Understanding Your Finances
Reading Between the Line Items
For a crystal-clear picture of how a co-op board or condo association is doing, there are few better lenses than the community's budgets and financial reports. From an investment perspective, they show the association board, property managers, the unit owners/shareholders and tenants whether the property is solvent or not. If the numbers add up and monies coming in and out balance, you can safely assume everyone is doing their job, and upholding their financial and fiduciary duty to the community. If the property is in the red, it’s important to determine why that is, and what needs to be done differently to turn the situation around and restore solvency.
Maintaining and updating the accounting of their property is one of the primary responsibilities of a board—one that is all-too-frequently neglected, according to the pros.
“I think the place to start would be to, to steal from the late Sy Syms—and the message is that an educated board member is the best board member,” says Jules C. Frankel, CPA, from the certified public accounting and consulting firm of Wilkin & Guttenplan, P.C., with offices in New York and New Jersey. “And that doesn't mean that a board member should be interfering with a managing agent or what the management company is trying to do. But that a board member has a fiduciary responsibility, should understand what's going on, and therefore help protect the property and the property values for their particular condo or co-op.”
It’s important to understand each financial document and its purpose so you can have a better understanding of exactly what’s going on in your building board or association. So here’s a little Financial Paperwork 101.
Financial statements show the income and expenses for a building board or an association.
“From a financial perspective, there are three major groups of documents. Basically, before the year, the most significant document is the budget. During the year, the most significant set of documents are the management packages. Most of the time they're on a monthly basis, some cases, rarely, they're on quarterly basis. And the last set of documents is after the year ends, which is normally the audited financial statements and the tax return,” says Frankel.
Mindy Eisenberg Stark, an accountant in Scarsdale, says that the key elements of a monthly management report include a bank reconciliation with a copy of the bank statement, copies of checks that cleared the bank that month, copies of bills paid, notes for bills that don’t have details explaining what purchases were for, comparative financials of the budget and year-to-year, detailed cash disbursements and cash receipts, and detailed accounts receivable and accounts payable.
An important component of managing finances is completing an annual audit. According to the Institute for Internal Auditors, “Internal auditing bridges the gap between management and the board, assesses the ethical climate and the effectiveness and efficiency of operations, and serves as an organization’s safety net for compliance with rules, regulations, and overall best business practices.”
“At the end of the year, you want to make sure that an audit is performed on the books and records, that the auditor communicates the results with the board, and that the board looks and takes seriously any recommendations that the auditor might make as a result of their examination,” Frankel says.
As the year draws to a close, the board needs to prepare a budget for the upcoming year to outline a formal and written plan of financial operations. The budget reflects the needs and goals of the board or association for that year and identifies sources of income and the cost of potential expenses the board is anticipating.
“You want to make sure that when a budget is prepared that it's realistic. The way most condos and co-ops prepare their budget is let's say, they have a December year-end and they're preparing the budget, they might do so in October to have three quarters of a year of actual experience to look at. They project what they think is going to happen for the last three months of the year. Then they're going to project what are the changes that are known about for the following year that need to be dealt with. So in New York—maybe it's Local Law 11 that they've got to deal with and the scaffolding and then all the checking. So the educated board member will make sure that the budget is prepared in such a way that it's realistic and that there's some amount of contingency there, because with Murphy's Law, something will always go wrong, and you need some extra funds to deal with what goes wrong,” says Frankel.
Phillip Miller, CPA, at the accounting firm of Miller & Cusenza, P.C.in New York City, advises that the financial documents should be updated either by the treasurer or by the management company and of course, by the accountant when they issue a new financial statement.
For Your Eyes Only
It is also important to consider who can see which documents. Certain paperwork should only be accessible to board members, while other files can and should be viewable by owners and even prospective buyers in order to disclose the status of the board or association and its expenses. It is important to note that being too generous with who can see what can lead to problems and unnecessary unease, but on the other end, being too secretive can lead to distrust in residents who might suspect that the board or management has something to hide. In other words, it is a very fine line to tread.
“All unit owners have the right to a copy of the annual approved budget and the monthly financial statements,” says David L. Ferullo, a partner at The Curchin Group, LLC in Red Bank, New Jersey. “To obtain a copy, the unit owner must generally make a request of the board or the management company. In some instances, this request must be made in writing.
“There are some financial documents that unit owners are not entitled to receive,” Ferullo says. “These include a listing of delinquent unit owners, certain payroll information and documentation relating to certain legal matters. The board is mandated by law not to release information of this nature,” he says.
Last year in Chicago, the co-owners of a defunct condominium management company were charged with fraud for allegedly stealing more than $2 million in assessment payments. In Washington, D.C., the FBI arrested the owners of a property management company accused of defrauding an estimated million dollars from homeowners. And this past spring, in Exeter, New Hampshire, a property manager was accused of stealing $67,000 from three Exeter condominium associations. He allegedly pocketed money meant to pay expenses. These examples are not meant to provoke panic and suspicion among residents and board members but serve to show that fraud can occur, especially during under-supervised and overly permissive circumstances.
So how does an association board maintain financial security? There are a couple tasks to perform to ensure the confidentiality and safety of your documents and certify the integrity of employees and residents. And it starts with the simplest procedure of them all: actually checking the documents.
One of the most important safeguards against fraud is making sure the opportunity to commit it does not exist. Stark says that “the person committing the fraud sees the opportunity to “get away with it” and assesses the act to have particularly minimal risk of getting caught. The majority of people that commit fraud are people with no criminal past. They rationalize their actions in order for the fraud not to be viewed as criminal acts to themselves,” she says.
The key control to maintaining financial security is a board who takes a very active role in reviewing the monthly financial statements and supporting documentation, questioning those who have prepared the statements and being very involved in the board’s operations.
Frankel says that financial misdeeds can be mitigated by an involved board. “In those rare instances in where we deal with fraud, we've seen a number of times where it's the managing agent. We've even seen sometimes where it's board members. So, the ways to reduce the probability of this happening, is to make sure that somebody is keeping their eye on the money and looking over somebody else's shoulder. Not in an obnoxious way, but to be educated about how we're spending our money,” he says.
He continues to say that “part of it deals with making sure that for significant items, you're getting competitive bids so that you're choosing the vendors whose bids are in the ball park and there's no padding and money going back to somebody else. Some boards are adopting conflict of interest policies, to make sure that board members understand what their fiduciary responsibility is. And there's even some co-ops that have adopted whistle blower policies, that if somebody is suspecting that something is awry, that they notify somebody like the independent attorney to let them know that there's an issue here and maybe it ought to be looked at.”
As added measures, Miller recommends that each check require two signatures and all bills are properly authorized meaning expenses are double checked and reviewed against the monthly financial statements by the appropriate person, whether the treasurer or the managing agent.
Reviewing and updating an association's documents is a vital process that all board members should be engaged in. Doing so can aid in preventing fraud, help develop a realistic plan of financial operations and increase both board member's and owner's knowledge of the building’s or association’s cost and expenses.
Lisa Iannucci is a freelance writer and a frequent contributor to The Cooperator. Editorial Assistant Maggie Puniewska contributed to this article.