency (NSA) uses 256-bit encryption for sensitive data, and many online services have moved to require a 256-bit key size as a minimum standard. Bank transactions typically employ this level of encryption, for example.

Not all data is created equal. More often than not, financial information and personal identities are the objects of attack.

To keep these safe, any online login form requiring a username and password should be encrypted.

Real-time access points should be safeguarded and encrypted, and so should data backups. Ask whether or not backed up data is encrypted.

Web portal vendors might offer integration with payment processors and even offer single sign-on (SSO) access to make online payments from within homeowner portals.

SSO allows for users to make payment without entering a separate set of login credentials on a secondary website. It is important to confirm that your site/web portal uses a Secure Sockets Layer (SSL) connection and that this SSL chain is unbroken in the server dialogues and “handshakes” used to authenticate payments.

Free Software Many business tools are available for free trial or for free download. A common practice with free software downloads is to include a host of unwanted applications, search engines, or antivirus programs.

This is termed “bundling” and could expose you to malware or viruses. Adobe Reader is free to download, for example, but McAfee antivirus is bundled with it. This might not be the worst program to have bundled in, but for many, it could still be an unwanted download.

To avoid downloading unwanted bundled programs, slow down and review all of the setup or install screens; bundled programs are often set to be included by default and usually can be omitted by unchecking a box. If you are clickhappy or skip the fine print, you could end up with unwanted programs or viruses, and the hassle of rooting them out.

Chris Kelsey is the Director of Support for eUnify, a cloud-based property management software and iColligo, an HOA collections software for law firms.

He serves on the board of his self-managed HOA and has earned a Masters of Business Administration from Arizona State University.

Spring 2015

25

Protecting Your Community From Theft and Embezzlement

By Chad M. Gallacher, Esq.

“I can’t give you specific information about the Association’s accounts because you are not an authorized signer, but I can tell you that our bank is not holding any of the Association’s money.” The banker’s words ricocheted violently around the small room as the newly elected treasurer for the association struggled in disbelief to grasp their significance.

The association’s former treasurer had prepared meticulous financial statements every month. The financial health of the association had been fully and beautifully charted in financial statements the former treasurer had dutifully prepared each month the entire seven years he served in that capacity.

The financial statements clearly indicated that while the association’s operating funds had been moved to a new financial institution about six months earlier, the association still held approximately $120,000.00 in a savings account at the bank. Yet the bank had just confirmed that the money was not there.

That there was something awry with the former treasurer was not a complete surprise to the association’s new board.

The meeting with the bank that morning was supposed to have been a joint meeting with the former treasurer and the newly elected one to sign over authority to access the money purportedly held in a savings account at the bank. The meeting had been once postponed already due to alleged health issues cited by the former treasurer. A couple hours before the appointed time for the rescheduled meeting, the former treasurer sent an email advising that he would not be meeting at the bank that afternoon on advice he received, and that he would not sign over access to the association’s account until certain “concerns” could be resolved. The former treasurer had been instructed in clear terms that he must sign over access to the association’s account, and he was required to meet the new treasurer at the bank to sign the appropriate paperwork. However, the former treasurer had not come.

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The failed meeting at the bank kicked off an extensive and expansive investigation in to the association’s finances. The association initiated a lawsuit and subpoenaed records from the bank. In response, the association received over 1,200 pages documenting that the financial statements carefully prepared by the former treasurer for seven years were false and wholly fabricated. The documents subpoenaed from the bank further revealed a pattern of embezzlement via electronic transfers from the association’s accounts to an account with a second bank, which was later confirmed to be owned by the former treasurer personally. The first electronic transfer to the former treasurer’s account at the second bank was made within the first three months of being elected as treasurer. The electronic transfers increased in size and frequency as time passed. Ultimately, the former treasurer stole hundreds of thousands of dollars from the association. The association succeeded in securing a judgment for the full amount of the embezzled funds, avoiding discharge of the community debt in a bankruptcy proceeding filed by the former treasurer’s spouse, and assisting the State in a criminal prosecution that resulted in the former treasurer’s incarceration. The association, however, is far from whole.

Currently, the association is receiving monthly restitution payments from the newly-released-from-prison former treasurer. However, the effects of the embezzlement on the community have long outlived the former treasurer’s now-completed sentence and may continue to plague the association for some time to come. While the association is on its way to recovery and ultimately will not be forced into bankruptcy due to the embezzlement, the cost of the embezzlement on the community has far exceeded the dollar amount stolen. As part of its recovery, the association has implemented several safeguards to protect against possible future theft. Many of these safeguards can likewise be

implemented by homeowner associations to reduce the risk of theft or embezzlement from the inside. This article identifies five such safeguards.

1. HIRE PROFESSIONAL AND REPUTABLE MANAGEMENT Homeowner associations often consider the possibility of saving money through self-management. If community members have extra time and are willing to donate their time to managing the association, the prospect of selfmanagement can sound appealing. Especially to members of the community far removed from the demands of daily community operation, the idea of lowering dues by cutting professional management can gain strong support.

However, professional management can be an effective shield against theft from the inside. While professional management can be a significant expense, hiring professional and reputable management can be much less expensive than embezzlement due to inadequate financial safeguards. Although professional management does not necessarily guarantee that a homeowner association’s funds will be adequately protected, professional management can increase the security of the Association’s finances.

2. HAVE MULTIPLE SIGNERS ON ASSOCIATION BANK ACCOUNT. Authorizing multiple signers on association bank accounts improves the checks and balances related to corporate funds. If only one individual has direct access to association bank accounts, the possibility for others to investigate and identify questionable activity is greatly reduced. Additionally, an individual with sole access to an association’s bank account can be emboldened in the temptation to steal knowing no one else can review the record created by the bank statements without his or her knowledge. When more than one person can independently access an association’s bank statements, no one signer on the account can control the availability of financial information. This is not to suggest that every member of an association’s board and every member of the management team should have unfettered access to the association’s funds. Nevertheless, having more than one person with access to obtain and review bank accounts directly can decrease the possibility of theft.

3. DO NOT GET TOO COMFORTABLE. As homeowner associations run smoothly, there can be a tendency to relax with respect to formalities that can serve to protect the corporation. Long-standing board members bring valuable continuity and operational understanding to the Association. However, each individual member of an association board should take personally his or her duties to the association and not get comfortable to the point they fail to pay attention to the business of the association. There can be a tendency for members new to a board of directors for an association to rely heavily on more seasoned board members, especially if everything seems to be functioning

without turbulence. Resting too heavily on tradition and history without confirming documentation to support the history and ground the tradition, can create a setting ripe for theft. Remaining ever vigilant in reviewing financial documents and maintaining a keen awareness of association business will help protect homeowner associations from internal threats.

4. CONDUCT AN ANNUAL AUDIT, REVIEW OR COMPILATION. Arizona law requires an annual audit, review or compilation of association finances. A.R.S. § 33-1810 imposes this requirement on planned communities and A.R.S. § 33-1243 requires the same for condominiums. Although Arizona law does not require that the audit, review or compilation be completed by an independent third-party, it is good practice for homeowner associations to periodically employ outside accountants to conduct the required audit, review or compilation. While Arizona law does not require an annual audit, review or compilation to be performed by an independent third-party, some community documents do contain such requirements. Review your community documents before you determine to have an in-house audit, review or compilation.

5. SECURE APPROPRIATE FIDELITY COVERAGE. Fidelity bond coverage is insurance an association can buy to indemnify against the dishonest acts of a director, officer or employee of the association. Purchasing appropriate fidelity bond coverage can protect homeowner associations from loss in the event a board member does steal funds from the corporation. Fidelity bond coverage will generally only serve to reimburse losses that occur while the coverage is in place.

Therefore, it is important for homeowner associations to always carry such coverage.

Embezzlement from someone in a position of trust within a homeowners association can destroy the peace and security of a community. By ensuring that appropriate safeguards are in place to protect against embezzlement, homeowner association boards can increase the possibility of catching a problem before it causes too much damage.

Likewise, appropriate safeguards can deter such criminal activity in a community. Homeowners associations are encouraged to contact legal counsel with questions regarding implementation of such safeguards. The safeguards identified herein are not intended to be an exhaustive list; there are additional precautions and procedures associations can put in place to protect corporate funds. However, implementing safeguards such as those discussed above will increase the probability that your community will never have to hear a banker tell you “I’m sorry, but the Association’s funds are gone.”

Chad M. Gallacher is an attorney with the Law Firm of Maxwell & Morgan, P.C. He has been practicing homeowner association law for seven years.

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Cyber Crime Liability Protection

By Jeffrey Tirado

Does an association you manage have a website? Does it conduct credit card or electronic funds transfer banking transactions on its website or through a third party vendor, or record or track unit owner, homeowner or volunteer information? Does the association use social networking media such as Facebook or Twitter? Do association staff and volunteers have access to sensitive information via laptops or other portable devices like smart phones?

If you can answer “yes” to any of these questions for an association you manage, it may be at risk of a potential data/ security breach—the fastest growing crime in the world.

While the standard insurance coverage available to community associations covers general liability, D&O and commercial property, it typically doesn’t provide coverage for cyber liability-related claims. If left unprotected in the event of a cyber-liability claim, an association could be at significant financial risk.

What is a data/security breach?

A data/security breach is when sensitive, confidential data, such as personal identification or health information, trade secrets or intellectual property, may have been viewed, stolen or used by an unauthorized individual. Such breaches, called cyber-crimes, occur every day and cost those affected billions of dollars per year to investigate, repair company systems and websites, recover losses from the disruption of business, and even defend against lawsuits and rebuild a tarnished reputation.

Any organization—including homeowner associations— that houses or exchanges electronic data via a website or conducts business online is susceptible to a data/security breach. Roughly 75 percent of all organizations will experience at least one data-related violation each year, and expenses incurred from the theft or loss of sensitive data can be debilitating.

Although a security breach may be caused by someone intentionally hacking into a system, more often than not, it’s due to negligence; a lost or stolen laptop, smart phone or memory stick, or an unsecured IT network can lead to significant breaches. Any data in the wrong hands can cause damage.

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Data breaches are expensive At least 46 states have mandatory notification laws, and if an association you manage experiences a data breach, affected customers and certain regulatory agencies must be notified.

The association may have to prepare written alerts or press releases, and pay for printing, postage, advertisements or call centers to inform members and unit owners of the breach.

With your members/unit owners’ personal information exposed, the association also may be expected to pay for credit monitoring services for each person or household affected. Because the association had a duty to secure consumer information, it could face lawsuits for its breach of duty, which can result in hefty legal fees and years of litigation. An association also may be liable for a digital forensics analysis to determine how the breach occurred and the installation of new security systems to guard against future instances.

What is cyber insurance?

Cyber-liability insurance—sometimes known as data/ security breach, network security or privacy insurance— extends an association’s D&O liability coverage to include coverage for claims related to third party unauthorized disclosure of nonpublic personal information or identify theft. Cyber-liability and expense-coverage may be offered as an extension to a D&O policy. Such a policy may cover fees and expenses required to comply with a Security Breach Notice Law including notification, monitoring, computer forensics, attorneys/experts to negotiate with regulators after a privacy breach event and remediation of the deficiencies that gave rise to the privacy breach event.

The policy may also provide protection for inadvertent disclosure or theft of confidential information like social security numbers, bank account information and credit card numbers and help protect against damage to computer systems and data from computer viruses, hacking and criminal activity.

Jeffrey Tirado is a Regional Sales Manager at Ian H. Graham Insurance, a division of Aon, the world’s largest insurance broker. Ian H. Graham specializes in providing insurance, including Directors’ & Officers’ Liability, to community associations. For more information, please contact info@ihginsurance.com.

This article is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. The information contained in this article was compiled from sources that Aon Affinity considers to be reliable; however, Aon Affinity does not warrant the accuracy or completeness of any information herein. You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article. Only the relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.

Thank you for helping us make our first

25 years

successful!

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Annual Sponsors

CAI - Central Arizona Chapter

2015 Annual Sponsors

DIAMOND SPONSORS Carpenter Hazlewood Delgado & Bolen, PLC FirstService Residential Maxwell & Morgan, PC

HOA Community Roofing Experts Since 1971

copper SPONSORS Vial Fotheringham LLP Lawyers GOLD SPONSORS Brown|Olcott, PLLC CCMC Community Association Underwriters of America, Inc. DLC Resources Metro Phoenix Bank Roofing Southwest Shaw and Lines, LLC SILVER SPONSORS Alliance Association Bank Associa Arizona Association Captial Bank Burdman & Shore, PLLC Burns Pest Elimination Butler Hansen Desert Classic Landscaping Dynamite Paving & Sealcoat Goodwill Commercial Maintenance HOAMCO - HOA Management Company Integrated Landscape Management, LLC Kasden Weber Turner, LLP Mutual of Omaha Bank Paramount 911 Restroration and Construction Republic Services Sherwin-Williams Paint BRONZE SPONSORS AlliedBarton Security Services ALPHA Community Management Benjamin Moore & Co. Brown Community Management, Inc Caretaker Landscape & Tree Management CBI Consulting and Construction Mgmt.

CLC Enterprise Painting Ginsburg & Dwaileebe CPAs, LLP Holbrook Asphalt Co. Metro Property Services PMG Services SealMaster AZ The Travis Law Firm, PLC Transcend Security Solutions, Inc Union Bank HOA Services Urban Tree Care, Inc. 30

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C o n g r at u l at i o n s Corner

AMS Designations Vision Community Management Ms. Jen Amundson Apache Wells Homeowners Association Mrs. Anemone Colegrove Dobson Ranch Homeowners Association Mrs. Susan Richards CMCA Designations CCMC Mr. Todd Wuellner Mr. Samuel Paparazzo Ms. Natasha Bell Sun Lakes Homeowners Association #1 Miss Katherine Giardina Westbrook Village Association Ms. Kelly Smith PCAM Designations Trilogy at Power Ranch Mr. Ian Welsh CCMC Ms. Cheryl Miller DC Ranch Association Ms. Sandra Breiling LSM Designations FirstService Residential Mr. Terrance Smith

2014 Volunteer of the Year Awards HALL OF FAME Recognizes an individual who has significantly contributed to the overall success of CAI, its vision, goals and objectives. This individual has promoted the growth of our industry, helped to educate others and is a constant champion for CAI. AMBER WELCH METRO PHOENIX BANK She joined Metro Phoenix Bank in 2010 after graduating with honors from Arizona State University in 2009. Her studies were focused on business administration and communication, which has served her well and was a natural progression in joining the Bank and building and maintaining their homeowner association relationships.

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As a fourth generation Arizonan, giving back to her community has always been a value that she and her family has shared.

Additionally, while being new to the industry, volunteering has provided her a great opportunity to build solid relationships with association managers and other industry vendors. She has found that volunteering for organizations like CAI has been beneficial, on both a personal and professional level; working towards the common goal, helping the community by building strong relationships.

As a community bank, Metro Phoenix values the importance of giving back and supporting their local businesses. If you are interested in volunteering for CAI and would like some suggestions, or to learn more about Metro Phoenix Bank’s HOA services please, feel free to contact Amber at any time.

Amber Welch Metro Phoenix Bank Relationship Manager, Specialty Accounts 602-346-1816 awelch@metrophoenixbank.com BUSINESS PARTNER OF THE YEAR Created to recognize business partners in good standing for their contributions in time and resources for the betterment of the Chapter.

Suzanne White, CMCA, AMS Director of Business Development Paramount 911 Restoration and Construction Paramount Roofing I have been a member of CAI for several years and have enjoyed watching the Arizona chapter grow and evolve every year. I am privileged and honored to be a part of the inception and growth of the CAI Family Community Clean-up Project Committee during this time and the service the program provides for homeowners and communities that have struggled with money for maintenance and services that they would otherwise not have been able to obtain. I am awed by the generosity of our membership volunteers and what they have done and provided to give back to our communities. They say the best way to find yourself is to lose yourself in service to others. Our membership has demonstrated that to the fullest extent. I am excited for our future events with the committee, volunteers and communities of our management membership.

Suzanne White, CMCA, AMS, CAAM is the Director of Business Development for Paramount 911 Restoration and Paramount Roofing and has been involved in the homeowners association industry since 1994. Suzanne is the chair of the CAI Family Community Clean up Committee.

Family. Friends. Community.

At CCMC, we build community by bringing people together in the neighborhoods where they live and offices where we work. Simply put, we create experiences that connect people.

Our unique brand of community association management is about connecting neighbors, encouraging leaders to be their best, and infusing life with fun!

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C a l e n d a r o f Ev e n t s

2015 CAI-CAC Event Calendar

Keep your money where your house is ...

APRil 1st Best Practice Series -Class #2

Conflicts of Interest/Conflict Resolution/Ethics

Location: 1600 W. Broadway Rd., Ste. 200

Tempe, AZ 85054 17th CAI – Central Arizona Chapter Tradeshow

Location: Glendale Civic Center

5750 W. Glenn Dr.

Glendale, AZ 85301 29th-May 2nd CAI – Annual Conference & Exposition

Location: Caesars Palace

Las Vegas, NV May 6th Best Practice Series -Class #3 Meetings

and Elections/ Board Officers/Committees

Location: Desert Ridge

Community Association

5415 E. High St., Ste. 220

Phoenix, AZ 85054 7th New Member Breakfast Club Meeting

Sponsored by Goodwill Commercial

Maintenance

Location: 2626 W. Beryl Ave.

Phoenix, AZ 85021

Amber Welch

Relationship Manager Give your associations the satisfaction of banking locally by keeping their investment in Arizona!

Whether you are looking for a full service banking relationship or a great return on your reserve accounts, Metro Phoenix Bank is sure to meet all of your association’s financial needs.

Metro Phoenix Bank

4686 E. Van Buren #150 Phoenix, AZ 85008 602-346-1816 awelch@metrophoenixbank.com

Call us Today!

602-346-1816

14th

PCAM - Professional Speakers

Location: FirstService Residential

9000 E. Pima Center Pkwy, Ste. 300

Scottsdale, AZ 85258 JUNE 3rd Best Practice Series –

Class #4 Attorneys/Delinquencies

Location: 1600 W. Broadway Rd., Ste. 200

Tempe, AZ 85054

Exterior Landscape Management Irrigation Management Landscape Improvements

4th-5th PMDP Course M-360 Phoenix, AZ

Location: Pointe Hilton Squaw Peak Resort

7677 N. 16th Street

Phoenix, AZ 85020 9th CAI – Central Arizona Educational Lunch –

2015 Legislative Update

Location: Hilton Phoenix Airport

2435 S. 47th St.

Phoenix, AZ 85034 JULY 9th

New Member Happy Hour Meeting Sponsored by Integrated Landscape Management

July 10 Bingo

Location: Elks Lodge #335

14424 32nd St.

Phoenix, AZ 85032 For more information, visit the chapter website at www.cai-az.org or call the office at 602-388-1159.

Items in red are CAI National events.

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Arbor Management Property Health Management Pest Control Services

480-675-7709 www.ilm-llc.com

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Diamond Corner

Diamond Corner The CAI Central Arizona Chapter wants to thank our Diamond Sponsors, whose contributions assist us in preserving, protecting, and enhancing the industry. Our Diamond Sponsors contribute at the top level to our organization and are recognized in each issue by providing helpful information to our members.

Carpenter, Hazlewood, Delgado & Bolen, PLC Fraud prevention in community associations is much the same as fraud prevention in any business. Lawyers usually don’t get involved until there is a problem. The practical solutions must be followed, and what is needed by a Board of Directors depends on your own situation: more than one check signer, actively checking bank statements and financial statements (even if there is a treasurer and/ or a manager), regular financial reviews or audits by a CPA, careful control over persons with bank cards, having bonds on employees. Moreover, associations need to pros-

ecute persons that violate their trust.

Maxwell & Morgan, P.C. Being proactive from the outset is the best manner which to prevent fraud. Community associations should concentrate on who is in charge of its funds. This starts with using a reputable community management company that has a demonstrated and longstanding track record in the industry and is a member of a top tier industry professional organization, such as CAI. If fraud is suspected, an audit should be immediately initiated utilizing a CPA firm experienced in auditing community associations.

FirstService Residential “Selecting a top management company that is regularly audited, has strong internal controls, adequate insurance & a solid track record is the single best way for an association to protect itself from fraud.” Jason Proudfit

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Sales start before your salesperson calls… by advertising in CAI’s Community Resource Magazine.

Call 480.634.1708 to advertise.

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When You Want Technology to Work, and Need it to Work For You

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