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.

THE BASICS
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.

SOUND POLICIES
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 the damage.

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 OF FRAUD
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.