How do You Know if Your Employees are Committing Fraud?

By Mike Ballard

Determining if fraud has been-or is being-committed at your properties can be difficult find and uncover. Even when they suspect something isn’t right, many property owners will often overlook red flags until the amount of money stolen is significant enough to cause them severe financial issues.

How can you tell if an employee might be stealing from you? Scott Seegmiller, managing partner of Ascent Multifamily Accounting, said one way to keep an eye out for potential fraud is by paying close attention to the monthly Loss/Gain report.

“At the end of each month, the report will show what the total loss is or what the gain is,” Scott said. “If you see an amount in there that is roughly the same of what rent would be for a tenant who is currently living at the property, that’s a sign of fraudulent activity. That tells us that someone reversed the rent on that unit.”

Lisa Scarnecchia, who works as a consultant in Ascent’s forensic accounting investigations, recently uncovered fraud being committed at a Las Vegas property after investigating suspicious activity on a multitude of units. She found that the property manager who was handling the accounts of various apartment dwellings was going back months and even more than a year to reverse rent. The property manager starting reversing rent, or zeroing out the rent charge, on four properties beginning in March 2020, and continued to reverse the rent nearly every month for almost a year.

“Last year was the perfect time to commit this kind of crime because there was a rent moratorium put into place,” said Lisa. “Owners were not as likely to expect fraud when they had reports of delinquent rent or if the numbers weren’t quite adding up because of the moratorium.”

What finally caught the owner’s attention was the discovery of a “hijacked unit,” meaning the power had been transferred from the property, but the unit was still reported as vacant. When units were rented at this property, the power was transferred from the property to the tenant. The owner noticed the power was turned on and transferred from the property in March 2020, but the unit continued to show as “vacant” on monthly reports.

During Lisa’s investigation, she found that the manager had moved someone into the unit, but had continued to change the tenant’s move-in date on reports to collect the rent on the side. In total, Lisa found that the property manager had stolen roughly $50,000 in rent by reversing rent charges on 14 units.

“It took us about a week to put the numbers together and provide the owner with substantial evidence of fraud,” Lisa said. “The total loss was substantial, but not compared to some who have lost hundreds of thousands of dollars to this kind of theft. We caught this one before it could have completely devastated the owner.”

The rent moratorium is set to expire for many cities and states around the country in the upcoming months, including in Las Vegas when it will no longer be in effect after June 30. Following the moratorium’s expiration, Lisa said there will likely be issues with fraudulent accounts that come into light, in that renters who were reported as delinquent might claim that they in fact did pay rent.

Employees who are stealing from the property might start covering their tracks if suspicious activity is detected by offering concessions or reversing rents. Lisa said the best way to find accounting fraud in the upcoming months is to pay attention to the month-end Lost Summary reports and the Loss/Gain reports. It is also important to look at Loss-to-Lease reports for significant financial losses.

Too much trust between owners and employees is also an issue. In normal times, red flags still might be ignored or overlooked, often due to owners trusting their employees too much and not administering proper oversight, Scott said.

“Trusting your managers too much is a big issue, especially with people who have been with you and your company for many years,” he said. “The good news is there are many solutions if you think your trust in your employees might be impeding your view of the problem.”

If you think someone may be stealing from your properties, hiring an outside company with experience in the multifamily industry is a great first step. They will be unbiased, and can review accounting records and run full financial examinations of the property’s accounts to uncover the facts. Ascent Multifamily Accounting offers forensic accounting services to its clients. Our services include:

  • Identifying, analyzing and interpreting data
  • Evolving procedures as the engagement progresses to fit each unique case
  • Advising and guiding staff and property owners on how to detect fraudulent behavior in the future
  • Presenting our findings in an objective manner

Scott also recommends that property owners rotate managers on different properties, even if the change is temporary. That not only allows for a different set of eyes on the financial documents, but it also might reveal a noticeable break in pattern if the previous manager of the property was committing fraud.

If you’re looking for experienced and comprehensive solution to investigate or prevent fraud at your properties, Ascent Multifamily Accounting might be a viable option to consider. For more information on Ascent’s multifamily accounting services, call or email me.

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