Condo Media - February 2017 - 26

INDUSTRY PERSPECTIVE
"best practice," he suggests, is for
boards to review work orders above a
specified amount and to require competitive bids for work above another
specified price benchmark.
They don't evaluate a management
company's internal controls. Most
boards are aware of the need to establish their own internal controls, but it is
equally important, McBride says, to review the financial controls the management company has in place to prevent
fraud. "It's the absence of checks and
balances that creates the greatest exposure." Segregation of duties is essential,
he emphasizes. "The person balancing
the checkbook should not also be paying bills or processing receipts."
They allow the association's manager
or treasurer to submit copies of
banks statements instead of insisting on receiving duplicates of the
originals directly from the bank. One
way to disguise the theft of association
funds is to doctor the statements board
members see. Original bank statements
can't be doctored in that way.
They don't establish adequate controls on withdrawals from association
bank accounts. Industry experts generally recommend requiring the signatures
of at least two trustees for withdrawals
above a specified amount from the operating account, (giving the manager signing authority for sums below that) and
for all withdrawals from the reserves.
McBride agrees with that advice, but
he doesn't entirely share the consensus
view that managers should not have any
signing authority for reserves.
"I agree generally with the philosophy," he says, but as a practical matter,
when a board turns over, it can take
time to "jump through all the hoops
and hurdles" required to change the
signatures on association accounts.
His solution, to avoid periods when
no one has the authority to withdraw
reserve funds: "We have one of our
senior executives designated as one
of the signers, with other board mem-

CONDOMEDIA

bers. If that executive is going to sign
for any reason, we require written instructions from the board instructing
him or her to cut a check for a specified amount. We want a permanent
written record."
Boards don't review the financial
reports their managers prepare for
them. Many board members, if not
most of them, skim the reports, read
only parts of them, or rely entirely
on the manager's summary. Boards
have a fiduciary obligation to monitor
the association's finances, McBride
says. "They have to follow the money.
They need to ask questions and they
shouldn't be afraid to insist on documentation."
The more closely boards scrutinize
the financial reports, McBride notes,
the more difficult it will be for a
manager or other board members to
misappropriate funds. "Everyone on
the board doesn't have to examine
the financial reports [in depth]," he
says. "But the board should designate
someone to take a deeper dive into the
numbers and inform the others. That
won't prevent swindles," he acknowledges. "Someone who is good enough
at it will get away with it for a while.
But 99 times out of 100, the perpetrator gets caught." Careful oversight and
effective controls "will limit how much
the association loses in the meantime."
Adequate insurance, he adds, will
ensure that if the association suffers a
loss, it will be made whole.
Kenneth Bloom, CPA,
Bloom Cohen Hayes, LLC
Like McBride, Bloom emphasizes the need for board
members to pay close
attention to association finances as the
most effective fraud deterrent, and he
puts this high on his list of the things
many boards fail to do. "It's really that
simple," he says.
Board members think others are
watching the financials, so they don't
have to. "If you look at most significant

"It's the absence of
checks and balances
that creates the greatest exposure...The
person balancing the
checkbook should not
also be paying bills or
processing receipts."
-Robert McBride,
President,
The Dartmouth Group,
an Associa Company
frauds," Bloom says, "not all, but a
large number of them would have been
detected and stopped long before they
grew into anything close to what they
became, if board members had been
paying attention."
Boards underestimate or ignore
internal risks. When boards are creating internal controls or enforcing them,
Bloom has found, they will often focus
on the individual rather than on the individual's role and the access to association
funds the role creates. "They say, 'Bob's
the treasurer and we trust Bob,' instead
of saying, 'someone needs to watch what
the treasurer is doing.' Boards need to
de-personalize their controls," Bloom
says. "They have nothing to do with
trusting a particular individual."
They assume that as long as the
association is operating within its
budget overall, everything is fine.
In fact, Bloom says, the association's
finances may not be fine at all. Board
members shouldn't focus only on the
bottom line, he explains. "They should
look at the variances in individual
line items, and ask if the variances
make sense." If electricity prices have
fallen below the budget estimates, he
suggests, if the expenditures are still
on budget, and the association hasn't

Condo Media - February 2017

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