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What Every Treasurer Should Fear

You're the treasurer of your cooperative or condominium. You think of yourself as a nice guy - and you take your job awfully seriously. After a few months on the job, you notice something a little odd about the accounts: the managing agent seems to be making unauthorized wire transfers of money from your corporation's account into his management company account. When you confront him on it, he admits he did do that once but swears it will never happen again. The problem seems to disappear.

Only it doesn't. He just hides his tracks better. Suddenly, your property's checks are bouncing. And you - as the treasurer - are in big trouble. Everyone is blaming you.

That situation may sound surreal but it actually happened in a Manhattan cooperative. "This treasurer let himself be taken in," recalls attorney Steve Wagner, a partner in Wagner, Davis & Gold. "He started noticing something unusual, and then relied on the manager's statement that it had been taken care of. He never made further inquiry. When the agent got caught in the annual audit, one of his defenses was that he had shown all the books and records to the treasurer who had okayed and signed off on them. About $140,000 disappeared and the treasurer was the one the residents blamed. He was trying to do a good job. He just wasn't sophisticated enough."

Corrupt managing agents, bouncing checks, angry owners - these are the stuff of nightmares for a treasurer, and also the sort of situations that make many think twice before agreeing to serve as a financial supervisor. Yet the role cannot go unfilled or be taken lightly, since the treasurer has one of the most crucial functions in the property.

"In my view, other than the president, the treasurer is the most important board member," notes Wagner. "The job is to make sure that the money is properly spent, not wasted or stolen. Many people do take it that seriously. They have uncovered problems and saved their co-op or condo lots of money. The job doesn't require a technical background; just someone who is conscientious. "

For those who become treasurers - and for the board that utilizes their services - three questions frequently come up. What are my worst nightmares? What are the signs that they are starting to occur? And how do I protect the property?

NIGHTMARE SCENARIOS

What are the worst nightmares? As an accountant and certified fraud examiner, Mindy Eisenberg Stark has encountered a number of crises. Among them:

Empty Accounts. The managing agent is in charge of the reserve fund. When the treasurer keeps asking for statements that show the status of the account, he gets the runaround. Eventually, when the manager has fled, he finds that the accounts have been emptied.

No Tax Money. The co-op pays real estate taxes. The agent handles these. The monthly management report shows that taxes are being paid. When the co-op calls the municipality on a routine matter, it finds out that the money was actually never paid. The manager had used the cash for other expenses, spreading funds among his different accounts.

No Mortgage Money. A property has both an underlying and a wraparound mortgage. The building is paying the wrap, but the sponsor has not been paying the underlying mortgage. The board is unaware of this, however, since the mortgage statements don't come to the building but to the sponsor's office. The board members discover the problem when they are served with a default notice by the lender.

Lost Records. The management company changes but the old manager doesn't turn over the appropriate records to the new one. Among those papers: the records of the old bank accountants. As a result, the treasurer has no idea of how much money is on hand.

SIGNS OF TROUBLE

What are the signs that the nightmares are about to begin? Stark cites a series of clues:

Vendors Won't Work. If you call up vendors to do jobs, but they do not return calls or refuse to work, that's a sign they are not being paid on time.

Lack of Documentation. Be concerned if your manager refuses to produce documentation for jobs that have been done or has trouble getting bank statements together for you. That may indicate he is sloppy or corrupt or both.

Accounts Receivable Pile Up. If your monthly financial reports show that arrears are rising, you could be heading for a financial crisis. That's a sign that no collection efforts are being made and that the manager is not handling your finances well.

Default Notice. The lender notifies the property it is in default. By that point, the sign and the nightmare are one. The manager or the sponsor has not been paying bills.

Notice of Insurance Cancellation. As with a default, this is clear sign that bills are not being paid.

PREVENTIVE STEPS

The way to avoid such problems is to set up a series of protections that allow the board to follow the money's trail. Among the safeguards:

Segregate Duties. The person who writes the checks should not be the person who signs the checks or does the bank reconciliation. The board should very carefully segregate the different duties of those involved with the money. It may not always be possible, but the board should try to have as many people in the review process as practical. "It is always harder to steal when there is more than one person involved," notes Mark Shernicoff, an accountant with Zucker & Shernicoff.

Require Check-Signing Requirements. Every check over a certain pre-designated amount should also require two signatures. "Remember, when money is involved, your friend is not your friend," notes Douglas Condon, an accountant. "They could take advantage. It's like the federal government: you need checks and balances."

"Somebody should be watching," agrees Shernicoff. "It's a good idea to get second signatures on checks, but a bad idea to sign checks in advance. It's better to make it a routine that everything has two authorizations. That diminishes the likelihood of something going wrong."

Keep track of those controls, too. If there are signature cards at the bank for check-signing privileges, be certain they are current. "There are changes in the board that have to be reflected in the controls," says Richard Montayne, an accountant at Marin & Montayne. "We have had instances where the board members do not remain signatories or they are not currently serving, and the managing agent has become the only signatory. Sometimes, it has been changed so that both signatories work for the managing agent. You don't want that."

Beware of Commingling. Accountant Jay Menachem warns about commingling funds. That could raise the danger of paying for a crisis now but being unable to pay for a problem in the future. Segregate accounts. "Make sure you have the money to pay bills when they come up. If the mortgage company is not requiring an escrow account, you should do it anyway. If the funds are not segregated in that way, there could be problems."

He notes that if a water pipe broke and $80,000 in emergency repairs are needed, a co-op without segregated funds might be tempted to use all the money they had on hand to pay the repair bill. "But then they would have no money to pay their mortgage or to pay their real estate taxes. If all the funds are commingled, you could be caught short."

There are other, more heinous forms of commingling which you should safeguard against. Wagner recalls an agent who was very engaging, charming, and seemingly trustworthy. The agent had a special account into which property funds were deposited. Instead of issuing checks directly from the co-op to vendors, he would issue a single check to his special account to cover all the co-op's monthly payments and anticipated expenses. Then the agent would write all the checks.

"The problem was that all the funds were commingled with the manager's other funds," says Wagner, who notes that such an arrangement is frequently prohibited by the management agreement. "In this case, the board and treasurer had allowed it to happen because they trusted the manager."

Unfortunately, the manager also had a gambling problems. Soon, wire transfers started being made out of the account to someone in Las Vegas. By the time the co-op got wind of it, upwards of half-a-million dollars had disappeared. "By not being familiar with the prohibitions against commingling funds, the board basically gave this guy carte blanche to issue checks," Wagner notes.

"The big issue is understanding the funds," manager Neil Davidowitz, president of Orsid Realty, observes. "Sometimes it's not a question of corruption, it's that no one has done anything. Because of omission or carelessness, treasurers find themselves in a difficult position. On a basic level, the treasurers should know how many accounts they have. Sometimes there are different treasurers, different boards, and there is confusion about accounts. At a minimum, there should be two: an operating and a reserve account. But there may also be security accounts and escrow accounts - you have to find out and keep track of where the money is going."

Have Regular Reviews. The most important way to keep track of the money is to have periodic reviews, usually every month, during which the projected expenses are compared to the actual costs, spending patterns are tracked, bills are checked, and the managing agent offers a financial report.

"Get as many people involved in those reviews as practical," advises Davidowitz. "Bring in the treasurer, the manager, the accountant, even the super. The superintendent can bring to the table a lot of information about whether capital costs were unusually high or low."

At such a review, the group should discuss variances between the actual and projected costs of the budget. That discussion should keep you on track financially so that your property has enough money to pay bills. "You look at what's happening," Davidowitz explains. "This is the point where you can make adjustments. Are you heading for a deficit? Do you have sufficient reserve funds?"

Cash flow should be the major fear of everyone involved in finance. "The treasurer has to do most of the work," notes Condon. "He has to stay on top of that, making inquiries. He should get some kind of financial information, at a minimum, on a monthly basis. He should receive the bank statements, too. The most common error is finding the agent has paid a bill when he is not supposed to because there was a lack of communication between the board and the manager.

"The treasurer must keep the budget under control by seeing the weak spots," Condon continues. "By constant review, he can make corrections on a timely basis. He should have two budgets: an operating and capital budget and stick to it. If there has to be an emergency repair, you should be prepared so you don't have to hit up everyone in the building for money."

Ask Questions. Asking questions is crucial to keeping fears of financial failure from becoming reality. Indeed, don't be afraid of what you don't know: if, during a review, you look at a supply bill and don't know what it was for, the best thing to do is to make inquiries.

"I recommend to my clients that they sit down, a couple of times a month, with the property manager and the super and go through the bills. Just because you're looking helps," says Shernicoff. "The staff knows that they have to come up with answers. They'll be more cautious about how they handle things.

"Most treasurers have no idea how to read a managing agent's report," says Menachem. "Many have a financial background but the report comes and they do not know what to look at. You need to ask questions and be sure you understand what it all means."

Shernicoff recalls a case in which a check was drawn by the managing agent for an oil supplier. In the regular review, the treasurer looked at the endorsement and noted that it was not the same as the endorsements on the other checks made out to the oil company.

"When we do an audit, we look at the backs and fronts, on a spot basis," says Shernicoff. "If the payment was supposed to be made to the Hess oil company, then the endorsement should be to Hess. In this case, the endorsement was handwritten and there was a different account number on the check. It was the managing agent's account."

AN ANNUAL AUDIT

There should be an annual, independent audit, prepared by the accountant. Some may balk at the expense - depending on the size of the property, it could cost thousands - but experts say it is essential.

"Only a handful of properties - mostly very small buildings - do not have one," Montayne says. "You want the audit for your protection. You want it for resales; the potential purchaser wants it. Covenants for banks require an audit to be done for the mortgage. The audit is the most expensive and most valuable service provided."

The alternative is a review, or a so-called "compilation." The review is like an audit, but there is not an independent confirmation from banks or an auditing agency. The compilation is just a summary of financial activity without looking at the bills and bank statements. The audit is highest level.

"The audit will catch most major things," observes Shernicoff. "You look at enough things so get satisfied that things are okay. You get a report that says you paid Hess oil. There should be an amount on the bill and a delivery ticket should be signed by the super. The treasurer has to look at these things. Then the auditor does a review."

THE IMPORTANCE OF BEING A TREASURER

The thing to fear most of all is having a treasurer who lacks common sense. "Common sense is a pretty good guide," says Montayne. "If you have that, you don't need a financial background."

Indeed, the treasurer needs to be able to say, "no." Wagner cites a case in which a board decided to offer certain repairs that had traditionally been done at the unit-owners' expense. The board said it they would assume the responsibility to make repairs caused by leaks. "But they did not evaluate the potential cost of this," says Wagner. "So in doing a number of repairs, they ran significantly over their repair budget and the building went into deficit."

In such situations, it is the treasurer's job to ask about the impact of policy on the budget. "The board, in an effort to be generous to the unit-owners, approved a resolution that wound up getting their budget out of whack - and helped the sponsor who had all his apartments painted in the process," Wagner observes. "The treasurer should have said something. No good deed goes unpunished."

Adds Condon: "Because they are all friends and neighbors, there is a tendency to take things for granted. But that is not the way to run things professionally. If the treasurer is not attuned to the day-to-day functions of a co-op, he should be removed. Never take things for granted."

In the end, the biggest fear that any treasurer should have is not recognizing his or her own importance. "The treasurer should act as the first line of defense," says Wagner. "He needs to be proactive and on-the-ball."

The attorney points to a treasurer with whom he worked who raised questions over a repair contract. "He was worried that it might have been padded because the property manager who had negotiated it was subsequently hired by the company to be a sales person. So he brought it to my attention and to the attention of the accountant. We did an investigation into the circumstances of negotiation and appropriateness of costs and we found no irregularities and that everything had been properly disclosed."

Although nothing was amiss, the concern was appropriate and the treasurer had done his job. "He may have blown the whistle too early, but that gave everyone a lot of comfort," says Wagner. "When a question came up at the annual meeting about the propriety of the situation, the treasurer was able to say, 'We saw it, we were concerned, and no irregularities were found.' That makes everyone look good because the treasurer took the extra step." H

 

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