Check fraud was one of the main reasons the federal government, state, and local governments converted over 14 years ago to purchasing cards. Unlike a credit card, purchasing cards were the replacement for check writing and check register controls. The rapid tracking of "where is my money" was foremost on the minds of Fortune 1000 companies as purchasing cards were becoming a standard in these American corporations over 10 years ago.

The reporting, safe guards, and controls that purchasing cards have offerred the housing industry assures easy accountability and offers the Board of Directors a real-time view of spending and peace of mind, as purchasing cards are a safer way to pay service providers. In addition, they are preferrable to credit cards because purchasing cards do not have a credit balance; instead, there is a monthly roll-up statement, which makes accounting easier and less time-consuming.

In California alone, banks are believed to be currently spending about $12 million per year to fly paper checks to banks in other parts of the country.

Federal Reserve Banks – which provide checks and other payment clearing services to financial institutions nationwide – are already feeling the financial pinch of change. At the end of 2006, the Reserve Bank System had shuttered 22 of its regional check-processing sites, and half of its sites. Fed officials note this was due to declining workloads. The check processing centers will be limited.

Currently, most service providers are paid by a paper check. This payment method provides very little control over whether or not a vendor exists, who actually receives the check and allows for manipulation or theft of the check. The Department of Justice reports that the occurrence of check fraud is on the increase along with increased economic losses to businesses. They report that a check is vulnerable to fraud at every point in the delivery cycle, from how it is issued, to how it is mailed and finally to how and where it is cashed. Locally, a treasurer for a Southern California homeowners’ association pled guilty to embezzling over $200,000 from the association from payments that were allegedly made to service providers, when they actually were not. This is the most prevalent type of fraud that occurs in the homeowners’ association industry today, which is just one reason why using purchasing cards are preferrable to writing checks.

Performing a risk analysis allows organizations to get an accurate picture of the threats at play and the potential impact they may have. It is imperative to have an understanding of the terms "risk" and "threat". A threat is an event that has the potential to cause harm to the assets of the Community or Management Firm. A threat can be manmade or can be a naturally occurring event. An earthquake, for example, is a naturally occurring threat. Vulnerability would be if a home was built on the earthquake fault. However, risk is the uncertainty of loss and is not the loss itself. Therefore, the uncertainty should be measured in order to reduce the vulnerability to the threat. Many Risk Managers measure risk based on the expected annual losses that may be derived from a particular threat.

In the case of check fraud, an equation which assumes a total loss of assets, as opposed to the more likely situation in which the asset would be partially lost, but not totally destroyed, would look as follows.

Single Loss Expectancy x Annualized Rate of Occurrence = Annualized Loss Expectancy (ALE)

In the case of check fraud, for example, the hypothetical likelihood of a fraud is one in $100,000. Let’s say the value of the asset to be protected is $5,000,000, then the ALE = ($5,000,000 x 1/$100,000) or $500 per year. For the sake of simplicity, this is only a baseline of loss expectancy. More complex variations of the equation can be used to calculate loss expectancy using variable impacts.

With check fraud on the increase, some risk mitigation strategies should be employed. Three primary risk categories are: Transfer Risk, Risk Avoidance, and Risk Retention. With check fraud on the increase at alarming rate of 300% or more a year, the annualized loss expectancy that was $500 in our example will grow to $1,500, and will creep at alarming rates in the ensuing years.

When we think of Risk Management, we tend to think in terms of simply reducing the risk through the implementation of counter-measures. With check fraud, the elimination of check writing would be a risk reduction measure. However, the service provider would still be expected to be paid for their services provided to the Community. In the art of Risk Mitigation, transference is generally the easiest and most cost-effective. This method places the financial burden of risk on some entity other than the Community Association or Management Company. Buying Fidelity Insurance or using Pay Orders transfers the financial burden of check fraud.

Effective risk management requires ongoing evaluation and adaptation to find a safer way to pay in the case of check fraud. As the business environment changes, so too do the threats facing us as managers. An old saying holds true: "If we continue doing business as yesterday… we will be out of business tomorrow."