Fraud Can't Happen Here? Sure It Can. Experts Tell You How to Avoid It

Procurement Policies

Establish monetary thresholds for check authorization. For example, your managing agent may have general authorization to make purchases valued at less than $1,500 but need board approval for higher amounts.

Competitive bidding through requests for proposal (RFP) should be used for major work or purchases. Some RFPs have successfully used "right to audit" provisions in contracts. These provisions, not as common in New York as elsewhere, give the organization the right to review the contractor's books and records related to the transaction. Often, the provision requires the counterparty to reimburse the organization if it discovers evidence of significant overbilling.

"You have to have systems in place so that you would ordinarily have a treasurer getting the financial report and seeing the check runs every month and getting a balance sheet and getting a reconciliation of a checking account. That's how a co-op properly functions," says attorney Linda Plotnicki, a partner at Kaufman Friedman Plotnicki & Grun.

If you want to have the

tightest controls it could

hamper the operations.

But to put too tight a restriction on your professionals can be counterproductive. So be reasonable. Notes Plotnicki: "Agents are writing checks all the time. They have an operating account and they're paying the bills and the management agreement gives them these rights and this is very standard in the business. It's not unusual and you would hope that in a perfect world, a list of checks would be sent out to the treasurer and is signed off on, but that's not how it works. So if you want to have the tightest controls it could hamper the operations."

Purchase-Order Procedures

Understand your building's purchase order system. Purchase orders should be numbered to reduce the risk of their unauthorized use. Failing to number them may result in duplicate vendor payments through sheer negligence.

Check Preparation and Disbursement

Checks should not be signed unless all of the supporting documentation, including original invoice, is provided. "The treasurer should be reviewing all bank statements, as well as a monthly report of building expenditures and income," observes Arthur Weinstein, an attorney in private practice.

Control

Particularly in self-managed buildings, the board should avoid giving too much control over one function to any single person. For instance, if the person responsible for custody of the cash were also responsible for performing monthly bank reconciliations, this person could conceal defalcations of cash altering bank reconciliation reports.

Petty-Cash Guidelines

Petty cash should be independently reconciled monthly. Expenditures should be supported by invoices and statements as to purpose of expenditure.

Internal Audit Function

Internal audit is the eyes and ears of the organization. Your cooperative or condominium should not skimp on dedicating adequate resources to internal audit.

In the end, everyone needs to know his or her duties and follow the proper guidelines. "With all members of the board and all officers doing their job properly," observes Weinstein, "the chances of having a runaway board president or managing agent are dramatically decreased."

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