Co-op, condo and HOA living represents a unique social arrangement; it’s a paid-for membership club and a home at the same time. Many people enter into this arrangement without a complete understanding of the responsibilities of membership. Others, fully aware of their community responsibility, volunteer to help guide, shepherd and monitor the health and welfare of the community by serving on association or corporation boards.
A typical single-family homeowner employs the skills of various professionals over the course of years to maintain and manage their home; attorneys, accountants, contractors and others as needs arise. The management of a large residential complex, one that may contain hundreds of units, often requires more complex skills. A single-family homeowner might require an attorney to close the purchase or sale of their property; an accountant to do their annual personal income tax; and a contractor to repave a driveway or fix a roof; In large residential complexes legal, accounting and other skills often come into play more frequently and in a more complex manner.
Those association or corporation members who volunteer their own time to serve on a board may not themselves have the skills, education, experience and time to provide the expertise for these functions. That’s why co-ops, condos, and HOAs have managing agents. But sometimes, unfortunately, things can go awry. As much as we don’t want to think about it – and rare as it may be – what is a board to do to keep everything on the up and up?
Your Fiduciary Responsibility
Tana Bucca, an attorney who represents co-ops and condominiums, and is a shareholder with Stark & Stark, a law firm with several offices in New Jersey, suggests the following as a rule of thumb for boards and board members in protecting themselves: “While an association board certainly has oversight responsibilities with regard to its management, they should be careful not to micromanage the manager. This is totally unproductive, and will create delay or even liability for the association or individual board members. We suggest that boards work together with management to create policies that clearly delineate the role of the manager and staff versus the role of the board itself. Perhaps the board, together with management, can work together to create a responsibility chart. The board should strive to meet regularly with the manager to discuss responsibilities, goals and expectations. Beyond this, the board can set a protocol for vetting vendors.”
Arlen Lasinsky is a director in the Advisory Services Group of Marcum LLP, an international accounting and advisory firm based in New York City. He and his firm offer forensic accounting services, and he says a condo association’s board “Is ultimately responsible for whatever happens. They have the fiduciary duty to do what’s proper. They have to do their due diligence.” But, he continues, “The board should rely on their management company to refer vendors. The management company and the manager have the connections and the expertise to locate the best vendors for a job. There should be two levels of vetting; first by the management, and then by the board.” Perhaps most importantly, Lasinsky points out that like all vendors, “The management company is a not a substitute for the board. They are a contractor the board hires as well.”
Bucca concurs with Lasinsky’s observations. As a practical matter, she says, “The board can set a protocol for vetting vendors, and then ask the manager to follow that protocol in the contractor selection process. The board may ask the manager to obtain at least three proposals from separate vendors, and make sure each vendor has the same specification for work, so that the board is comparing apples to apples when looking at the quotes.” But, she points out, “In general, it is not a good practice for boards to solicit bids directly from vendors. By becoming directly involved in bid solicitations, a board member may get him or herself in hot water and open the door to accusations about the integrity of the process. Bid solicitation is a responsibility for the manager to handle.”
What If the Worst Happens?
While it is by no means common, fraud and malfeasance can occur on the part of a contractor, engineering or architectural consultant, a managing agent or even a board member. In the event your board is concerned that shadiness may be afoot, the first thing to do is to contact your association’s attorney. The attorney will in turn contact a forensic accountant.
A forensic accountant – usually a CPA – is trained to use accounting skills to investigate fraud or embezzlement and to analyze financial information for use in legal proceedings. Lasinsky explains that forensic accounts generally employ both analytical procedures and interviews to complete their investigations.
Barry Pulchin, a CPA and the director of Forensic Accounting and Valuation Services at Prager Metis, an accounting firm with offices worldwide, says, “We employ various forensic techniques beyond normal auditing procedures in order [for our findings] to be suitable for use in a court of law or public debate.”
He describes some of questions his firm asks when brought into an investigation. First, he says, “Were there sealed bids for the job, and were the bids sealed and opened at the same time? The likelihood of one company getting jobs over and over again is minimized – if not negated – because the managing agent would have to justify the selection. Second, have the vendors been vetted? The board has to do the vetting. The managing agent should not vet the vendors. There must be a separation of responsibilities.”
Furthermore, Pulchin suggests there are ways to make sure board members are on the up-and-up as well. “To check if there are conflicts from board members, we investigate whether anyone on the board is connected to the vendor.” Jobs shouldn’t be contracted out to a board member’s uncle or cousin, for example. Also, “We review contracts for pricing and add-ons. We do comparative pricing. We look at the contract, and compare the prices in it to the market to see if they are inflated, or are consistent with the industry. When they’re not, that might indicate a kickback.”
Other modes of investigation include viewing canceled checks to make sure they were signed by a board member, and comparing them to invoices for compliance. Bank statements are examined, and canceled checks are reviewed and compared to the books to make sure payees are the same. Payroll is also examined. “In some cases,” says Pulchin, “a member of the construction team can be listed on multiple [simultaneous] jobs. We spot-check who is on the job on a daily basis. A contractor could have 10 employees, but all of them can’t be on multiple job sites at the same time.”
Lasinsky makes use of interviewing as part of his forensic investigations. “You must always have a scribe present,” at the interview, he says. “You must always have someone to take notes. It’s very much like police work. The interviewer needs to focus on the interviewee—pay attention to what they say and their body language.” He stresses that the interviewer must understand who they are interviewing and have the right questions prepared.
Pulchin points out that “A forensic review is to answer questions – not to make allegations. Based upon forensic finding, if a board believes there was fraud, they should bring in an attorney. Normally an attorney has already been hired,” so it’s usually the attorney who brings in the forensic accountant. “Accountants will want a ‘Kovel Letter,’ so that their work is subject to attorney-client privilege.” Named after a famous case, United States v. Kovel, the Kovel Letter makes the accountant a subcontractor of the lawyer, and allows them to keep their findings confidential.
Managers are as much aware of the potentials for fraud and malfeasance as accountants and attorneys. Their professional duty is to their clients: the board of directors of the condominium association, and ultimately to the association members themselves. They strive to do the best job they can, and both the attorneys and the accountants interviewed by The New Jersey Cooperator for this article say that cases of fraud perpetrated by management are rare in their experience.
Managing agents generally seek to work effectively and efficiently with their association clients. This means having the right level of communication and an understanding of what responsibilities the board has, versus what duties the manager has. Like the story of Goldilocks, the porridge shouldn’t be too hot or too cold, but just right. Meaning, a board shouldn’t micromanage their property manager, nor should they abdicate their responsibilities and leave it all up to him or her. The manager should effectively execute his or her duties so that the board can make educated, effective decisions and choices.
Barbara Polychronis, a community manager for FirstService Residential in New Jersey, says that “With capital projects, we need the professional advice and input from an engineer, because most of these projects are structural, and the board and management are not experts. The engineer draws up specifications which are then sent out for bids. We recommend engineers we trust to the board. The engineer looks into the project for them, and creates the specs. They then recommend contractors. We as management might also recommend contractors.
“We usually get a list of the vendors,” she continues. “The vendors submit references from work they’ve done for other associations. If that work is something the board members can go to look at, we recommend they do. Sometimes we get the names of board members from the other associations where the vendor has done work, and our board members reach out to them.” Information, she stresses, is the key to choosing the right contractors.
While the enthusiasm and dedication of board members to their communities may be evident, it is best to leave certain responsibilities to the professionals. Like attorneys and accountants, managing agents are professionals. A management company is hired to reduce liability, implement best practices, and make sure you’re operating the way you should. Having a board member researching vendors opens up liabilities. There’s not much that can be done when something goes wrong with a contractor or vendor, and all you have is ‘A board member found them on Google.’
In the final analysis, everyone has a job to do in keeping tabs on the purse strings. Ultimately, the fiduciary ‘buck’ rests with the board. They have to do their part by properly vetting contractors and vendors to make sure they are getting reliable, honest service at an acceptable price. They have a support staff; lawyers, accountants and management. And when all four work together, things should work out just fine.
Alan Sidransky is a published novelist and a staff writer for The New Jersey Cooperator.