Q: I have just been elected president of my 150-unit condominium association and have heard that some property managers throughout the country have embezzled association funds. How can we protect ourselves and our money?
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A: My condolences on your election. Board members get no thanks for the work they do, and have to periodically put up with noisy complaints from owners. But your condo is your investment, and you want to make sure that the value is protected and grows.
Most property managers are honest and hardworking. Unfortunately, as in every walk of life, there are bad apples.
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Talk with your association attorney, your property manager and your insurance agent. Each will be able to provide you with information that will help secure your funds.
Here are some suggestions I have made over the years, especially since I have represented several associations whose property managers stole their money:
*Check out the property management company carefully. Obtain credit reports for the firm — as well as the property manager who will be servicing your association. This will, of course, require the manager’s permission, but he or she should not object if the company wants your business.
*Put limits on check writing. Generally speaking, there are two pools of money in community associations: operating and reserve accounts. For the operating account, the property manager should have the authority to issue checks up to a dollar figure set by the board.
Clearly, there are routine payments to be paid on a monthly basis — water bills, insurance, trash collection. If you set the dollar limit based on your monthly needs, 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 signature requirements should be spelled out in those documents. Then the bank will have to honor your request.
Reserve accounts should be in the association’s name only. Only board members should be authorized to sign checks or transfer funds from those accounts.
*Look into insurance. Make sure the property management company has adequate insurance to cover your association in the event of embezzlement, fraud or other activity that may cause your association to incur a loss. The insurance industry will write “third-party coverage” bond insurance, which will protect you in the event of a loss. The amount of the policy will, of course, 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 communities. Ask if the management company has a fidelity bond in place to cover any loss created by its employees. If they do, your association must be named as an additional insured.
*Make sure that you (and not the property manager) hire an accounting firm to give you a full audit or review every year. Your association should give a letter of engagement to the accountant and the accountant should report back to you — not the property manager.
*Make sure your funds, operating and reserves, are in separate bank accounts, and in the name of the association. It is absolutely inappropriate for a property manager to commingle funds with other associations, or with his or her own bank accounts. That would violate generally accepted accounting principles.
*Perhaps most importantly, insist that the property manager give you and your board members a monthly financial status report, including copies of the actual bank statements received by the management company. As president, you, or the treasurer, should also receive a copy of the bank statement directly from the bank. In the past, some property managers who embezzled money created false bank statements on their computer. In one case, although the manager left the association with only $2,000, he created monthly bank statements showing more than $80,000.
Benny Kass is a practicing attorney in Washington, D.C., and in Maryland. He does not provide specific legal or financial advice to any reader. Readers may email him, but he cannot guarantee a personal response.
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