Quantcast
Don't Miss
Home / Biz Blog / When it comes to embezzlement, property management is a risky business

When it comes to embezzlement, property management is a risky business

Property management is rife with opportunities to steal. This is true in both residential and commercial markets. In the residential market, home sales are down and residential rentals are up. With no licensure requirements in Idaho, there are few barriers to anyone who wants to enter the market, so competition is on the rise. The commercial market is showing early signs of recovery, but it is still soft and competition is keen.

As market volatility and competition increase, companies shore up profits by cutting costs which often means downsizing. Employees who are fortunate enough to retain their jobs are expected to do more work, putting downward pressure on morale. Efficiency is emphasized when work is redistributed, and checks and balances in the accounting department are diminished. This leaves companies vulnerable to embezzlement and other types of workplace fraud, by both owners and employees.

Just ask former real estate broker Jerry Gunstream. He opened Gunstream Commercial Real Estate in Nampa in 2000 and affiliated with Coldwell Banker Commercial in 2008. A year later, Gunstream informed Coldwell Banker that he had taken nearly $600,000 from eight clients whose property he managed.

Describing his actions as “unauthorized borrowing,” Gunstream claimed he intended to repay the money, which seemed unlikely considering his bankruptcy filings show under $4,000 of assets and over $2,000,000 of debt.

Gunstream is not the only example:

The owner of a property management company in Corvallis, Ore., pleaded guilty to embezzling $68,000 from rents and deposits, unreturned deposits, and unpaid utility bills. Property owners reported the company’s suspicious business practices to law enforcement when they didn’t receive their monthly payments, or received checks that were returned for insufficient funds.

A Virginia couple faces charges for embezzling $2.5 million over five years from a property management firm where the wife was employed. Officers seized seven luxury autos, jewelry and a Harley Davidson motorcycle, among other high-end items.

In another Virginia case, a management agent for a property management company is alleged to have embezzled $365,000 from an apartment complex.

According to a survey by the Association of Certified Fraud Examiners (ACFE), the brightest red flags of fraud are financial difficulties and living beyond one’s means. Each of these cases fit that profile.

The vast chasm between assets and debt on Gunstream’s bankruptcy petition suggests he was in financial straits. As a prominent real estate professional, Gunstream had to maintain a successful image in order to attract clients, and apparently indulged in “unauthorized borrowing” to sustain the pretense of success.

The suspects in the two Virginia cases appear to have used their ill-gotten gains to fund lavish lifestyles, common in embezzlement cases. Unless it is caught early, embezzlement tends to start small and grow exponentially over time. As fraudsters are liberated from past financial constraints, they adopt exuberantly freewheeling lifestyles. Whatever pangs of guilt they felt when they started stealing are placated with the self promise that they will pay it back, or the rationalization that they somehow deserve their extraordinary good fortune.

To protect both assets and reputation, property management companies should have checks and balances in place to deter fraud and to detect it before losses reach three inch headline potential.

Hotlines have proven highly effective in identifying fraud and other types of workplace violations. In the ACFE survey, tips from employees, customers and vendors uncovered three times as many frauds as any other method of detection. Companies without hotlines lost twice as much as those that invested in hotlines. Hotline services proliferated after Sarbanes-Oxley and today there are many cost-effective options for small and medium sized businesses.

Another effective tool is surprise audits, especially for companies where only a few people collect money and perform accounting and recordkeeping functions.

In general, there are two ways to improve checks and balances: (1) Separate duties so no one controls a transaction from beginning to end, and (2) Monitor. The latter is the only option in small accounting departments. Having an owner, a manager or an outside accountant perform periodic unannounced reviews of rent collections, payroll, cash, expense reimbursements and other high risk areas deters employees from stealing by increasing the probability of being caught. It can also be effective at identifying problems early – before losses reach six figures.

The real estate market is showing signs of recovery. Property management firms will enhance both security and profitability by updating checks and balances, especially for the accounting and rent collection processes..

Trust, but verify.

Denise McClure, CPA, CFE is a forensic accountant and the owner of Averti Fraud Solutions, LLC in Boise. She is a frequent author, speaker and trainer on preventing and deterring embezzlement and fraud. Her ideas on fraud risk management have helped organizations improve efficiency, profitability and security. For more information, visit www.AvertiFraudSolutions.com or e-mail Denise@AvertiFraudSolutions.com.

About Denise McClure

Scroll To Top