Spotlight on: The Steps a Board Can Take to Help Protect Itself from Fraud
June 25, 2015 — Anyone who read about the saga at Sherwood Village, a co-op in Queens, knows that it's not representative of your typical board. The board's treasurer from 1991 to 1995 became convinced that the co-op was riddled with corruption and "fictitious billing." He got the Department of Housing and Urban Development and the Queens district attorney's office to open formal investigations. Neither found any evidence of financial wrongdoing, but allegations of corruption continued. It's quite the story, and one that reminds boards about the dangers of letting politics get personal. However, it doesn't mean that boards shouldn't exercise caution and protect themselves from potential fraud.
Sherwood Village ended up cycling through three management firms, with each company starting out as the new White Knight, and then departing some months later as the blackest of villains, corrupt to the core, joining the string of lawyers, accountants, and contractors who had been similarly accused by the former treasurer.
It's an extreme example that may leave some boards feeling apprehensive about voicing any concerns about anything that seems amiss, but it shouldn't. For starters, corruption does exist, and boards should never hand over the reins to a single person, even a professional, without ever checking up on things themselves — especially when it comes to financial statements.
Here are some steps a board can take to help protect itself from being defrauded:
1. Compare your management company's monthly financial report with the prior month's report and with the report from the same month a year ago. Be on the lookout for abnormal fluctuations.
2. Make sure your management company provides the monthly bank statement and bank reconciliation, and that it includes your building's name, along with the monthly financial report. Make sure they conform. Examine canceled checks and copies of paid bills. Get a statement for every one of your accounts — not only checking, but also escrow, reserve fund, money market, investments, and any others.
3. Insist on seeing a maintenance roll, including maintenance charged per apartment, other charges, maintenance collected per apartment, and other income collected. Make note of arrears, and ensure the managing agent is taking appropriate collection action.
4. Designate a director as co-signatory on checks with the managing agent. Do not allow the agent access to the reserve fund, and limit the amount he or she can spend without a second signature on the check.
5. Have your accountant review your accounts annually at least.
6. Ensure the management company is bonded for at minimum the amount your building has in all of its accounts.
7. Carry an up-to-date and adequate fidelity bond, a type of insurance also known as a "crime policy" or "employee dishonesty policy." That way you're protected in case your safeguards fail to prevent the theft of your building's money.