Q. I have just been elected treasurer of our 215-unit condominium association. I am not an accountant but am eager to learn more about my job. I have started to review the books and records of our association, especially the financial data, and am not comfortable with what I see. I do not suspect fraud or embezzlement, but it does not appear that my predecessor paid any attention to these records.
I know that over the years, there have been cases where property managers have been caught stealing association money. What can our association do to protect ourselves against such events?
A. The great majority of property managers are highly professional and honest. However, in the past several years at least two property management companies have gone out of business in the Washington area, leaving behind a trail of unpaid bills and large losses from community associations' reserves and the operating accounts they managed.
I like your attitude. Directors of community associations should do their homework and fully understand how the board of directors and the property manager work. This is especially important in the financial arena, since budgets and association dues and assessments are usually of most concern to the owners. It seems that few people show up for routine association meetings; but when there's a possibility that dues will be increased, the owners show up in droves.
Here are many ways to protect your association funds:
* Before you hire a property manager, make sure the firm is appropriately licensed in your jurisdiction.
* Check out the management company carefully. Perhaps you should even obtain credit reports on the firm (and on the property manager who will be servicing your association). This will, of course, require the permission of the manager, but who should not object if he wants your business.
* Keep control of your funds. Generally speaking, there are two pools of money in community associations: operating accounts and reserve accounts. All accounts should be solely in the name of your association.
Regarding the operating account, set a dollar figure above which the property manager will need the co-signature of at least one board member on any check. It's true that this creates a burden on board members. But, in my opinion, those wanting to serve on the board should be willing to assume their responsibilities. The signature requirements should be spelled out on the association's bank signature cards.
Clearly, there are routine bills, such those for water, insurance and trash collection, to be paid every month. If you set the dollar limit above the usual amounts on those checks, the property manager can write them without a second signature. But any checks over that limit will have the extra security of being cosigned by a board member.
Regarding the reserve accounts, only officers of the association should be authorized to sign checks (or to transfer funds). Community associations do not transfer money often from reserve accounts, so this should not be too big a burden on anyone. At a minimum, two officers' signatures should be required; you do not want to give absolute power to any one officer to sign these checks.
* Make sure the property management company has adequate insurance (fidelity bond) covering your association in the event of embezzlement, fraud or other activities that may cause your association a loss. The insurance industry will write "third-party coverage" bond insurance that will give you protection in the event of a loss. The amount of the policy will, of course, depend on the amount of the reserves anticipated.
* Establish that the association itself has enough insurance coverage in the event of embezzlement, fraud or other similar activities. The policy should include wrongful acts of officers and managers.
* Be certain that you--not the property manager--hire an accounting firm to give you a full audit every year. Your association should give a letter of engagement to the accountant, and the accountant should report back to you--not the manager.
* Insist that the property manager give you and the board members a monthly financial status report that includes copies of the 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 of receipt.
Most property managers are honest and hard-working. However, one dishonest manager will cast suspicion on the entire industry. I do not believe that property managers will object to the suggestions I have made, and indeed most community managers have already implemented these recommendations into their operations.
Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.