An Attorney Explains: Why Boards Should Verify Bank Statements
Nov. 10, 2014 — The client’s tale: The co-op board started hearing rumors that many buildings were terminating their relationship with their managing agent and that many of the agent’s employees were quitting.
The board started to get a little nervous, but it received management reports and had a certified financial statement from their accountant for the last calendar year. After a few months, the board decided that even if the accounts appeared to be fine, it didn’t want to be the last building managed by this seemingly troubled agent.
The board hired a new agent, who received no documents from the recently fired agent except for the rent roll and a list of arrears. The new agent did not receive the co-op’s reserve account, the one that was listed in the management reports and appeared on the certified financial statements.
The board hired our firm, and we contacted the bank listed on the reports. The bank said that the statements were fraudulent. The co-op’s accountant gave us a copy of the signed bank confirmation (a document verifying the end-of-year balances in the co-op’s accounts), which we forwarded to the bank; it was fraudulent, too.
We asked the accountant about his procedure for obtaining his confirmation statements. He said that he had always sent them to the agent to forward to the bank. Based on a cursory review, two reserve accounts that have been listed for more than two years never even existed.
The lawyer’s take. The board in this case was lulled into a false sense of security. It was receiving management reports and had even received a financial statement from its accountant.
Most boards feel that this would be enough to protect them. However, boards should independently verify the bank statements, either by having a second set sent directly by the bank to the treasurer or by spot-checking with the branch.
Also, confirm with your accountants that the confirmation information that they receive comes directly from the bank.
Case closed. Another set of eyes cannot hurt. Boards should also confirm that the “checks and balances” are being performed by their professionals.
Tara Snow is a partner at Novitt, Sahr & Snow.
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