Weak controls leave associations vulnerable
05/13/2009 10:00 PM
Every year, it seems, we hear about a management company owner who makes off with his client’s accounts or an employee who embezzles a condominium association’s funds. News of these improprieties should put condominium and cooperative owners on alert and prompt them to ask how can they protect their own association funds from a similar fate.
Whether by outright embezzlement, fraud or negligence, misappropriation of your association’s money is a disaster. In today’s economic downturn, it is even more distressing to discover that funds deposited with what seemed like a reputable firm have disappeared.
Hiring a firm to manage your building is an act of confidence. No matter how much a firm wows your board with a professional presentation, vigilant oversight of association funds begins as soon as you turn over the books and keys. Your management company must continue to earn the board’s confidence by providing accurate information on a monthly basis.
Financial reports should clearly and completely document the financial position of the association. When monthly statements are not received or present an inaccurate record of cash flow, an association needs to pay attention — immediately. It may not mean that the property management firm’s owner has skipped town, but it usually means trouble.
Some management firms engage in less-than-ethical dealings such as accepting “referral fees” (i.e., kickbacks) from vendors or pad the association’s charges with undisclosed, add-on fees. Many firms own related companies — from painters to maintenance to insurance agencies — and use their services instead of seeking independent, competitive bids.
Having been hired by associations that were previously managed by companies with unscrupulous business practices and lax financial controls, my firm, The Building Group has become savvy at identifying financial improprieties. To prevent your association funds from being misused, you need to have certain safeguards in place:
Research your management company. Talk to current and past clients. If possible, find out if accurate records are provided on a monthly basis. Also ask if funds were ever misappropriated or if there was evidence that the firm received kickbacks from vendors.
Does your management company have a fidelity bond to insure their client’s funds? Become a “named insured” and get a copy of the certificate.
Read and decipher the financial statements every month. Is every check and wire transfer documented? Are there any missing? Are the checks payable to known association vendors and for the appropriate amounts? Are bank statements included for every association account and are they reconciled with the financial statements?
Make sure your funds are not co-mingled with other clients of the management company. Also avoid “master programs” in which your building is grouped with others, thereby making it easier for a management company to add undetected fees and harder for an association to trace its funds.
Reserve accounts should be controlled by the board and require multiple signatures on their checks. Excess funds should be transferred out of management-controlled operating accounts when they reach previously set amounts.
Audits by a third party CPA should be preformed annually.
There is no such thing as a dumb question when protecting your association. Board members have the right to get timely answers to legitimate questions from their management company. Financial reporting should be done openly, thoroughly and transparently.
If proper controls are in place, reviewing monthly financial reports should not require much time. However, it needs to be done upon their receipt. Board members must learn to understand what is important and track monthly changes. Most reputable management firms provide board member training on reading financial reports.
Disciplined oversight of your association’s financial records may not be particularly exciting. But it is far preferable to the panic caused by lost funds, sloppy bookkeeping and questionable business practices. The more diligently an association board exercises its supervisory role, the less likely it is to discover that its funds have strayed. Having strong financial controls is a necessity for every association.
Jim Stoller is president of The Building Group.