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04/10/07: Protecting Your Association Assets

HOUSING COUNSEL

By Benny L. Kass

Q: I have just been elected Treasurer of our condominium association. Recently, I read that a property manager in Virginia may have embezzled thousands of dollars from the associations with which he was associated. Quite frankly, I am scared, because I am completely ill-equipped for this task.

What can I do to safeguard our association’s money?

A: In the last ten years, if memory serves me right, there have been 3 episodes where property managers have stolen their client’s money. While this is clearly traumatic for the affected association – and especially its Treasurer – in the total picture this is a very small number.

The great majority of property managers are concerned about the financial welfare of their clients.

But because there are a few “bad apples”, and because you as Treasurer are charged with the responsibility of handling the financial affairs of your association, you are justified in being nervous. Unfortunately, there are many board members who believe that being elected to a board of directors is only a ceremonial function. But you have the right attitude.

The first thing is to meet with your association accountant. Arrange to spend as much time as possible with him/her, even if this will be an additional expense for your association. The accountant should explain how the books are kept and give you tips on how to spot problem issues. You may even want the accountant to meet with you every month for a couple of hours, until you have a good understanding of the books and records.

Next, meet with your property manager and review your association financial policies as implemented by the manager. Ask questions if you don’t understand things; after all, the property manager works for your association and will be responsive to your concerns.

Finally, meet with the association’s insurance agent. Satisfy yourself that there is adequate coverage for any and all kinds of embezzlement from anyone – whether it is at the hands of the property manager, one of the board members or even an owner.

Now that you have a decent understanding of your association’s financial picture, here are some suggestions which you and your board should seriously consider:

First, make sure that the firm is appropriately licensed in the jurisdiction where your property is located. Some jurisdictions require the manager to maintain a current property manager’s license.

Second, when you are considering hiring a new manager, check out the company carefully. Perhaps you should even obtain credit reports on the firm (and the property manager who will be servicing your association); this will, of course, require the permission of the manager, but they should not object if they want your business.

Third, keep control of your funds. Generally speaking, there are two money categories in a community association: operating accounts and reserve accounts. All accounts should be in the sole name of your association and must not be commingled in any way with other funds controlled by the manager.

the operating account. Set a dollar figure above which the property manager will need the co-signature of at least one board member on all checks going out of that account. This will create a burden on both the property manager and the board member who has to sign checks. But, in my opinion, if you want to serve on the board, you should be willing to assume those responsibilities which will protect the funds belonging to the unit owners who elected you.

Clearly, there are routine checks that have to be paid on a monthly basis -- such as water bills, insurance, and trash collection. If you set a dollar limit (such as $1-2,000), the property manager can write checks up to that amount without a second signature. But any checks over that limit must be co-signed by at least one board member. Your bank will give you signature cards and these requirements should be spelled out in those documents. Then, the bank will have to honor your request.

the reserve accounts: only officers of your association should be authorized to sign checks (or transfer funds) from those accounts. Your association does not use reserve funds on a daily or monthly basis, and thus it should not be a hardship on anyone to require that only officers be authorized to have access to those funds. At a minimum, two signatures should be required; you do not want to give absolute power to any one officer to sign these checks.

Fourth, make sure that the property management company has adequate insurance (fidelity bond) covering your association in the event of embezzlement, fraud or other activities which may cause your association a loss. The insurance industry will write "third party coverage" bond insurance which will give you protection in the event of a loss. The amount of the policy will, of course, depend on your financial situation. Some associations have hundreds of thousands of dollars in reserves; clearly, third party coverage in the amount of $50,000, for example, is woefully inadequate for those associations. The policy should include wrongful acts of officers and managers.

Fifth, make sure that you (and not the property manager) hire an accounting firm to give you a full audit each and every year. Your association should give a letter of engagement to the accountant, and the accountant should report back to you -- and not the manager.

Sixth, and perhaps most importantly, insist that the property manager give you and your board members a monthly financial status report, which will include copies of the actual bank statements received by the management company. You should also demand that the bank send a duplicate bank statement directly to the Board Treasurer. Review this material carefully every month within five days from receipt. Keep in mind that every board member has a fiduciary relationship to all the unit owners. I assume that you review your own bank statements on a monthly basis; you should do no less for the unit owners you serve.

Most property managers are honest and hard-working. However, one dishonest manager will unfortunately cast a broad brush of distrust on the entire industry. I do not believe that property managers will object to the various suggestions I have made, and indeed most community managers have already implemented these recommendations into their operations.

But when there is money, there will be greed and corruption. Community association board members have the power to control -- as best they can -- the financial security of association funds, and steps should be implemented to do just that..

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