Condo Media - February 2016 - 28

MANAGING
FINANCIAL
IMPROPRIETIES
Community association crises not
caused by natural disasters typically
fall into one of three categories:
financial, management, or legal.
Pete Garrett, CMCA, AMS, PCAM,
president of Maine Properties, LLC,
scored a trifecta with a crisis that
spanned all three.
The problems arose at a Maine
condominium community (one of
several) that Garrett's company had
taken over from a smaller troubled
management firm. Shortly after coming
on board, he discovered significant
financial irregularities-laundry income
listed in one financial statement had
disappeared the next month. It turned
out the former manager was shifting
balances to cover the fact that he was
double-billing for his management fee,
which he had been collecting on the
first and 30th of one month and then on
the first of the following month.
Garrett had three immediate concerns as he created a crisis management plan: calculate the losses and
recover as much of that money as
possible; establish the administrative
checks and balances the association
needed (but did not have in place) to
prevent similar problems in the future;
and protect his company's image.
"I've built my business on a
reputation of being 100 percent honest
and reliable," he says. "When something
like this happens, it shakes everyone in
the management field."
RECOVERING THE FUNDS
The first step was to protect the
association's funds by making sure the
former manager didn't have access to
them. Garrett discovered the manager
was listed on the checking account

CONDOMEDIA

(standard practice),
as well as on the
reserve account (not
standard practice).
Also far from advisable:
Only the manager was listed
on the checking account, which
meant bank statements and canceled
checks went to him. Board members
never saw them.
With an eye toward ensuring
maximum transparency, Garrett
brought the board president with
him when he arranged the transfer of
association funds to a different bank.
Board members were listed along with
Garrett on the new checking account,
and only the president, treasurer, and
secretary were on the reserve account,
with two of their signatures required
for any withdrawal.
Tallying the association's losses-
estimated now at about $80,000-
Garrett found to his relief $30,000
remained in the checking account.
As it turned out, the former manager
hadn't touched the reserves. "It
could have been disastrous for this
community," he says.
With the remaining funds secure,
Garrett recommended an attorney to
pursue recovery for the association
and to explain the situation to owners.
Effective communication was crucial,
he says. The board had to inform
the owners of the improprieties, but
with possible litigation pending, they
couldn't discuss the details or risk
saying something that might prejudice
the association's case.
COMMUNICATING WITH OWNERS
So, the attorney rather than the board
or Garrett explained at the annual

meeting what had happened, told
owners where they could find more
details, and explained the legal
process, emphasizing that while
owners could expect to recover some
of the missing funds, they wouldn't
recoup everything.
The attorney also outlined the
"best practices" that Garrett had
recommended and the board had
implemented to make sure they "will
never lose sight of or control over the
association's funds again."
At press time, events were still
unfolding. At least initially, the attorney
wanted to try to reach a settlement with
the former manager through mediation
because it would be less costly than
litigation and less likely to produce
negative publicity.
One of Garrett's major goals,
and a key component of his crisis
management plan, was to avoid
what could have become a crisis of
confidence in the board, if owners
blamed the trustees for the association's
losses. Although the current board and
previous ones "allowed this to happen"
by failing to establish necessary checks
and balances, Garrett has emphasized
the here and now.
"I think owners recognize we have
precautions in place to make sure
nothing like this happens again and
they understand we're doing our due
diligence to limit the losses as much as
possible," he says.

Condo Media - February 2016

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