Condo Media - July 2016 - 24

The Risk Is Real
n The person who reconciles bank ac-

count statements should not also be
responsible for making the deposits;
the individual(s) with check-writing
authority should not review the bank
statements.

n At least two board members (prefer-

ably, Meskin suggests, board members
"who don't like each other") should
receive original copies of the bank
statements and should review them
every month.

n The individual responsible for hiring

employees or selecting vendors should
not also be responsible for paying
them. The risk here, Pierce says, is
that the individual with hiring authority could receive kickbacks or create
phantom contractors and channel payments to himself. "The more authority
you give someone to hire vendors and
approve cash disbursements," Pierce
cautions, "the more likely that authority will be abused."

REQUIRE MULTIPLE APPROVALS
If only one approval is needed for expenditures, fraud requires only motivation;
if two or more approvals are needed,
Pierce points out, fraud requires "collusion." The more people involved in the
process, the less likely any of them will
be able to perpetrate a fraud. With that
basic truth in mind, boards should:

n Require two signatures on checks

above a specified minimum, written
on the association's operating account.
What that minimum should be will
depend in part on the size of the association and the amount of money at

Fraud isn't a
theoretical risk
for condominium
communities-it is
very real and all too
common.
24

CONDOMEDIA

risk. Most industry experts agree that
association managers should be authorized to write checks for recurring
expenses without obtaining a second
signature. But the consensus view is
that $500 should be the outer limit
for most communities. "I don't care
how inconvenient it is," Meskin says.
"There should be a limit on the size of
the check a management company can
write." You don't want to set the limit
so low that association operations are
impeded. On the other hand, the higher
the limit, the larger the potential for
loss. Pierce, who once worked as an
auditor for a large accounting firm, recalls, "If a company had a $2,500 limit,
you'd see a bunch of checks written for
just under that amount."

n Checks written on reserve accounts

should require the signatures of two
trustees-without exception, because
the amounts at risk are so large. Industry experts, including association managers, also agree that managers should
not be allowed to approve withdrawals
from the reserves.

Bankers who work with condominium
associations have an interesting perspective on their check-writing policies. "I'm
not a big fan of boards delegating their
check-writing authority to managers,"
Wesley Blair, senior vice president at
Brookline Bank and CAI-NE's current
president, says. "I'm not saying anything
against managers," he adds, "but board
members have a fiduciary responsibility
to pay close attention to the association's
funds. I think it's better money management for the trustees to sign off on the
checks."
That said, his bank doesn't require
multiple signatures for operating or
reserve accounts. But it does require
the board to adopt a formal resolution
specifying who is authorized to sign the
checks for both.
EXERCISE DUE DILIGENCE
Due diligence requires many protocols
in many different areas. Some of the
most important:

n Issue checks in numerical order; keep

blank and unused checks in a secure location to which there is limited access.

n Change personal identification numbers and access codes regularly and
keep them in a secure location, too.

n Require original invoices to document
expense payment requests and stamp
invoices "paid" once the checks have
been issued.

n Conduct background checks on as-

sociation employees. Vet vendors carefully, as well.

n Require employees to take vacations

every year. While the individual who
never takes time off may be truly
dedicated, it is also possible-and even
likely, Meskin suggests-that this individual doesn't want anyone to look too
closely at what he or she is doing.

n Obtain an audit or a financial review

annually. Some state laws require this
for larger communities (more than 50
units in Massachusetts); some association bylaws require audits or reviews,
as well. But required or not, independent financial reviews make sense for
communities of all sizes. Audits and
reviews won't necessarily uncover
fraud (although they may spot irregularities suggesting something is amiss),
Pierce says. "But they can deter fraud,"
he notes, because people are less likely
to misbehave if they know someone is
looking over their shoulder. Security
experts call this "hardening the target."
The more controls you have in place,
the more diﬃcult you make it for bad
actors to act badly, the less likely they
are to do so.

INSURE AGAINST LOSS
All of the steps we've described here
will reduce your fraud risks, but nothing you do can eliminate those risks
entirely. Insurance provides the safety
net that will protect you from losses if
other precautions fail. All condominium associations should have fidelity

Condo Media - July 2016

Table of Contents for the Digital Edition of Condo Media - July 2016