Condo Boards of Directors Asleep At The Switch As They Authorize Property Manager To Write Huge Checks

The Connecticut General Assembly tried to do a good thing by putting limits on how much money property managers can write checks for without prior approval from the board of directors or for requiring the signature of a board member.

Our legislators trusted the boards of directors to set reasonable limits. Big mistake in some complexes where boards of directors went along without questioning why property managers should be able to write $10,000 checks, eliminating a critical safety check.

And that took place as police, courts and accountants attempt now to unravel how a Westport property management employee made off with more than $1,000,000 from at least 9 Fairfield County condo complexes.

The $10,000 issue was brought to light by Linda DeNoia of Norwich, who read the minutes of the New Concord Green condo association which said that based on the request of its property manager it was giving it approval to write up to five digit checks.

Infact the minutes went farther, stating that the General Assembly had required the $10,000 limit.

DeNoia, the former president and former property manager for New Concord Green, had trouble believing that the General Assembly would pass such legislation, especially considering the fact that this complex’s total annual assessment is only $200,000. Twenty one checks and the year’s assessments are gone.

“I live in a condominium of 48 units and I have a question.  The current manager where I live just met with the Board and told them that he must put an amount of $10,000 into his contract.  This is the amount he can spend on behalf of the association should the need arise.  He stated that this is part of the new law that was just passed.  IS THIS CORRECT?”

I had never heard of it and I contacted two condo attorneys who advise the Connecticut Condo Owners Coalition – Patricia Ayers of Glastonbury and George Coppolo of Hartford, both of whom said the General Assembly only passed a law stating that a LIMIT had to be placed on how much money a property manager could sign a check without prior approval.

Here is the significant part of the statute:

Sec. 20-458.  (2) Provides that the person contracting to provide management services shall not issue a check on behalf of the association or transfer moneys exceeding a specified amount determined by the association without the written approval of an officer designated by the association; and

Both the property manager, Josh Parsons, and officers of the board of directors said the minutes incorrectly stated that the General Assembly required the $10,000 limit.

However, they all said that the $10,000 limit was adopted as there was no objection.

Infact, Parsons, who also manages nine other condo complexes, said he recommended the $10,000 limit to all of them and to this day hear no objections.

Parsons of Readco Management of Old Lyme, said his associations trust him and said he provides regular – full – financial reports monthly and yearly. Instead of charging unit owners for researching and copying financial documents, Parsons said he provides free electronic copies. Most property managers make a profit from providing unit owners with their own financial documents.

If anyone had objected, Parsons said he would have reduced the $10,000 and would reduce now, even though it is in his contract, if there are future objections.

Christine Steliga, president, and June Owens, treasurer, defended their decision at New Concord Green to permit Readco to write $10,000 checks. However, Steliga seemed surprised that their authorization was for EACH check, not for a total of $10,000 for all checks in a month.

“My focus is transparency – we have had 100 percent transparency since Josh took over, our treasurer and board get copies of checks and everything, every unit owner can get all the financial documents.” Steliga said in a telephone interview. “We have a paper trail every month, what we get in, where it comes from, and where it is spent.”

“This was all done at an open board meeting,” said said adding that if a unit owner objects they will reconsider their votes.

Steliga said there are three board members at the 48-unit complex, and the board members are almost daily in contact with the property manager. That to me begs the question of why the property managers needs to be able to spend up to $10,000 without checking with the board.

The contract will be challenged at least in New Concord Green. DeNoia, who manages five small condo complexes and requires only $100 check authorization, said she will challenge it.

Good for her. Boards of directors needs to be vigilant of property managers, allowing them too much freedom to write checks is a recipie for disaster. If I were an insurance company providing a bond for a property manager I would insist on a more reasonable number than $10,000.

The following is the full statement of Josph Parsons:

Hi George-

Nice speaking with you today. On reflection of our conversation this morning, I had a few related thoughts regarding condominium management and condominium unit owner exposure that you have already probably considered; but seemed to me poignant given what I have seen in the industry. Forgive me in advance if you find this redundant to your own observations.

As we discussed, it is certainly too bad that some bad apples ruin the bunch, as I would like to believe the vast majority of managers out there act with integrity and treat their fiduciary responsibilities to their clients with the utmost care. Unfortunately, as I have seen too often, even amongst this group, there is probably a shortage of real professional competence. Maybe the new educational requirements will help…but I am skeptical. The barriers to entry to this industry are pretty low.

 

So, I really think the important question that Boards (and the owners they represent) should be asking are:

1)      Do we have crime insurance? Does our manager have a fidelity bond or other insurance?

2)      Does our manager have a good understanding of the state statutes, and are they complying with them?

3)      Is our management firm large enough/sophisticated enough to have proper check and balances within their own processes ( i.e. segregation of personnel for A/P, A/R, Matching invoices to checks, check approval at multiple levels, and bank reconciliation? Are they audited? Are we conducting periodic audits?

4)      Does our board receive timely, accurate and complete financial information (yes, including copies of invoices, checks, and bank statements)?

5)      Does our manager provide information on any irregular expenses before they are paid?

Unfortunately, I believe the answer from most associations would be “no” to one, or more likely, several of these…I know this from experience and it’s why my accounts either come to me in the first place or stay with me (I have never lost an account). Boards switch managers primarily because they feel like they are in the dark, and either can’t understand the financials or are not getting them on a regular basis.

I think this is where the real problem/potential for fraud in the industry lies, and until boards are made aware of what they should be looking for (in fact insisting upon), stories like the ones you mentioned from Fairfield County will happen despite well intended legislation. And while I am unfamiliar with the Fairfield cases, in an industry with lots of Mom and Pop shops using editable systems like quickbooks, etc and having one person doing all the accounting (or at least only one gate-keeper), the risk is great.

 

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6 Responses to Condo Boards of Directors Asleep At The Switch As They Authorize Property Manager To Write Huge Checks

  1. HappyOwnerAndBoardMember1 says:

    The heck with any limit in the law. Every Board should have the Treasurer or President required to sign every check. That is what we have always done, over two management companies, and five treasurers. Nobody every suggested anything else. Dual control. The management company cuts the checks, provides the invoice, and the President or Treasurer signs.

  2. Anonymous Unit Owner says:

    I agree with HappyOwnerAndBoardMember1 who commented that every board should have the treasurer or president required to sign every check. I would even add for further safety that two officers be required to sign every check. This would help provide another layer of financial security for unit owners.

    Unfortunately, my condo board refuses to have any officer sign checks despite unit owner urging and a call for an Internal Audit Committee to help ensure best practices in financial management of owner funds.

    I would like to see CCOC and CAI-CT work on legislation in 2013 that established financial management procedures associations must follow to better protect the interests of unit owners.

  3. Eva Jones says:

    The current board at New Concord Green has, for example, accomplished the following:
    1. Reduced the size of the board itself to three members – the current three have run the board for several years and resisted vehemently the most recent attempt to increase board membership to the original five of years past.
    2. Reduced the involvement of the board members in the daily operation of the community by turning over a great deal of the work to READCO, thereby reducing personal contact with unit owners and the efficiency which comes with such contact
    3. Eliminated the amount of assessment money coming in for the roofing replacement fund for one full year
    4. Instituted a policy requiring unit owners to seek
    prior approval for any statue, furniture, solar light, etc., placed outside/around each unit.

    It should be noted that many of the NCG units have changed hands over the past 10 years. There are less than 25% of the unit owners who regularly attend monthly board meetings. Recent meetings have been held at 3 p.m. on weekday afternoons, precluding the attendance of unit owners who work. But even when held at 6 p.m., the attendance is minimal; most unit owners don’t seem to care and the absence of protest of the $10,000 limit bears this out.

  4. In Maryland, a management company closed its doors about 3 weeks ago after it was discovered that the Reserve accounts of nearly 100 associations were co-mingled. In addition, the management company had sole signature on almost all of the Operating accounts and the associations have to litigate to obtain their funds.

    This is the answer I provided to an inquiry regarding bank account access:

    In the early 90s, following the Cameo Mgmt losses, I chaired a 6 month investigation on behalf of the Washington Chapter of CAI and we not only provided a written report, we presented our recommendations to management companies and produced an entire issue of Quorum (CAI’s local magazine) on this issue. First and foremost – do not permit management companies to have signature on any Reserve Account. Yes, they need to receive a bank statement to compile financial information. Just not access to the funds.

    At a board meeting, a resolution should be introduced (by the Treasurer) to open a Reserve Account, or even a savings account, at [specifically named] Bank or Investment Company and the authorized signatures on the account for the ensuring year are [names of at least 3 board members] XXX, YYY, ZZZ.
    The resolution should continue with the requirement that any withdrawal requires board approval and 2 of 3 signatures.

    At time of withdrawal, there should be a board resolution specifying the amount of withdrawal, the bank account to transfer the funds into, the purpose of the expenditure, name of vendor providing service, and referencing a specific contract for service.

    As to the Operating Account, all associations should permit the management company to handle the regular ongoing payments, require approval at a board meeting of any one-time individual expenditure prior to payment, and require that at least 2 board members have signature on the account(s) with possible Internet access to monitor the account. The Treasurer should receive a bank statement mailed directly from the bank to the association’s PO Box or to the Treasurer. Sometimes there may be a charge; however, the security of the members’ funds is paramount.
    The board should proceed with a resolution naming the financial institution where this account will be maintained.
    The board should require that no separate bank account be opened without prior consent of the board and only by resolution.

    Any management company that objects to these types of requirements is not placing the safety of members’ assessments as a priority. Some will argue that these are strigent and unnecessary. This year, two Maryland professional management companies, one in business for many years, have had a loss of association income. It is anticipated that the results of the current large loss of funds, with claims to many insurance companies, will result in stricter requirements by banks and by insurance companies, and by the mortgage institutions loaning individual members funds to purchase units within the association.

    • While this is a serious issue, and we appreciate you bringing it to our attention, according to news stories I have read there are only about six condo associations affected and less than $1 million involved.

  5. Deborah Cady says:

    Under the new Ct. common interest ownership act, do unit owners have the same right as before to vote on and approve a Board’s anticipated expense, beyond a specific amount such as $10,000, to control ouflow from our reserve fund?

    Our By-laws are still in the process of being re-written to incorporate the new.

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