Craig: As a new board member, I was recently made aware of gross financial mismanagement by the prior management agent, as well as suspicious financial oversight by both the president and vice president. Shareholders are calling for not only their resignations but also a full audit of the cooperative’s financial records, including all revenue and expense activity.
Has anyone conducted an audit of their co-op’s activities? Is this something that can be done with a special committee of shareholders in lieu of hiring a CPA?
Steve: An audit will only tell you if the financial statements are reported in accordance with generally accepted accounting principles (GAAP). (It may also catch gross mismanagement, unreported assets, and potential theft.) In my opinion, you need an independent voice confirming the finances. If an audit has not already been performed (my complex performs one every year), then I would absolutely have a CPA firm perform one. If you need a suggestion on which firm, please respond. This is not an activity that a board is typically able to perform.
However, an audit will not give an opinion on business decisions within the law. For example, the question “Was it really wise to do ‘x’ with shareholder funds?” would not be answered. However, this is something that a board along with a financial adviser (either a finance person on the board or a hired consultant) can perform.
I would also be really careful about alleging “theft” or “mismanagement” without proof, as it may open you and the board to lawsuits. Additionally, sometimes a change in management companies is in order.
Finally, think about unintended consequences. If theft or fraud has actually happened, be sure to contact the authorities or begin lawsuits. However, if the issue turns out to be differences of opinion on permissible matters, remember to respect each other as you all have to live together in the same community. Certainly discuss what is needed, but remember to come together in the end.
Steve Rosenstein: Steve is correct. There is a lot of gray area between what is poor judgment and what is illegal. The kind of audit you are asking about is called a “forensic audit,” intended to uncover illegal activity. These are very expensive and most likely will not add any value to the issues you are facing. Following what Steve suggests is a very good place to start.
Stephanie: Unfortunately, my co-op was plagued by this situation for over 20 years. We also included the accountants in this group because they produced the financial statements that covered the fraud. We had massive overstatements of expenses, etc. We did have a forensic audit, but beware who you hire. Our former management company had not paid total withholding taxes for almost a year – we paid over $50,000 to the IRS; they did not pay the union, which cost us $200,000, etc.
During this time, we had increases and assessments of 25 percent, 15 percent-plus every year – yet the accountant couldn’t find anything. Absolutely amazing. So where did all this money go? Because the corporation did not have the money.
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