COMINGLING BANK ACCOUNTS, P.2

The danger here, she adds is, "You haven't really segregated one co-op's money from the other, so it's very easy for the co-ops to be borrowing from each other; when one is running short you use the money from one to pay the other's bills, even on a temporary basis. And since that account doesn't belong to any individual co-op, the management company will typically deny access to that account to an auditor because it has [many different buildings'] transactions in it."

Although some say commingling is illegal — attorney James Samson, a partner at Samson Fink & Dubow, points to a law forbidding the practice by brokers (and managers can only collect rent/maintenance if they are licensed as brokers) — others say it's a grey area with little case law to illuminate it.

Still, boards should beware of how their money is handled because commingling is apparently still going on. DeLorme took over a building in Queens where the CPA discovered evidence of commingling, while Steve Greenbaum, director of management at Mark Greenberg Real Estate, notes that his firm started managing another Queens co-op where the practice apparently had taken place.

Recalls Greenbaum: "We came to the [job] interview, and they said, 'We haven't gotten a bank financial statement in two months.' I said, 'Hold it right there. Don't let anyone write any more checks unless you know in advance what they are for.' The [manager] stole $150,000."

How do you prevent commingling? Among the steps you should take:

• Be sure your management contracts forbid it. "My formal standard contract that I prepare for managers clearly requires several separate accounts," says attorney Steve Wagner, a partner at Wagner Davis.

• Insist that you see monthly bank statements, not just financial reports prepared by the manager. Don't settle for excuses like "Our system crashed," "We got a new bookkeeper," etc. "If your managing agent can't give you an almost-instant snapshot account of where you are," says Greenbaum, "then you've got troubles. That's a real big flag."

• Review canceled checks to be certain that bank statements and bank reports are from the same account. Look to see if vendors who you've never heard of are being paid from your account. That's a sign that accounts are being mixed together.

• See that your CPA reviews the accounts at least twice a year to note any discrepancies.

• Have one or two board members as co-signatories. If the funds are commingled and you fire the agent, it could be hard to separate your funds from everyone else's. Attorney Arthur Weinstein advises boards to have two directors be co-signatories on the building's account. "It makes it easy for you to transfer the money if you terminate the agent because you have access to the account," he explains.

In the end, you should trust but verify. "The bottom line is that the board should be vigilant," says Greenbaum. "Don't expect the accountant to catch it. It's up to you."

Adapted from Habitat July/August 2009. For the complete article and more, join our Archive >>

Illustration by Liza Donnelly