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Cash and Carry

Call it CSI: Co-op Scene Investigation. Except instead of TV’s Gil Grissom and his forensic cop-scientists examining a body to learn the time and circumstances of death, you’ve got a guy with a pocket calculator who’s going over your checks for plumbing supplies. And if you’re both unlucky and lucky, in that order, this member of the brave new breed of forensic accountants will follow that trail of pipes and joints to uncover the corrupt super, bookkeeper, board member, managing agent, or anyone else who might be skimming, kiting, padding, or whatever cutesy term you choose to use for embezzlement, fraud, and misappropriation of building funds. Sad as it is to say, your co-op or condo’s a ripe target and even your own board president might be found to have his or her hand in the cookie jar.

“Fraud has always been around,” notes Kari Hall, chief association officer of the nonprofit professional society the American College of Forensic Examiners. “But many people are becoming more aware of it now and are hiring accountants who specialize in the investigative side of their field. You need someone to make sure everything’s being done accurately and that there aren’t any under-the-table dealings.”

Get that “it-can’t-happen-here” thought out of your head. Sure, it’s easy to be paranoid and get so suspicious about every little thing that you nitpick your vendors, managing agent, and time-pressed volunteer board members to a point where they might have to send the real CSI to identify your body. But there’s a middle ground to take between c’est la vie and j’accuse.

How common is financial fraud in a co-op or condo? “How do you define common?” asks CPA and fraud examiner David Glodstein of Forensic Accountants. “It happens, and you have to watch for it. It revolves around ‘the fraud triangle,’” he says. “You know the fire triangle? That says it takes three elements to make fire: oxygen, fuel, and a spark. Without any one of them, you won’t have fire. Same thing with fraud: opportunity, incentive, and rationalization. If the opportunity is there, and the incentive to steal is there, and people can rationalize it to themselves, you get fraud.”

Brad Sargent, chair of the American Board of Forensic Accounting and the head of the forensic group at Chicago’s Stout Risius Ross, talks about it in terms of “crimes of passion”: “The predicating factor may be, ‘I’ve got medical bills,’ or, ‘I’m going through a divorce and getting raked over the coals, and I’ll be left with nothing.’ There can be strong, compelling personal reasons to motivate an otherwise honest person to steal. But once that element of passion is removed, and they find they can do it for small amounts and get away with it, the historic trend is that they begin to take more and more.”

In the past, boards suspecting fraud might investigate it themselves or call in their attorney, two options fraught with volunteer/layman lack of expertise at one end and very high expense at the other. Since the attorney would normally call in an accountant to check the books anyway, boards began finding it more cost-effective to hire the accountant themselves and present his or her findings to the attorney.

What’s the difference between a regular accountant and a forensic one? “Accountants make sure the numbers add up, that one plus one equals two,” says Michael G. Kessler, head of the financial investigative firm Kessler International. “Forensic accountants look at an invoice and say, ‘That $32 [for] a single 60-watt lightbulb [means] something might be wrong here.’ We’re looking for irregularities,” notes the former field auditor who coined the term “forensic auditor” in the 1970s. “We’re looking for fraud.”

Specifically, forensic accountants go over the board’s financial records, match invoices to checks; confirm the identities of vendors and employees; interview staff members and others; run database searches; and present a report. In the case of criminal prosecutions, they testify in court.

Before it gets to that, however, how can a board – or perhaps even individual board members, in the case of a crooked president – spot financial finagling? Here are four real-life cases of different but typical types of co-op/condo fraud.

The Ghost Employee

A bookkeeper in a New York City condo put a dummy person on the payroll and, for a year and a half, sent salary checks to a post office box. “There was an actual person cashing the check and splitting it with the bookkeeper,” Glodstein says. “I don’t know the percentage.”

The bookkeeper, however, knew the chance of getting caught was low. She had worked for the condominium association for over five years, and, since it was convenient for the board to give one person sole responsibility for paying its bills, she controlled the checking account.

“Because the board trusted her,” says Glodstein, “they thought she would never take money.” But after about three-and-a-half years of this, the bookkeeper, very simply, added the name of a relative to the list of maintenance employees. Neither the board treasurer nor the condo’s accountants ever tried to verify all the employees’ existences, and there was no red flag since it was slow and consistent.

Eventually, however, “a member of the board came to us because he noticed there was a person on the books, and he didn’t know who this person was,” Glodstein says. “I think it was a new person who came onto the board and was kind of gung ho. He did his own research. He wanted to look good in front of the board and also felt he was on a mission to save the entity money.”

Armed with this member’s basic research, the board called in Glodstein’s company. In typical forensic-accounting fashion, an accountant went in person to the building to look at the condo’s books and records, and an investigator started interviewing staff – none of whom were notified beforehand in order to prevent staff members from colluding and “getting their stories straight.”

The scheme began unraveling when they talked to the bookkeeper. “We didn’t even know she was doing anything wrong,” Glodstein says. “But you talk to everybody, try to find out what their responsibilities are, and follow through. She was handling all the money coming in and going out. That gives you the feeling that something could go wrong here.”

Then they got their break: a name on the employee list suspiciously similar to the bookkeeper’s. They asked her who he was; she didn’t tell them – not immediately anyway. After a few more questions, however, she allowed that he was a relative. That was enough hard information to take to the board treasurer, who confirmed he didn’t know who the person was. That did it. The sordid scheme was out in the open.

But unlike TV’s CSI, the perpetrator profited and didn’t go to jail. The condo association fired her, but since the roughly $15,000 she’d stolen was already spent, the board felt it would cost more to pursue the case than what might eventually be recovered. “The sad part in these situations,” Glodstein says, “is these people move on to the next gig, and they know that, in the majority of cases, they’re not going to get prosecuted.”

The Single Client Company

At a co-op in the Bronx, some of the maintenance employees set up their own company to do renovations on the building – charging more than double the going rate for the services. The managing agent knew all about it – and, in return for a 10 percent kickback on the company’s $50,000 to $70,000 annual billing, let it go on for five years until they were all caught.

“It was a middle-income building in a middle-income neighborhood,” says Kessler. “I walked in and met the president of the board. She suspected the building was spending more on certain items than they should. She also told us she suspected that some of the employees might be corrupt.”

In the process of cross-checking vendor invoices against board payments, the investigators discovered that with one company all the invoice numbers were consecutively numbered – which meant they never had any other clients.

Before making any accusations, however, the investigators had to verify. They visited the supposed street address of the company – and found it was only a mail drop. They then ran database searches that turned up the fascinating fact that the wife of a building employee was listed as this renovating company’s president.

Kessler’s firm broke the news to the board over the phone, giving the president a head’s up about what the final report would detail. “She was taken aback because it wasn’t what she was expecting,” Kessler says.

Despite finding the six-figure overbilling, the kickbacks, and the personal betrayal of trust, however, the board merely fired the employees and discharged the managing agent. As too often happens, the board, not wanting to draw attention to its own inattention, did not pursue prosecution. The wrongdoers were free to go back into the workforce because the board didn’t want to look bad. Which means, of course, they may be in your building right now.

The Doctored Documents

A member of the board of a New York City co-op handled his building’s investments and regularly supplied the board’s CPA with bank and brokerage statements. Not the originals, of course – you keep the originals in a safe place and mail photocopies. But without a third party making sure the numbers matched, those statements could be scanned into a computer, altered, printed out, and then photocopied. In fact, the altered printout could even be switched with the original.

The board member in this case wasn’t quite so high-tech – he merely used a photocopier and correction fluid to reduce the statements’ interest and dividend figures by the amounts that he stole. This went on for two-and-a-half years and cost in the area of six figures.

One reason he was getting away with it so long is that the board’s CPA auditor never sought the standard “third-party verification” – in other words, he never contacted the banks and brokerages to get statements directly from them and instead relied solely on copies given him by the board. Another reason was more personal: even though the board member didn’t relinquish the originals to anyone else, the board – for reasons that might have ranged from trusting a friend to not wanting to appear as if it were insinuating thievery – never insisted that he do so.

The embezzling was uncovered when the board needed money to pay for a major co-op expense and found the cash wasn’t available in the investment account. They called in Glodstein’s company to find out where the money went.

“We got originals from the investment company, compared them with the documents provided to us by the board, and noticed a difference between the two,” says Glodstein simply. But that break came only after a lengthy process covering any of a number of possibilities. “A lot of times we go into cases and don’t know where the bleeding is; the board just says, ‘There’s supposed to be more money there, and we don’t know where it is.’ We go through the checking account, we make sure signatures are proper, we make sure they’re not paying themselves,” he says, describing some of the standard steps.

The board member, when confronted, confessed. “A lot of times when you have ‘em nailed, and there’s nothing really they can do, it’s kind of a relief for them to get caught,” Glodstein says. “These people have been hiding and stealing, and they want to get it out in the open. Most of them think they’re only going to ‘borrow’ the money and put it back. But then they find they can’t, and, after having gotten away with it once, the temptation to go back can be like an addiction.”

Despite the stealing, however, the board member didn’t go to jail. “I think there was restitution he had to pay,” Glodstein says. “A lot of times in these cases, the board doesn’t want to bring negative attention to the situation, because how’s it [going to] look for the board? They gave all this autonomy to one person and never checked on what he was doing! There always should be a checks and balances approach: always ask for original documentation instead of copies. Anything that’s not original, there’s a chance of it having been altered.”

The President, the Lawyer, and the Case of the Fake Loan

A high-end co-op bought four units in its building for $1 million around 2004 and converted them into one single luxury unit. They sold it for $2.8 million – and netted just $237,000 profit. Even subtracting the renovation fee, the $80,000 legal fees, and other such expenses, that didn’t account for a missing $1.5 million.

A special committee of the board took their concerns to an attorney who was also a professional property manager. He suspected fraud, and eventually the committee replaced the co-op’s existing freelance managing agent with the attorney/agent and moved all the old records from the former’s office. The attorney/agent, in turn, hired Kessler’s firm – which noticed a suspicious business arrangement in which the co-op board’s attorney had allegedly loaned the building $540,000. A private, non-bank loan is unusual enough – but the co-op’s accounts showed deposits of $330,000, leaving $210,000 unaccounted for. On top of that, Kessler’s investigators found a $300,000 loan-repayment check to the lawyer – who, they found out later, was a business partner of the co-op board president, a minor 1960s art-world celebrity from a prominent New York family.

Her business partner wasn’t the only person to whom the missing money went – more palms were being greased than at an oil-and-lube mechanic’s. The investigation uncovered a $50,000 check unaccountably paid to the managing agent, exclusive of the payroll yet listed as part of it. Another $55,000 check went to a renovation contractor, above and beyond his $242,000 fee – and as for his fee, the committee could find only nine “extremely sparse” invoices totaling $5,500.

“We found the [contractor’s] checks were all deposited into a credit union in New York,” Kessler says. Later, “when things were getting hot and federal investigators were interviewing, the construction contractor fled the country to Poland. We understand he’s back in this country again – probably doing the same to another building.”

There were “a load of suspicious vendors,” Kessler says, including a plumbing contractor who was allegedly paid $78,000 and many of whose invoices “were scratched out, written over or had Wite-Out, and were in the handwriting of the first managing agent.” Additionally, “we found a vendor from Shirley, New York, that did about $600 worth of work. Now, Shirley is in eastern Long Island. A vendor in Shirley is not going to drive several hours to New York City, park his truck, and risk a ticket or being towed for a $600 job. The board president, however, has a house in the Hamptons,” which was nearby and made more sense as a work site for a Shirley firm.

And that still wasn’t all. The investigators found $20,000 paid over six months to the credit-card account of a former board member. There was another $3,000 in credit-card payments for the co-op president’s daughter. Two brokers involved in the sale were supposed to split a six percent fee evenly – but one of them was a close associate of a former board president, and, despite the agreement, got four percent of the sale.

The investigators found the contractor with the $55,000 payment and skimpy invoices living in Queens. They went to his house wearing recording devices. “He did not want to be interviewed at his home, so he asked us to interview him on the street corner,” Kessler says. “We had about an hour interview, in which we got him to finally admit that he was billing as a conduit for one of the former board presidents and the first managing agent, who would divvy the money up between herself and the [then-current] board president. We had subsequent conversations afterwards, asking him to produce documents, and recorded every one of those conversations. We got enough evidence, we felt, to indict for commercial bribery.”

But it was not to be. As Kessler puts it, the evidence “was taken to the U.S. attorney’s office, who dropped the ball on it and nothing was done. It was taken to [Manhattan District Attorney Robert] Morgenthau’s office, who dropped the ball and nothing was done. They got away with it,” Kessler says of the perpetrators. “It’s disappointing. It’s really disappointing. You have to question politics and influence.”

There Are Eight Million Stories

These are just four cases. There are many more. Forensic accountants describe plots involving a company listed as doing work in 2001 and 2002, even though the New York Secretary of State’s office shows the corporation having been dissolved in 2000. Another building had $50,000 worth of marble delivered to it, but no one knows where it supposedly was installed. The fraud can range from screenplay-worthy to simple, like the managing agent who tells a landscaper that he’ll give him the condo’s contract if the landscaper mows the agent’s lawn every week.

Some obvious signs are within any board member’s ability to spot. “Look for individuals living beyond their means,” advises Sargent. “If a super shows up in a brand new Mercedes and you’re paying them a $60,000 salary, that’s a telltale sign.”

When fraud is suspected, one of the crucial steps is to get staff member information. “The workers are called into an office and told we’re conducting a forensic audit or inquiry and that we need their cooperation,” Kessler notes. “You don’t let them know ahead of time – you have to keep people off guard because you have usually one shot at interviewing a person. If you don’t do it right the first time around, they’re going to discuss it among one another and get their stories together.

“An interview can take anywhere from a half-hour to a couple of hours. You’re going to try to get a feel for whether they’re telling the truth or not. That’s instinct. People talk about ‘body language,’ but just because a person seems nervous, it may just be just because they’re a nervous person. What you’re looking for is how their demeanor changes during the interview.”

As in poker, it’s all about the “tell”: “In one interview I did on the phone, I could tell when he was lying to me because his speaking pattern changed dramatically, and he hesitated with his words. And, whenever we caught him in something, he would tell us to go talk to someone else about it,” Kessler notes.

Stay unemotional and noncommittal throughout the process, and be polite and friendly to put the person at ease. Don’t reveal too much yourself. And don’t make accusations or snap judgments – interviews are only part of the process, and a paper-trail confirmation is critical.

Final tip: you can record the interview without informing the subject of it. “New York State is a one-party-consent state. If I’m sitting in a room, I can record without telling anybody,” says Kessler who adds, however: “I can’t leave the recorder on, leave the room, and record two people in the room. One person with knowledge and consent has to be in there.”

And what else can you do about corruption in general? Monitor your cash accounts, since those have the highest liquidity. Separate all your monetary functions, not just who can write a check. Have one person fill out the deposit information and another person make the deposit. Remember, in the end, the perception of an effective deterrent is one of the strongest means of mitigating fraud in any organization.

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