Heeding the Warning Signs of Fraud

Doubts around misappropriation of trust funds is one of the things that causes some people to distrust the real estate industry. It’s also a major concern that keeps principals up late at night because it could happen to anyone. Natalie Hastings highlights five signs to watch out for.

Principals tend to be particularly alert to fraud when their property management portfolios are in their infancy. However, as rent rolls mature and businesses begin to thrive, a principal’s perception of the risk of fraud diminishes – and it’s this very comfort and complacency which create the ideal environment for real estate fraud to flourish.

Remain vigilant and protect both your business and your clients from real estate fraud by understanding your accounting processes – and keeping an eye out for signs or environments that make your business ripe for property management fraud.

Principals are busy people. That’s why they engage specialist staff across their property management and sales businesses to support their clients and their dreams of expansion. Unfortunately, many cases of serious real estate fraud involve very trusted, very senior staff members stealing from a trust account.

No matter how well you know your business, no real estate agency is immune from fraud. You can better protect yourself by becoming engaged with your trust accounting processes, and by spreading risk across your team by developing strategic systems and processes which hinder individual fraud. Learn how to balance your own books thoroughly before engaging a staff member to assume that responsibility for you, and prioritise developing checks and balances within your property management department, putting you in control of all your accounts.

Fraud can begin in small ways, with $20 or $50 missing from petty cash which can ‘easily’ be explained away. Fraud can leave small traces which appear irrelevant initially, but indicate more serious problems when you dig a little deeper. The bottom line is your books need to balance. If you’re regularly ‘out’, even by amounts you consider inconsequential, bells should be ringing. Engage an auditor or trust accounting expert to identify unusual patterns within your accounts, and act as required. Hopefully, it’s an anomaly born of poor accounting practices rather than fraud.

Ignorance of basic trust accounting concepts are no defence when it comes to committing real estate fraud. Neither is being short on cash as a real estate business owner, for that matter. In recent years, principals across Australia have been fined and had their licences revoked as a result of misappropriating funds from their trust account to pay for business expenses.

It doesn’t matter whether you promise yourself you can pay back the amounts ‘borrowed’ from the trust account; you’re engaging in fraud. So if your business is failing, call in a business coach or call it a day. Don’t compound the failure of a business – which is sad, but not the end of the world – with committing fraud and being barred from the industry you love.

Noticed lots of new supplier invoices being raised? Take note and be wary. One common way to commit trust account fraud is by drawing illegitimate supplier invoices.

Large rent rolls with landlords who are disconnected from their investments, such as regional or overseas landlords, are particularly susceptible to this kind of fraud.

A property manager may create a business identity, like a window cleaner, plumber or a gardener, and be invoicing landlords from this identity for works which were never required and never executed. (And yes, we do hope this sends a shiver down your spine!) The landlord and principal are none the wiser, as their property appears to be cared for and their books appear to be balanced. A sophisticated hoax, so keep an eye out for new suppliers you may not have signed off on as a potential indicator of fraud.

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Natalie Hastings

Natalie Hastings is the Managing Director of Hastings + Co. For more information, visit hastingsandco.com.au.