Porzio, Bromberg & Newman, Partner
Steven R. Wagner
The client’s tale. The first indication that something was wrong was the treasurer’s discovery of unexplained notations in the managing agent’s financial reports of a roughly 40-unit condominium association. Monthly common charges had been “reversed” rather than credited to the unit-owners upon payment. These reversals were never for the same unit-owners, but there seemed to be one or two who received the mystery notation each month. The reports showing the reversals were buried in a ream of financial materials the agent produced every month. The sharp-eyed treasurer inquired at the management company, but despite promises of an investigation, the agent never provided any explanation for the reversals and never corrected the records. Frustrated, the treasurer contacted the condo’s accountant for an explanation and confirmation that the reversals were normal. They were not. In fact, the managing agent was skimming the condo’s common charges by reversing amounts due on the condo’s records and depositing the funds in a separate account the agent had opened to perpetuate the crimes.
By reversing charges on random unit-owners’ common charge accounts, it was easy to hide the disappearing money. The affected unit-owners only knew that they paid their common charges and the bill showed that nothing was owed. No arrears showed on the management reports because the reversal of the common charges meant the reversed amounts were no longer due. Thus, it appeared that the amounts collected by the managing agent matched the amounts due from the unit-owners. The problem was that the monthly common charges to be collected as shown on the management report were short, since the report did not include the reversed charges. More than $40,000 in reversals had accumulated over a period of more than two years.
My advice to the condo was to notify its insurance carrier and the carrier of the managing agent. The condo had been listed as an additional insured party on the managing agent’s policy, so there was no issue with the condo submitting the claim. I also advised the board to move the condo’s reserve and operating funds immediately from the managing agent’s control. Fortunately, the managing agent cooperated with these demands. The condo may suffer some losses, but the losses were minimized.
The lawyer’s take. This incident underscores the importance of the treasurer and how critical it is that the financial records be carefully reviewed by at least one member of the board. The treasurer is in the best position to monitor whether the common charges or maintenance arrears are growing, whether the expenses are rising, and any irregularities. Fortunately, this condo’s treasurer was not afraid to ask questions.
Case closed. Your managing agent may be the most trustworthy, wonderful person in the world. Still, the board has a fiduciary duty to manage the condo’s finances and affairs. I suggest to my boards that they have an active treasurer or finance committee to carefully monitor and review all financial matters. I also recommend two signatures on all checks with at least one being an officer of the condo. The management company should also agree to name the condo as an additional insured on its policies and be required to have adequate insurance coverage to protect against fraud, embezzlement, and dishonest employees.