Taking Charge of the Numbers

With the condo and co-op world reeling from revelations of the Saparn Realty scandal, in which a top executive in the management firm allegedly stole more than $2 million from dozens of buildings, boards need to wake up.

“People think, ‘Oh, the managing agent is responsible for everything,’” says Richard Montanye, a certified public accountant (CPA) with Marin & Montanye, “and the reverse is actually true. The board has to stay on top of things.”

Boards trust their professionals. They expect the accountant to prepare the annual financial report and answer some financial questions, but is he supposed to be the last line of defense in money matters? If so, what happened in the Saparn case and can it happen to you? In short, what is an accountant supposed to do for your building?

Range of Issues and Fees

First and foremost, the CPA prepares the annual financial report. According to Michael A. Esposito, a partner with Kleiman & Weinshank, this should include a balance sheet, a list of assets, liability, and equity; a statement of operations including income and expenses; a statement of equity, including any changes in equity, stock, or retained earnings; a statement of cash flow, which reconciles changes in cash; and notes and financial statements, which can include the mortgage, lease commitments, and corporate taxes.

Most CPAs will do work month by month toward the annual audit, which verifies the annual information gathered by the board treasurer, says Esposito, who adds: “The board gets a monthly packet from the managing agent, and we get the same thing.”

While your auditor will keep an eye out for irregularities, Esposito and other accountants say it is primarily the board’s responsibility to act as the so-called “internal control,” preferably every month.

There are three different places to monitor your money: the monthly bank statement; the monthly management report, prepared by your manager; and the annual financial report, prepared by your accountant. This means looking at disbursements, receipts, and a bank reconciliation to ensure the ending book balance reflected in the manager’s report matches the ending book balance reflected in the bank reconciliation, says Esposito.

If a board feels it needs guidance on a monthly or periodic basis, it certainly can turn to its accountant, notes Stephen Beer, a CPA with the firm Czarnowski & Beer. For example, if the monthly maintenance amounts are not where they usually are, the board might go to its accountant to get help in rooting out the cause. “It could be a bounced check; it could be that money got deposited in the wrong account,” he says.

Esposito puts it like this: the auditor gets a bill for a paint job on the ninth-floor hallway – the amount seems legitimate, the bill has the appropriate approvals, and the company is one the building has used before. “It looks good to me, but the board says, ‘Wait, we didn’t paint the ninth floor.’ Think of it this way, if you hired someone to write your personal checkbook, wouldn’t you be checking it, too?” Most accountants who do annual reports for condos and co-ops do far more monitoring work than would be expected under the industry’s professional standards, he adds.

Generally, CPAs charge a flat rate for the annual report, working into their fees a few hours here and there for extra advice given during the year, reports Beer. It’s hard to ballpark that amount since it depends on the size of the building and the specifics (Does it have retail? Ongoing litigation? Is a big renovation project pending?). Several accountants said that a flat fee could range from about $8,000 for a small building with simple issues to up to $25,000 for a large building with complex ones.

Watchdog Role

If the CPA is available only for a limited time, it falls on the board – and specifically the treasurer – to monitor the finances. Such supervision can catch irregularities early on. Say a managing agent has the ability to sign checks if they are under $2,000. In a monthly review – which should include the management firm’s report, indicating what bills were paid and when, as well as your bank statement – an alert board member would hopefully notice that there are an abnormally large number of checks for $1,999.

You should also be looking for too much money or too little. Either situation can be a red flag. Was the power bill paid for January, but not February? That can result in “too much” money in the account, compared to the typical balance. Esposito recalls a building that was not billed for water for a year, and no one on the board or in management realized it. Be careful if the reports are missing fundamental things, such as monthly bank statements. “Frequently, I speak to boards and they say, ‘Oh they stopped sending the monthly report,’ and too often that does not ring a warning bell,” says Montanye.

A good monthly management report should also include details on maintenance arrears, a schedule of disbursements and income, and a list of open payables (bills that are due but not paid yet), Esposito says.

Montanye and other CPAs say that management reports are often missing crucial information. “Most managing agents are not that formal with accounting systems, and frequently the classification of items is an issue,” notes Montanye. “Sometimes entire transactions are missing, and if there are board-held accounts, they may not be recorded in the managing agent’s records at all.”

Esposito agrees that there can be problems with poor record-keeping on the part of managing agents, and adds that such problems might lead to higher fees for the CPA’s annual audits. “Some managing agents’ records can be more difficult,” he notes, “which can lead to more time needed to complete the audit, and require higher fees to be charged.”

Boards generally hold their annual meetings in April, May, and June, which means that your accountant should be getting you the annual financial report by March, observes Beer. Receiving the report late may not be a red flag per se, but the auditor should be honest about the reasons for the delay. “It is a problem I hear about from boards a lot. They’re saying that they’re getting the financial statement just days before the meeting. People need time to review it.”

But board members often don’t take the time to review documents. Because boards retain the services of an accountant, property managers say there can be a frustrating level of apathy. “I can give the board a million reports, and I still don’t know that they will take the time to look at them. And it’s so important,” says Carl Borenstein, president of Veritas Property Management.

The board should be looking monthly at reserve account activity of withdrawals or checks, to view operating account current payables and amounts owed, and the invoices paid out the prior month to confirm that they were indeed for their building, says Borenstein. Make sure that vendor names are familiar and paid amounts look correct. Finally, he says members of the board should be aware of the opening and closing balances, and the current arrears in their building so that they don’t get out of hand.

Other boards don’t pay attention to the annual financial audit. Esposito says he had a situation where the entity took a tax position that, if challenged by the Internal Revenue Service, could result in significant additional taxes. The financial statement had a paragraph reflecting this risk. “It turned out the board had no idea,” he says. “They had approved the annual financial statement and had not even read it.”

In light of the recent Saparn scandal, the apathy issue becomes more important than ever. “The board needs to have tremendous oversight,” says Esposito. “They are the first line of defense.”

Criminal Minds

If, despite all this, you still suspect a fraud, keep your wits. “The first thing to do is to be in touch with your auditor and your attorney,” says Mindy Eisenberg Stark, a certified fraud examiner and CPA in private practice. “I think when boards try to do it themselves they get very emotional.”

Call the managing agent and ask about the situation to see if there is a legitimate explanation. Go through all the past monthly reports to see if you can figure out what went wrong. “If you don’t get your answer, then call your attorney and eventually a forensic accountant,” she says. “The worst thing is to create hysteria on the property.”

A forensic accountant is trained in the latest accounting standards and procedures and can give advice on beefing up internal controls. This individual can perform regular financial audits and offer advice on how to prevent fraud. He or she usually has legal training or is a lawyer, too, savvy about current federal and state laws. This expert should be able to prove suspicions of fraud. Some forensic accountants specialize in “analytics,” which is the process of gathering and analyzing data, such as reviewing the invoices of a vendor to identify fictitious vendors or phony bills.

When distinguishing a forensic audit from a financial statement audit, it is important to understand the objective of each. The objectives of the financial audit, Stark notes, are to establish that the financial statements are presented in accordance with generally accepted accounting principles; that the financial statements present fairly the financial position of the company; and that internal controls are adequate. The goal of a forensic audit is to establish the existence of a suspected fraud; determine who committed the fraud and how; calculate the potential losses from the fraud; and gather sufficient documentary evidence to assist the courts and prosecutors in the event of a criminal or civil case.

While the annual CPA financial report is typically performed on a flat-rate basis, a forensic audit is paid for by the hour. Stark says it’s hard to give a figure on that rate because there are so many variables. “We go in and get educated about what’s been going on,” she says, noting that her office often gets calls from a condo or co-op board and, more often than not, the financial problems are cases of management or error, not fraud. She recalls the situation where a building had to raise maintenance by 25 percent to pay for back taxes and water bills that were not paid. Unpaid bills like that often take time to be detected.

The board may think it’s theft, but, Stark notes: “We look at the prior few years of financial statements and a lot of times we discover that they’ve been operating at a deficit for the past few years… there is a lot of hysteria and rumors that go around a building. The best thing to do is to ask for help from a professional.”

After all, mistakes do happen. A management firm’s back office pays ABC Condo’s water bill with XYZ’s account. Or forgets to pay a bill one month, or double pays. What is important is what the manager does after the mistake is uncovered. “If he starts hemming and hawing, you need to get a real answer, backed up with documents,” says Stark.

In the rare instance where a CPA might find something troubling and the board declines to act upon it, a so-called “disclaimer of opinion” would be put into the financial statements, Esposito says. Both he and Montanye observe that if that were to happen, most accountants would likely note the issue and resign.

Montanye says it’s clearly a lot of work for boards to keep track of financials and easier to leave the duties to the building’s paid experts. “I feel bad for board members,” he says. “It’s a big responsibility – but they need people who are going to watch the financial reports on a monthly basis.”

An Ounce of Prevention

No matter how vigilant a board, it can fall victim to fraud and theft. For this reason, safeguards should be put in place. Among them:

Board sign-off on checks. One or two board members should be signatories on the management agent’s account for the building. That means that those board members can have access from the bank for those accounts at any time, says Richard Montanye, a CPA with Marin & Montanye. “If something seems to be going wrong you need to be able to call the bank and say, ‘Don’t [pass] any more checks.’ If the board member is not a co-signatory on the account, the bank must simply say, ‘We don’t know you from Adam. This is... not your [account].’”

That’s what happened in the Saparn case. The board had apparently given sole check-signing powers on the co-op’s reserve fund to the manager. Saparn had allegedly led the board to believe the money was still in the account by preparing false bank statements. When the board members learned of the possible theft, they brought what they assumed was the reserve fund statement to the bank for confirmation. Since they were not signatories on the account, however, the bank was hamstrung in what it could reveal. Nonetheless, the bank officials did say that the statement appeared to have been surreptitiously altered, which is a federal offense.

Control of the reserves. “In my opinion the reserve account should only be maintained by the board,” Montanye says, noting that there is often not a lot of money that should be flowing in and out of that account, so the record-keeping is not onerous. “It should require signatures of two board members because, generally, two people don’t lie at the same time.”

Wariness of CPAs who are too cozy with managers. Watch out: if your accountant prepares statements for all the buildings handled by your managing agent, that could be “a potential conflict of interest,” says Stephen Beer, a CPA with the firm Czarnowski & Beer. The risk would be that if the CPA is beholden to the managing agent in some way, the firm might not be as diligent in monitoring finances. Beer says he’s not sure how much of a problem this is, given how frequently boards change agents. But a good rule of thumb is that if an accountant is doing more than 60 or 70 percent of a manager’s buildings, you may want to change professionals – or at least look into the relationship.