Fraud draining Valley small businesses

Article Courtesy of The Arizona Republic

By Dianna M. Nez

Published June 15, 2007


Gilbert's Wind Drift community is one of thousands of organizations to suffer a financial loss as a result of fraud, a crime which experts say is siphoning billions of dollars from businesses nationally.

According to a 2006 study by the Association of Certified Fraud Examiners, "United States organizations lose 5 percent of their annual revenues to fraud."

Wind Drift Board President Larry Rice said that he wishes that his community had learned earlier about the simple controls that might have protected it from losing at least $200,000 to fraud and theft, allegedly committed by the owner, Tim Reedy, of their HOA management company.

Chandler police arrested Reedy, of Chandler-based Reedy Group management company, on Jan. 18 on charges of fraud and theft, charges Reedy denies.

Chandler police said in February that their investigation led them to believe Reedy stole a minimum of $500,000 from at least 12 Valley HOAs. The police said they expected the amount of funds stolen and HOAs affected to increase.

Since the theft, Rice said the board has implemented several new safeguards that allow the HOA more oversight of their new management company.

"We get the bank statements directly," he said. "Only the president and the treasurer can sign checks now."

Rice said the Wind Drift HOA board has also assumed responsibility for hiring an independent auditor to review its financial records annually. Previously, he said, Reedy would hire the audit company.

Rice said he hopes the media attention Wind Drift's case received helps others.

"If we'd known about his happening to someone else before (it happened to us) we would have been more careful," he said.

Former Phoenix police fraud investigator, Paul Hill said he saw a staggering number of fraud cases during his tenure with the department that involved small business owners and organizations.

Hill, who is currently an agent with the fraud division of the Arizona Department of Insurance, said time and again he worked local fraud cases that involved small business owners who were too trusting of their employees or contractors.

"They had no idea this person would do this," he said. "A lot of times they were small businesses that grew fast. It's the plumber or woodworker who knew everything about plumbing but when the company grew they handed the finances over to their office manager."

Hill suggests people set aside their personal feelings about longtime friends or employees and establish protections against fraud.

"Take away the temptation," he said. "Make sure there's never too much power in one person's hands."

Hill suggests that organizations have a certified fraud examiner audit their company for weak spots that a criminal could take advantage of. And if an organization or small business owner suspects that they have become the victim of fraud, Hill suggest they get their records in order or even consult a fraud expert before coming to police.

"Most agencies are overloaded," he said. "You need to be organized. I hate to say it but the less organized you are, the more at risk you are for having your case put on some shelf."

Hill suggested victims of fraud set a meeting with their police department's fraud investigators, ask that the fraud supervisor be present for the meeting and get information about how the agency would like the case organized before filing it with police.

"If you do this work at the beginning you have a better chance of building a case later," he said.

Kathleen Barney, a senior fraud expert with the Phoenix office of national accounting and consulting firm Eide Bailly, LLP, said the most important advice that she gives business owners is that they must create a "perception of detection."

Barney said she is handling several fraud cases that involve theft from Valley HOAs.

"It's hard for an HOA," she said. "You hire a board and then they hire a management company who has complete control of your finances. There are few checks and balances."

"People are reluctant to pay for an assessment to find where they are at risk (for fraud)," she said. "But they always wish they had once they are victims."

Barney said fraud assessments done by an Eide Bailly fraud expert range from $2,600-$3,900, depending on the size of the organization.