Qustion: I am the President of a 135 unit condominium association and have just read that a local Property Management company has been the victim of an embezzlement. I understand a lot of condominium money that was held by the Management Company may have been lost. What can our association do to protect ourselves against such events?
Answer: In my law practice, I have represented at least two property management companies that went out of business in this area, leaving behind a trail of unpaid bills and large losses from community associations’ reserve and operating accounts.
There are many ways in which to protect your association funds.
First, before you hire a property manager, make sure the firm is licensed in the jurisdiction where your property is located. However, not every state requires a license.
Second, check out the property manager carefully. Perhaps you should even obtain credit reports on the firm (and the property manager who will be servicing your project); this will, of course, require the permission of the manager, but they should not object if they want your business.
Third, keep control of your funds. Generally speaking, there are two pools of moneys in community associations: operating accounts and reserve accounts.
Regarding the operating account, set a dollar figure above which the property manager will need the co-signature of at least one board member on all checks going out of that account. This will, of course, create a burden on both the property manager and the board member who has to sign checks. But, in my opinion, if you want to serve on the board, you should be willing to assume those responsibilities which will protect the funds belonging to the unit owners who elected you — and yourself as well.
Clearly, there are routine checks that have to be paid on a monthly basis — such as water bills, insurance, and trash collection. If you set a dollar limit (such as $1,000), the property manager can write checks up to that amount without a second signature. But any checks over that limit must be co-signed by at least one board member. Your bank will give you signature cards and these requirements should be spelled out in those documents. Then, the bank will have to honor your request.
Regarding the reserve accounts, they should only be in the name of the association and only board members should be authorized to sign checks (or transfer funds) from those accounts. Community associations do not transfer moneys often from reserve accounts; it should not be a hardship on anyone to require that only board members be authorized to have access to those funds.
Fourth, make sure the property management company has adequate insurance covering your association in the event of embezzlement, fraud or other activities which may cause your association a loss. The insurance industry will write “third party coverage” bond insurance which will give you protection in the event of a loss. The amount of the policy will depend on the amount of the reserves you anticipate you will carry. Some associations have hundreds of thousands of dollars in reserve; clearly, third party coverage in the amount of $50,000, for example, is woefully inadequate for those associations.
Fifth, make sure that the management company has a fidelity bond in place covering any loss created by its employees.
Sixth, make sure that you (and not the property manager) hire an accounting firm to give you a full audit each and every year. Your association should give a letter of engagement to the accountant, and the accountant should report back to you — and not the manager.
Seventh, and perhaps most importantly, insist that the property manager give you and your board members a monthly financial status report, which will include copies of the actual bank statements received by the management company. Review these carefully every month within five days from receipt. Keep in mind that every board member has a fiduciary relationship to all the unit owners. Presumably you review your own bank statements on a monthly basis; you can do no less for the unit owners you serve. In recent years, it has been easy to access bank accounts on line. The association treasurer should have the password and must review the bank statement each and every month. If there is anything unusual, ask the property manager for an explanation.
Most property managers are honest and hard-working. However, one dishonest manager will unfortunately cast a broad brush of distrust on the entire industry. I do not believe that property managers will object to the various suggestions I have made, and indeed may have more recommendations of their own.
Several years ago, the United States Attorney in New York indicted a large number of property managers there. Clearly, not all were involved in community association management. However, the lesson to be learned from New York and from the two incidents in the Washington area is quite clear: when there is money there will be greed and corruption. Community association board members have the power to control — as best they can — the financial security of association funds, and steps should be implemented immediately, while it is not too late.
