For a crystal-clear picture of how a co-op board or condo association is doing,  there are few better lenses than the community's budgets and financial reports.  From an investment perspective, they show the association board, property  managers, the unit owners/shareholders and tenants whether the property is  solvent or not. If the numbers add up and monies coming in and out balance, you  can safely assume everyone is doing their job, and upholding their financial  and fiduciary duty to the community. If the property is in the red, it’s important to determine why that is, and what needs to be done differently to  turn the situation around and restore solvency.  

 Maintaining and updating the accounting of their property is one of the primary  responsibilities of a board—one that is all-too-frequently neglected, according to the pros.  

 “I think the place to start would be to, to steal from the late Sy Syms—and the message is that an educated board member is the best board member,” says Jules C. Frankel, CPA, from the certified public accounting and consulting  firm of Wilkin & Guttenplan, P.C., with offices in New York and New Jersey. “And that doesn't mean that a board member should be interfering with a managing  agent or what the management company is trying to do. But that a board member  has a fiduciary responsibility, should understand what's going on, and  therefore help protect the property and the property values for their  particular condo or co-op.”  

 It’s important to understand each financial document and its purpose so you can  have a better understanding of exactly what’s going on in your building board or association. So here’s a little Financial Paperwork 101.  

 Financial Statements

 Financial statements show the income and expenses for a building board or an  association.  

 “From a financial perspective, there are three major groups of documents.  Basically, before the year, the most significant document is the budget. During  the year, the most significant set of documents are the management packages.  Most of the time they're on a monthly basis, some cases, rarely, they're on  quarterly basis. And the last set of documents is after the year ends, which is  normally the audited financial statements and the tax return,” says Frankel.  

 Mindy Eisenberg Stark, an accountant in Scarsdale, says that the key elements of  a monthly management report include a bank reconciliation with a copy of the  bank statement, copies of checks that cleared the bank that month, copies of  bills paid, notes for bills that don’t have details explaining what purchases were for, comparative financials of the  budget and year-to-year, detailed cash disbursements and cash receipts, and  detailed accounts receivable and accounts payable.  

 An important component of managing finances is completing an annual audit.  According to the Institute for Internal Auditors, “Internal auditing bridges the gap between management and the board, assesses the  ethical climate and the effectiveness and efficiency of operations, and serves  as an organization’s safety net for compliance with rules, regulations, and overall best business  practices.”  

 “At the end of the year, you want to make sure that an audit is performed on the  books and records, that the auditor communicates the results with the board,  and that the board looks and takes seriously any recommendations that the  auditor might make as a result of their examination,” Frankel says.  

 As the year draws to a close, the board needs to prepare a budget for the  upcoming year to outline a formal and written plan of financial operations. The  budget reflects the needs and goals of the board or association for that year  and identifies sources of income and the cost of potential expenses the board  is anticipating.  

 “You want to make sure that when a budget is prepared that it's realistic. The  way most condos and co-ops prepare their budget is let's say, they have a  December year-end and they're preparing the budget, they might do so in October  to have three quarters of a year of actual experience to look at. They project  what they think is going to happen for the last three months of the year. Then  they're going to project what are the changes that are known about for the  following year that need to be dealt with. So in New York—maybe it's Local Law 11 that they've got to deal with and the scaffolding and  then all the checking. So the educated board member will make sure that the  budget is prepared in such a way that it's realistic and that there's some  amount of contingency there, because with Murphy's Law, something will always  go wrong, and you need some extra funds to deal with what goes wrong,” says Frankel.  

 Phillip Miller, CPA, at the accounting firm of Miller & Cusenza, P.C.in New York City, advises that the financial documents should be  updated either by the treasurer or by the management company and of course, by  the accountant when they issue a new financial statement.  

 For Your Eyes Only

 It is also important to consider who can see which documents. Certain paperwork  should only be accessible to board members, while other files can and should be  viewable by owners and even prospective buyers in order to disclose the status  of the board or association and its expenses. It is important to note that  being too generous with who can see what can lead to problems and unnecessary  unease, but on the other end, being too secretive can lead to distrust in  residents who might suspect that the board or management has something to hide.  In other words, it is a very fine line to tread.  

 “All unit owners have the right to a copy of the annual approved budget and the  monthly financial statements,” says David L. Ferullo, a partner at The Curchin Group, LLC in Red Bank, New  Jersey. “To obtain a copy, the unit owner must generally make a request of the board or  the management company. In some instances, this request must be made in writing.  

 “There are some financial documents that unit owners are not entitled to receive,” Ferullo says. “These include a listing of delinquent unit owners, certain payroll information  and documentation relating to certain legal matters. The board is mandated by  law not to release information of this nature,” he says.  

 Financial Security

 Last year in Chicago, the co-owners of a defunct condominium management company  were charged with fraud for allegedly stealing more than $2 million in  assessment payments. In Washington, D.C., the FBI arrested the owners of a  property management company accused of defrauding an estimated million dollars  from homeowners. And this past spring, in Exeter, New Hampshire, a property  manager was accused of stealing $67,000 from three Exeter condominium  associations. He allegedly pocketed money meant to pay expenses. These examples  are not meant to provoke panic and suspicion among residents and board members  but serve to show that fraud can occur, especially during under-supervised and  overly permissive circumstances.  

 So how does an association board maintain financial security? There are a couple  tasks to perform to ensure the confidentiality and safety of your documents and  certify the integrity of employees and residents. And it starts with the  simplest procedure of them all: actually checking the documents.  

 One of the most important safeguards against fraud is making sure the  opportunity to commit it does not exist. Stark says that “the person committing the fraud sees the opportunity to “get away with it” and assesses the act to have particularly minimal risk of getting caught. The  majority of people that commit fraud are people with no criminal past. They  rationalize their actions in order for the fraud not to be viewed as criminal  acts to themselves,” she says.  

 The key control to maintaining financial security is a board who takes a very  active role in reviewing the monthly financial statements and supporting  documentation, questioning those who have prepared the statements and being  very involved in the board’s operations.  

 Frankel says that financial misdeeds can be mitigated by an involved board. “In those rare instances in where we deal with fraud, we've seen a number of  times where it's the managing agent. We've even seen sometimes where it's board  members. So, the ways to reduce the probability of this happening, is to make  sure that somebody is keeping their eye on the money and looking over somebody  else's shoulder. Not in an obnoxious way, but to be educated about how we're  spending our money,” he says.  

 He continues to say that “part of it deals with making sure that for significant items, you're getting  competitive bids so that you're choosing the vendors whose bids are in the ball  park and there's no padding and money going back to somebody else. Some boards  are adopting conflict of interest policies, to make sure that board members  understand what their fiduciary responsibility is. And there's even some co-ops  that have adopted whistle blower policies, that if somebody is suspecting that  something is awry, that they notify somebody like the independent attorney to  let them know that there's an issue here and maybe it ought to be looked at.”  

 As added measures, Miller recommends that each check require two signatures and  all bills are properly authorized meaning expenses are double checked and  reviewed against the monthly financial statements by the appropriate person,  whether the treasurer or the managing agent.  

 Reviewing and updating an association's documents is a vital process that all  board members should be engaged in. Doing so can aid in preventing fraud, help  develop a realistic plan of financial operations and increase both board  member's and owner's knowledge of the building’s or association’s cost and expenses.    

 Lisa Iannucci is a freelance writer and a frequent contributor to The  Cooperator. Editorial Assistant Maggie Puniewska contributed to this article.