Couldn't happen to you? Don't bet on it. At your next industry event or anyplace that you are meeting with fellow owners, ask for their war stories. The reality is that fraud happens and we need to learn how to recognize and protect ourselves from it. Whether external or internal, situations happen where someone tries to steal from you. This can range from something as simple as an agent not being charged for some expenses to someone taking money from your bank account.
First and foremost in guarding against fraud…always trust your instincts. If it sounds wrong, it probably is. You were smart enough to start your own business and you probably have good instincts so use them. If you ask questions and the answers don't make sense to you, don't just assume that you don't understand. Keep asking questions until you do understand. One broker who lost almost $500,000, including $250,000 from an escrow account, kept asking about their bank reconcilations that didn't seem to make sense. They were receiving a vacuous answer and just kept accepting it. Finally they asked me to review their books one day and I told them in about 30 seconds that the escrow account was short funds. When asked why I thought that, I said, “Given your level of activity, you should have a lot more money in the escrow account than what you do.” The owner's answer, with a fixed look on their face, was “But most of our escrow goes into term deposits and that's why it doesn't show.” As soon as I heard that, with the look on their face showing a lack of comprehension, I knew they had been defrauded. What had actually happened was that the previous bookkeeper was writing checks to herself from the bank accounts and changing numbers in the accounting system to cover it up. What she couldn't cover up was the lack of funds in the bank account. And yes, I said previous bookkeeper. Because the person stealing was no longer working at the company. She had moved on but had convinced the owner that the new bookkeeper couldn't do the bank reconciliations so she would come in each month to do them. She was coming in each month to top up her personal bank account, to the tune of about $10,000 a month.
This fraud was easily preventable if a couple of measures had have been taken. The most obvious is getting an accurate bank reconciliation that is clean and free of confusing or misleading entries. The next measure the owner should have taken was to have been the one who received the bank statements. The bookkeeper was not only issuing the checks but also picking up the bank statements and removing the cancelled checks that she had written to herself. The most potent weapon to protect yourself from fraud is to open your own bank statements and have a quick flip through them, looking for anything unusual or suspicious.
In the old days, before computers, companies had a separation of duties which was meant to help prevent someone being able to steal from the company. With the efficiency that computers have brought to the workplace, we now have one person able to do a multiple number of tasks. This means that the person doing the billing to your agents might be the same person who collects the cash from the agents. Which brings up the next thought, what happens when staff and agents date? Yes, another frequent occurrence of fraud in real estate offices is the collusion between staff and agents. If an agent is dating the bookkeeper and they happen to not get charged that month for desk fees, that is fraud. We had a case once of the bookkeeper writing double commission checks to her boyfriend and the broker was not reviewing the bank account. It came to light when we were demoing our software to the company and the administrator said “this won't work for our office”. The broker was wise enough to ask the question why it wouldn't when everyone else in town was using it. The broker purchased the program and the administrator quit the next day. That office had lost $100,000 and closed down six months later. The moral of this part of the story is that you need to have reports that allow you to review what has been billed to agents, you need financial statements that show trends so aberrations stick out, and you need reconciliations of accounts to ensure the pieces of the puzzle fit.
The next major cause of fraudulent activity to be alert for is changes in personal lives. People think this means things like someone living in a big fancy house or driving a sports car. But the more common occurrence is something like a relative getting sick or children going to university. We had a bookkeeper whose husband came down with a terminal illness. Suddenly life didn't see fair anymore and those feelings translated into it not being fair that the broker had funds the bookkeeper didn't. Even the most trusted person's behavior can change when faced with life altering events.
All of the above refer to internal fraud, which with vigilance and some attention can mostly be avoided. The other type is external of which the most common is someone stealing your checks. There is software that can scan checks and produce totally accurate looking facsimiles. And forgot about the old days where banks actually checked signatures. They figured out a long time ago it was cheaper to pay to fix the few mistakes that go through than it was to pay to check every check. But many banks do have a service called “Positive Pay” where you transmit them a file each day of what checks you have issued and they match checks being cleared against that file electronically. The other option is to avoid checks altogether and use electronic payments to pay agents, employees and vendors.
In the area of controlling costs, the integration of financial and operational data is another excellent example of information helping you make the correct decision is the Uncovered Expense Report™. Having a list of your agent receivables is great but who would you be more worried about, an agent who owes you $2,500 or an agent who owes you $500. On a standard accounts receivable list, you will always pay attention to the $2,500 agent and ignore the $500 one. But now take that list, add a column for pending transactions and now look at the numbers again. The uncovered agents are the ones who show up without enough in the pipeline to cover their expenses. Now the $500 agent with no deals jumps out at you. He is your potential bad debt and possibly an agent getting ready to leave. Be pro-active and deal with them on your terms.
In summation, there are steps you can take to alleviate the possibility of fraud occurring in your office. Be vigilant to changes, ask questions and get answers, review your operations and look at ways to plug holes. Fraud occurs in less than 1% of real estate offices, which doesn't sound like much until it happens to you!
Lorne C. Wallace C.A. is the CEO of Lone Wolf Real Estate Technologies, a company with over 9,000 offices utilizing its software to administrate and manage their real estate email@example.com