The Manhattan District Attorney's investigation of corruption in the
construction and management industries has caused the boards of directors
of many cooperatives and condominiums to reexamine their policies for
interfacing with management.
While it is not the policy of the Council of New York Cooperatives
& Condominiums to dictate specific practices to its members, we
offer below a set of recommendations that can be implemented at little
or no cost and are designed help the board and management work together
well to ensure sound operation of the building with opportunities for
problems reduced to an absolute minimum.
Each month, no later than the 15th day of the month, the treasurer should
receive from management, at a minimum:
A. A summary of income and disbursements for the previous month,
including the beginning balance and end balance in the agent's account.
B. A list of disbursements accompanied by invoices, check numbers,
and dollar amounts paid, and authorizations for unusual expenditure
which include an explanation of work done.
C. Lists of all payables and all receivables including a breakdown
of shareholder arrears.
Controlling Operating Costs
1. A Strict Policy for Overseeing Disbursements. A clear policy on
disbursements should be established and strictly observed. While you
will probably authorize management to meet recurring obligations automatically
each month – the mortgage, the phone bill, the electric bill
– clear policies are necessary for extraordinary expenditures.
You may require double signatures on checks exceeding a certain amount,
or a system of approval by the treasurer before a payment is made.
2. Compare Cost Data to Relevant Benchmarks. The treasurer should
carefully review the monthly bills, checking them against invoices
and comparing disbursements against the budget and against data from
prior years. CNYC's Comparative Study of Building Operating Costs
provides rough parameters for reasonable costs. Additional comparisons
can be made of fuel prices listed in the Journal of Commerce, etc.
Access to other data bases may also be available. When questions arise,
they should be asked promptly and management should provide a clear
response in a timely manner.
3. Enhanced Presence of your Accountant. Far too many buildings underutilize
the valuable resource represented by their accounting firm. Rather
than seeking input from your independent accountant only through the
annual audited financial statement, you can request that the bills
be reviewed quarterly, or even monthly, by the accounting firm. This
regular review will enable you to catch cost overruns or other irregularities
more quickly and to execute course corrections in your budget or your
policies as necessary.
4. Rotating Internal "Reviewers." A policy of rotating
review is an innovative means of assuring management that the board
is vigilant. Periodically, at random intervals, different board members
take on the task of selecting one cost item to review in depth, reporting
their findings at the next meeting. One reviewer may do a careful
inventory of cleaning products on hand and trace their purchase history,
perhaps coming up with the recommendation that larger purchases be
made less frequently, or that there be more brass polish on hand to
meet needs. Another reviewer may discuss staff overtime with the building
superintendent and develop recommendations. The scheduling of these
reviews should be outlined in the minutes, and board time should be
reserved for the resulting report and for implementation of suggestions
that it may engender.
5. Vendor Analysis. Monthly cost reports by vendor will help you
ensure that management is not changing vendors without authorization,
that a single vendor is not accumulating excessive charges, and that
costs are consistent and reasonable. Larger cooperatives and condominiums
might also consider computerizing inventory records.
Controlling Capital Costs
1. Reserves Separate from Operating Accounts. Your annual operating
budget should be planned to provide ample funds to operate the building.
Your management firm should keep these funds in a separate account that
is not commingled with the funds of other clients. A small cushion should
be calculated to ensure that normal operating expenses can be met throughout
the year. There should be a separate capital budget and a separate capital
account. Your reserve fund(s) should be under the direct control of
the board, with two authorizations required to access the money. Reserves
should NOT be held by the management firm, nor should management be
able to access reserves on its own. Maintaining a separate account for
reserves preserves your control over these funds.
2. A Well-Supervised Bidding Process with Independent Bidders. On large
projects, sealed bids are recommended. You will want a clear set of
job specifications, generally prepared by your architect or engineer.
Invite contractors to submit their proposals as sealed bids sent to
a specific board member by a specified date. Seek bidders through the
engineer, the managing agent, and independent sources to try to ensure
that there is no opportunity for a rigged bid.
CNYC has a referral list of contractors, and will provide members with
the names of firms that have received favorable ratings from other buildings.
Please advise CNYC of your own particularly good or particularly bad
experiences with contractors to update this data file.
Bids should be opened in the presence of both board members and management
personnel. When appropriate, the engineer or architect should help determine
the bidder best qualified for the job. Your contract should also contain
provisions for periodic approvals by the architect or engineer as work
progresses. Make good use of your attorney too, both to oversee the
bidding procedure and to review carefully all contracts.
A building implementing these simple policy suggestions should feel
that it is keeping on top of its responsibilities.
TO DETECT SUSPECTED FRAUD
If there is reason to suspect that fraud has been perpetrated in your
building, prompt action by the board can detect, contain or curtail
Detailed Review by your own Accountant. Your accounting firm presently
performs an audit of your annual expenses designed simply to ensure
that no glaring errors have been made and that all funds are appropriately
accounted for. You can engage your accountant to do a more complete
review of your assets, including an inventory and a careful review of
all your transactions. This will require at least five full days of
work and should provide insights to possible problem areas or assurance
that everything is in order.
Fraud Investigation by Accountants Specializing in this Field. There
are many accounting firms that specialize in investigative audits designed
to detect fraud. Several of these firms are now developing expertise
relating to cooperatives and condominiums. CNYC is compiling a list
of reliable firms with this specialty. Naturally, a fraud audit is costly
and should be undertaken only if there is good reason to believe that
corruption is present.
TO DEAL WITH STRONG SUSPICIONS
The District Attorney. If your research reveals good reason to believe
that your cooperative or condominium has been the victim of corruption,
contact the office of the District Attorney in your borough.
An Investigation Firm. There are private companies that will
conduct detailed investigations of suspected corruption, fraud, and
kickbacks. These companies will perform inventories and an analysis
of your relationships with vendors, and issue a report. Their services
are costly and should be used only if there is very good reason to believe
that corruption is present. CNYC is compiling a list of reliable firms
with this specialty.
Your Insurance Company. Your insurance policy may cover losses
to the building as a result of management corruption. You must notify
your insurance company as soon as you have reason to believe that a
problem may exist. Because of the uncertainties surrounding the present
investigation and the lengthy time frame anticipated before all details
are known, CNYC has proposed legislation that will allow claims to be
made once all information is revealed.