Co-ops and condos operate on significant budgets, usually in the hundreds of thousands of dollars,
sometimes well into the millions, and it falls to those who serve on these properties' boards to control all that money. One way they do it is by hiring professional management firms to handle the ebb and flow of their properties' financial assets. It behooves boards to educate themselves about effective systems and procedures that can ensure, to the greatest degree possible, that their property's financial assets are handled properly, and that the opportunity for untoward financial activity is minimized.
Who Signs the Checks?
In most cases properties hand over the responsibility for overseeing their financial assets to professional management. With this responsibility comes the authority to make purchases, write checks, reconcile bank accounts and sometimes even to make investment decisions. So boards are well-advised to ascertain how their properties' assets are protected within the operation of their management company.
Who signs a property's checks is very important. In some property management companies, like Manhattan-based Heron, Ltd., a company principal first reviews and then signs all approved checks. At MGRE, a management company based in Port Washington, dual signatures by officers of the company and the property are required unless the board has made different arrangements, such as the stipulation that management alone can sign all standard, non-discretionary checks (e.g. real estate taxes, utilities, etc.), and discretionary checks up to a pre-set limit established by the board, above which a board signatory also must review and sign the check.
Accountant Richard Smolin, a partner in Smolin & Yavel CPAs, which has offices in Manhattan and Brooklyn, likes this system. Any expenditure over $500 should get full documentation, he says. We also like to see checks over a certain amount countersigned by an officer of the corporation. MGRE vice president Jim Goldstick adds, In any case, it's imprudent to have anyone who does the bank reconciliation sign any check.
Internal Management Controls
It's up to the board to ask what the management company's procedures are, and then to inform management as to how they're most comfortable having their property's money handled. This raises the issues of internal management company checks and balances and segregation of duties. At Heron, for example, the computer system has different security levels and levels of access, so that while various employees are cleared to go into different parts of the financial accounting system, no one can go into everything except the chief financial officer. And while at some companies a single bookkeeper is assigned full charge of a property's finances, including payables and receivables, at MGRE no one person can have total control over any transaction. The people who write the checks are not the people who sign them, nor are they the ones who actually go to the post office to mail them. And the people who process deposits are different from the people who bring the deposits to the bank. The more control any one person has, explains MGRE controller and chief financial officer Cynthia Dubensky, the more possibility there is for impropriety.
There's also the issue of where money actually ffb goes when it's supposed to go to the management company. Some companies use a lock box system to collect maintenance, common charges, rent and other types of receivables. This system allows a bank to establish a post office box address for collections, to retrieve the collections from the lock box and then to deposit them directly into a property's account. Then the bank sends to the management company documentation of what was received and from whom.
Arguments in favor of a lock box include the fact that it can offer quicker fund availability because the funds are deposited into the bank the day they hit the lock box. Arguments against include the fact that such systems don't give management enough control over what's happening with individual residents. For example, says Dubensky, if we're not supposed to collect a payment because of a legal procedure, we don't want to accept it. We can give the bank directions, but sometimes they make mistakes. Also, most banking arrangements today can provide next day availability of funds, so that benefit may not be realistic. Yes, lock boxes do cut down on the amount of work, but I don't believe that's to the advantage of the properties we're managing.
With regard to what happens to the money once it's under management's control, Mindy Eisenberg, partner in the firm of Eisenberg & Krauskopf, CPAs, and a certified fraud examiner, warns that, Co-mingling of any types of funds should be out of the question. I've actually seen management companies lend money between buildings without the buildings' knowledge. Eisenberg also doesn't approve of bulk purchasing for any number of properties within one management company, and she advises that if a property is going to participate in a bulk purchasing program, they should insist that there be individual checks in the envelope to the vendor from each building.
Where the Money Goes?
Most management companies claim to have systems of checks and balances to ensure that only legitimate requests for payment are honored. At The Argo Corporation, a Manhattan management company, for example, there's a sophisticated system that includes a central purchasing department through which superintendents and managing agents must first have requests approved before anything is bought for any property. Once the request is honored and the purchase order is issued, it is the manager's or superintendent's responsibility to ensure and document that the service or product is delivered.
If there's no purchase order or one of the required documents is missing, says Argo director of management Jeff Levy, the vendor won't get paid. The purchase order systems at Heron and MGRE are similar, requiring that invoices be attached to purchase orders, and that all goods and services deliveries be acknowledged by the superintendent or managing agent.
Knowing how a management company is approving and tracking purchases is an important way properties can safeguard their assets. Watching the payroll is another. The opportunity exists for collusion between superintendent, subordinate and managing agent, warns Heron president Ronni Lynn Arougheti, pointing out that boards, as well as managers, must be vigilant about tracking overtime and comparing payroll budget with actual reports.
Reading Financial Reports
When prepared properly, the monthly financial reports supplied by the managing agent provide timely and complete information about a building's financial condition. It's essential that the report contain copies of most recent bank statements, copies of paid bills and schedules of accounts receivable and payable. But all that information is useless unless someone actually reads the report.
We caught one case where there was an error of a transfer from the reserve fund of one building into the operating fund of another building in the amount of $95,000, relates accountant Jack Brennan, a partner in Manhattan-based Greenberg & Brennan LLP, and neither building noticed it for seven months because no one was readin ffb g the reports. In another case, the statement said M-building sold' and nobody on the board called the managing agent. We were the only ones who called. It was there as a test to see if anyone was looking. In fact, there have been many cases where managers or board members have walked off with a building's reserve fund simply because no one was looking. If someone doesn't look, who knows where the money is?
Your Property's Best Friend
Your property's independent accountant can, and should, be intimately involved with much more than year-end audits and budget preparation. It's a great idea to have your accountant do a quarterly review, says Brennan. We review every monthly statement and bank reconciliation for our clients, and we advocate a very close working relationship with a property's CPA. We hardly ever get a call from a board member asking what's meant by anything in the financial statement.
Manager Arougheti agrees: We encourage accountants to come in here on a quarterly basis. Sometimes we invite them in, but the board says, M-No, that will cost us more.' But, as the scenarios above demonstrate, that type of attitude may be penny wise and pound foolish.
It's Your Money
Yes, your managing agent is being paid to handle your property's assets. And yes, your accountant is thereat the very least at year endto tally everything up. But it's your property's money and, as a board, you're responsible for it. Ideally, the point person on the board for overseeing finances is the treasurer. While it's certainly helpful for the treasurer to be knowledgeable in finances or accounting, it's more important that he or she has the time necessary to devote to the position.
Any lay person can be taught what to look for, says accountant Smolin, who advises that if a president or treasurer can't devote the appropriate amount of time to the role, they should excuse themselves and let someone else take over. But, ultimately, it's the full board's responsibility to safeguard the property's assets. I absolutely stress that boards cannot abdicate their authority to management, says accountant Eisenberg. The board is there to make sure that things are done the way they're supposed to be done. In the end, the buck stops at the board.
Ms. Dershowitz is a contributing editor for The Cooperator.