Inventory Control Keeping Tabs on Your Building's Supply Chain

Inventory Control

 Regardless of whether you live in a co-op or a condo, or whether your community  is a small, self-managed one or a sprawling development with hundreds of units  managed by a professional property management company, there is or very well  should be a system of checks and balances in place to help the administrative  side of the operation run smoothly.  

 Part of that system should include keeping track of how day-to-day supplies and  maintenance items are ordered and reordered, organized, and kept track of.  Preventing wasted supplies and inventory shrinkage (to borrow a phrase from the  world of retail) is an essential job component for both managers and building  staff members.  

 Track Your Orders and Expenses

 It usually starts out innocently enough but could snowball into a problem if no  one is watching the fox in the hen house to use a popular analogy, managers  says. According to Larry Vitelli, a senior vice president with Manhattan-based  Douglas Elliman Property Management, a coordinated ordering system should  exist. "Normally, the super should not order supplies directly. He should  requisition the supplies he needs, the account executive should approve the  requisition, and the purchasing department of the management company should do  the ordering."  

 Management pros note that the most common source of loss in a residential  building is probably due to wasteful spending due and incorrect ordering of  supplies and materials. Smaller purchases for parts or supplies may go  unnoticed, while the larger expenses are most likely red-flagged and monitored  very cautiously.  

 Peter Grech, a resident manager and building consultant, who is with the New  York City Superintendents Technical Association, says that in his 35 years of  experience, he has never been given any guidance regarding inventory control.  Management companies usually don’t get involved unless an issue arises. It is, however, important to track all  purchases and receivables, through use of a computer or maintenance log of some  sort, he says. “Inventory should be done monthly for large buildings and quarterly for small  buildings,” Grech says, “but then again, there is no set standard.”  

 Logs, he adds, should maintained for two years. A super in a large building  should keep track of all work orders and contractors on the premises by using  the log.  

 So what do you do if you suspect something awry? Following suspicion of fraud or  mismanagement, it’s key to identify the source of the problem. "It generally involves the  purchasing of services or supplies, and it's really hard for a board member to  detect it," unless the board member is involved on a daily basis, according to  Stephen Beer, a partner with Czarnowski & Beer, a Manhattan-based accounting and auditing firm. He recommends reviewing  invoices and receipts when something doesn't look right.  

 Grech says it’s a matter of trust. “We either trust the people we work with and for; and those that work for us or  we don’t.” He also added that it depends on the costs of the items that are suspected to  have been lost or gone missing. If the items are inexpensive, you can probably  chalk it up to the cost of doing business, he says. If the discrepancies  continue, then the building would have to conduct an investigation to find the  perpetrator, he says.  

 Possible indicators that building staff or management may be making dishonest or  wasteful purchases include large unauthorized expenses (usually over $1,000 or  more) or redundant quantities of small items. For example, if the super orders  80 parts and there are only 50 apartments in the building. Most regularly  ordered items are usually purchased in similar quantities every time, so a  large quantity that differs from past repeated orders may also be an indicator  of a wasteful or dishonest purchase.  

 Organization, Accounting, & Kickbacks

 “A big area of loss is janitorial maintenance supplies,” says Neil A. Sonenberg, a partner with Rosen Seymour Shapss Martin & Co. LLP, CPAs in Manhattan. “Supplies inevitably disappear—there’s no other way to say it. We could tell you war stories about very nice Fifth  Avenue buildings with very expensive, top-of-the-line copper plumbing supplies  where things were walking out the door. When the board looked at their  janitorial supply information in the management expense statement, we saw it  rising for three years.”  

 According to Syed Haque, a Queens-based accountant specializing in co-ops and  condos, as well as a board member and former treasurer of his own condo  association, while sloppy organization and poor accounting are to blame for  some loss, he says, “In actuality, condos and co-ops have very little tangible inventory. Most loss  and waste is caused by inefficient ordering of materials and occasional  internal theft—such as materials ordered for personal use or resale, rather than for legitimate  use by the association—employees or tenants taking small quantities of supplies, which can go easily  unnoticed and are very difficult to account for.”  

 Over the years, a number of New York management companies, board members and  contractors have been involved in multimillion dollar kickback schemes. Major  indictments handed down in 1994-95 and 1999 shook the real estate industry and  recent news headlines are proof that fraudulent practices are again on the  rise.  

 In December 2009, a Rockland County treasurer pleaded guilty to taking more than  $130,000 from an association and a managing agent in 2010 was ordered to pay  more than $628,201 to a Manhattan co-op he allegedly defrauded. A bookkeeper in  Maine stole $30,000 from two different condo associations. In Connecticut, a  former business manager—whom police allege had a gambling problem—pleaded not guilty to stealing $226,000 from a condo association in Ledyard,  home of an Indian casino. In March 2010, a New Jersey condo association  president pleaded guilty to embezzling more than $50,000 from her association,  and another business manager in Florida allegedly stole more than $856,000 from  five area homeowners associations. And there is the case of a New York managing  agent, who allegedly siphoned off $1.3 million in property taxes from six  co-ops.  

 Kickbacks do occur, especially in a down economy, and are extremely difficult to  account for because there is no real way to track them. Your staff and building  management should also have a formal policy about accepting gifts, although  often times such things are overlooked as an acceptable way of doing business.  

 Checks and Balances

 In order to establish oversight and cost-controls in a building’s day-to-day business transactions, a system of checks and balances must be put  in place that keeps track of inventory purchases and other expenses, such as  garages and parking. At most management companies, the managing agent approves  purchase invoices on a daily basis as they are processed through the management  office and creates weekly reports for checking and balancing the week’s expenses. In addition, the co-op’s accountants review the building’s expense records on a monthly basis prior to review by the board in order to  ensure everything is in order.  

 Because a management company is susceptible to regular audits, many pairs of  eyes must continually look over the co-op’s expenses, so that it would require a major collusion of many different parties  for dishonest transactions to pass through unnoticed.  

 In order to monitor cash outflow and ensure that jobs and supplies are bid out  properly, the building staff or managing agent should establish a set of  purchasing principles. One of the most basic purchasing principles is “to try to place business—whenever possible—with local suppliers whose past performance has been satisfactory and who  provide goods and services at competitive prices.”  

 Other tips such as these include:

 Make sure that all checks are made payable to cash. Also be sure you get copies of all checks along with your monthly bank  statement.  

 Look out for and check invoices to ensure they are not from non-existent  companies. Inspect a copy of every paid invoice; if you have doubts, do a  Google search and call the company to make sure it exists.  

 Be wary of kickbacks from vendors to the managing agent. With the help of your  engineer, compare bids to invoices as they come in. Get documentation for cost  overruns.  

 Be on the lookout for phantom employees. Keep an up-to-date list of employees  and call periodic employee meetings.  

 Keep an eye out for signs of bid-rigging. Make sure all bids are opened by a  board representative, not the managing agent. Rotate bids to different vendors.  Check references. Make sure bidders exist.  

 Additionally, no shareholder/owner, employee, former employee or members of  their immediate family should be used as a supplier of any materials, supplies,  equipment or services. Also, no shareholder/owner, employee, or family member  should be given any materials, supplies or services at any price under any  circumstances without the consent and approval of the general manager. It’s also mportant, managers say, to get competitive bids, at least three or more.  

 Who Ultimately Oversees?

 It is important to clearly define the financial authority of and outline various  policies for the building manager and staff to fulfill the purchasing,  receiving and inventory control functions. It is the board’s responsibility to outline the controls needed while the manager is responsible  for implementing the board’s requirements. The managing agent should be ultimately responsible for  overseeing building spending, although the board is in turn responsible for  checking after the manager. The manager is also responsible for determining the  need for and appropriateness of service contracts or agreements.  

 Often, supplies are ordered by the building superintendent and each invoice is  approved by the managing agent and/or the board before payment is made. The  board then reviews monthly expenditures, and makes note of anything out of the  ordinary, such as a significant change in the total cost or quantity of an  item.  

 Protection From the Inside Out

 “Internal fraud and business liability insurance is available to condo and co-op  associations, as a form of protection against dishonest practices that may  occur within the organization,” says Haque, who notes a disturbing trend in some buildings. “Some associations, however, are now cutting back on what they consider ‘unnecessary’ insurance due to the high rise in insurance costs in the past few years.” Cutting corners can cost a building in the long run, however, should it be the  victim of dishonest practices or theft.  

 Sonenberg recommends that boards “Sit down with their managing agent and work out a perpetual inventory system to  monitor their supply areas. It can be a lot of work at first—physical counts have to take place regularly, for example—and from time to time, you have to monitor the ledger for goods in and goods  out. Quarterly, you’ll need to do an actual physical inventory. In the three buildings where we’ve implemented checks like these, janitorial expenses have gone down 30 to 50  percent. So it’s a huge savings.”  

 And adds Haque, “There can never be too much oversight in a condo or co-op association. In most  cases there is not enough transparency in money matters.”  

 “It’s very important to keep good inspection tools over your managing agent’s head, and over your staff’s head,” adds Sonenberg. “People and companies don’t do what you expect of them—they do what you inspect of them.”  

 Hannah Fons is associate editor of The Cooperator.

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  • I have heard from a very reliable source that our new managing agent was suspected of taking large kickbacks a number of years ago. She put the blame on the super, who was fired. however, the staff believed it was her. I would like to find out if there is truth behind these allegations, How do I get this info?
  • I’m a new board member of a 200 plus unit Coop and appreciate some excellent guidance and comprehensive information, There is one sentence I believe needs correction. Under the heading, “Other Tips Such as These Include”; the first sentence states, “ Make sure all checks are made payable to cash.” This of course I should say “make sure NO checks are payable to cash.”