COMBATING CONS IN YOUR CO-OP OR CONDO

NEW YORK, NY… November 1, 2004...

Much of the appeal of being a shareholder in a residential cooperative is the feeling of safety, knowing that a screening process has reduced the chances of dealing with financial delinquency, former convicts or characters with a history of residence hopping. The decision making process at co-ops is designed to weed out potential problems before they happen, and every important matter is handled by a board of concerned members who make sure every dollar is spent responsibly. Foolproof, right? Wrong. Financial discrepancies and frauds are more prevalent than ever, and with the economy trudging through hard times, chances are someone connected with your co-op—whether it's a resident, a vendor or a managing agent—is taking a little something extra for themselves and giving honest shareholders nothing but undeserved headaches.

According to a recent poll by Kessler International, a global forensic accounting firm headquartered in the heart of New York City, 44 percent of co-ops say they have been the victim of theft or fraud within their community, while an astounding 93 percent suspect such negligence but have no evidence to support their suspicions.

Unfortunately, therein lies the real problem. Detecting illicit activity and fiscal mismanagement in co-ops can be a very difficult task. Schemes and kickbacks are cleverly covered up on the books with legitimate-looking transactions, and obvious irresponsible practices (such as contracting incompetent vendors or failing to keep accurate inventory of supplies) are often left unquestioned by managers or shareholders. Even when frauds or grievous errors are discovered, many shareholders are reluctant to accuse their neighbors due to embarrassment, friendship, or the possibility of bad publicity for the community.

So what can co-op residents do to fend off mismanagement and outright fraud? A good start, especially for newly-formed or inexperienced boards, is to institute a comprehensive system of checks and balances for each and every aspect of the community. Not sure what to include? Here are a few tips that can help even long-standing boards improve financial vigilance:

• Maintain careful documentation of all contracts and transactions.
  Keep invoices and printed receipts for everything, from telephone bills to paper towels. If paying for contracted work, make sure invoices indicate exactly what was done and where it was done, and have residents sign off on any work done in their buildings. If fraud does occur, complete, accurate records will be instrumental in determining where the money went, and who was responsible.
• Never "rubber stamp" expenditures.
  Many boards approve routine - and sometimes not-so-routine - expenditures without even a passing glance, putting full trust in their managing agent, which is simply an open invitation for fraudulent activity. Some boards do just the opposite, and examine every regular purchase with a fine-toothed comb. While this sort of scrutiny may prevent abuse, it can be very time-consuming and it usually isn't necessary. The practical solution? Periodically review regular expenditures, and pay closer attention to large or non-recurring expenses.
• Keep an eye on your supplies.
  The theft and abuse of supplies by employees is one of the most common problems facing co-ops, and one of the most easily remedied. Take regular inventories of supplies, store supplies in secure locations and give keys to a limited number of employees. Conduct surprise inspections on a regular basis, and make sure to compare records against maintenance logs.
• Encourage vigilance in your community.
  Certainly, co-op residents are concerned with the safety and strength of their community, which is why board members should make it very apparent to shareholders and employees that fraud, theft and dishonesty will not be tolerated. Encourage residents to look out for signs of illicit behavior, and to report any suspicions they may have. By making this clear from the start, people will be less hesitant to come forth with information, and potential thieves will give their plans a second thought.
• Choose vendors wisely.
  A common mistake made by co-op boards is giving the managing agent complete control over bid solicitations and the final decisions on costly tasks, which could result in kickbacks, overcharging, and poor-quality workmanship. If possible, have the board solicit sealed bids from vendors for large jobs, and make sure to research potential candidates. Avoid extremely low bidders, check references, find out if proposed rates are competitive, and always make sure contractors are properly licensed.
• Hire an expert to determine if large jobs are necessary.
  One of the more frequent scams perpetrated by crooked contractors is recommending and performing work that isn't needed. Most boards aren't comprised of plumbers, heating specialists and structural engineers, and sometimes those who appear to be knowledgeable take advantage of this. If you have a large, expensive job on the horizon, hire an independent expert to objectively evaluate the situation before you spend millions on unneeded repairs.
• Conduct routine, annual compliance audits.
  Often, the main reason people commit fraud is because they know they won't get caught. Treasurers write extra large checks, but no one questions them. Managing agents pay suspiciously high bills, but nobody gives it a second glance. Employees stuff their bags with supplies, and orders for more keep getting signed. So what can be done to keep tabs on expenses? As with buildings, preventative maintenance is the key, and regular compliance audits go a long way toward preventing fraud and financial negligence. Yearly audits give you the benefit of knowing where and how money is being lost, allowing you to tighten controls and put the extra assets back into the community. And if you have a feeling that fraud has already occurred, a certified forensic accountant can dig deep to find pieces of evidence that your average accountant would overlook.