Mid-sized to large Real Estate Investment Trusts are more vulnerable to fraud in their parking operations than smaller property firms and the effects can be more devastating to the bottom line.
The types of fraud that property owners and managers need to be aware of generally fall into four categories: cash theft, validation theft (discount coupons), financial statement fraud, and monthly parker access abuse. Cash theft or misappropriation of the cash collected, make up the majority of fraudulent activity, however financial statement fraud is growing in the marketplace.
These illegal activities, either by directly stealing cash, selling validation discount coupons for cash or mismanaging monthly parker access cards, are usually done directly by parking attendants. This is a tough reality for many commercial REITs, who often build a long trusting relationship with their parking operators over many years.
The other primary type of fraud involves financial statement reporting such as parking sub-contactor kickbacks/payoffs (e.g. for power washing, cleaning etc.) or inflating operational expenses. In this case, senior management within a parking company benefit personally, although violating their ethical and legal responsibilities to their REIT client.
The reason mid-sized and large commercial REITs face greater risk is due to several factors. A lack of training, direct oversight by property staff, or administrators performing multiple duties across large portfolios within strict timelines. In addition, close relationships are often built between attendant staff and regular customers which can lead to instances of theft in the form of free monthly parking.
There can also be a shortcoming of formal oversight procedures by REITs when it comes to parking, along with a lack of expertise in understanding parking revenue reports. All of these factors play a significant role in the overall fiscal health of a REIT asset.
Having said that, it is vital that commercial REITs take the necessary steps to identify all types of fraud in their parking facilities and to deter it as soon as possible. Here are 7 steps to help you.
1. Appoint a Dedicated Administrator
Due to their massive size, many commercial REITs have multiple individuals that handle bookkeeping functions such as receivables, payment processing, invoice payment etc. and record these functions in an accounting system. This can make it much easier for cases of parking operator fraud to go unnoticed. REITs should have at least one individual trained to oversee all parking-related functions and to be involved in the monthly revenue report meetings with the parking operator.
2. Know Your Parking Operator
While every business strives to hire honest vendors, having a detailed RFP/RFQ parking process can help prevent fraud. Background checks, letters of reference and the evaluation of other sites managed by a potential parking operator will provide details not easily identified during a face-to-face meeting.
The RFP/RFQ evaluation process provides REITs with the ability to request specifics regarding financial reporting methodology, transparency, and internal audit controls.
Although it may seem counterintuitive, parking operators committing fraud are often perceived to be the most trustworthy by their clients because they will go out of their way to help and gain trust. A parking vendor operating with almost full autonomy, and no direct oversight by the REIT can exponentially increase the chances of fraud over time.
3. Implement Internal Controls
Commercial REITs need to create and maintain internal controls to prevent and detect fraud across their portfolio. These should include reviewing financial account data vs. parking equipment reports, bank account activity, establishing a multi-person sign-off system for vendor reimbursements and other accounting functions. By performing a regular audit of the parking operators financial activity, REITs can greatly reduce the possibility of fraud.
4. Direct Deposits
With the availability of online banking, it’s easy to quickly review account activity and statements. By requesting that the parking operator deposit both revenue streams (transient parker cash/credit & monthly parker credit) directly into the REIT’s bank account, the risk of incorrect payment or short payment by the operator is greatly reduced.
This provides the REIT with more visibility over the parking facility’s financials, as well as taking control and eliminating any delay of payment from the parking operator. Direct deposit also gives the REIT an additional opportunity to do a checks-and-balances review of collected revenues to verify the legitimacy of operational expenses to be reimbursed to the parking operator.
5. Audit the Books Regularly
REITs should routinely audit their parking facilities in areas of cash payments and the use of validation tickets. Additionally, occasional unannounced “spot audits” on daily revenue collections and monthly Pay on Foot float replenishments can help detect fraud in high-risk scenarios.
Comparing parking equipment transaction reports against revenue collected will lower the likelihood of unidentified fraud. Third party companies such as AuditPark offer auditing services as well as a Fraud Prevention Check List to help REITs identify risk and develop internal controls to prevent losses.
6. Zero Tolerance
If you’ve set up your REIT with fraud prevention measures and reporting procedures, you must still follow up by reviewing your parking operator’s revenue reports and expenses on a regular basis. To reinforce fraud elimination, there should be zero tolerance for cases of theft by site staff or unethical reporting by the parking operator.
At the end of the day, the REIT is paying the parking operator for their management services. If the site staff cannot be trusted with cash or validation tickets, how much effort has the parking operator truly invested in the security and accuracy of client revenues?
No “three strike rule” on this one. Parking operators should know that it’s “one and out” when it comes to theft. By implementing this rule, parking operators will put forth a more concerted effort to ensure both parking revenues and validation ticket use are secure and accurate.
7. Get an Expert’s Opinion
If a REIT has implemented fraud prevention measures and the numbers still don’t add up, or if there could be legal implications, it may be prudent to hire a parking consultant and professional accountant to come in and perform a more extensive review of the parking operator’s reported revenues. AuditPark Services Inc. works with CPAs and Certified Fraud Examiners and can provide extensive help in parking revenue fraud deterrence, detection and, if necessary, prosecution.
About the author:
Ross Frangos is the President and Founder of AuditPark Services Inc., a parking consulting firm based in Toronto ON. He specializes in Requests for Proposal, parking documents and assisting his clients in the procurement of parking management services.