Every autumn, the Council of
New York Cooperatives & Condominiums holds its day-long
information-packed Housing Conference at Hunter College,
where 60 workshops and seminars present unparalleled opportunities
for board of cooperatives and condominiums to learn and
to share information on every aspect of operating their
buildings. Small buildings are often those most in need
of education for they are often self managed. Accountant
Charles Zucker lives in one such building, where he has
been proclaimed "treasurer for life". Mr. Zucker's
lively and informative course on Internal Controls for Small
Buildings is summarized below. It will be offered again
at this year's Conference on Sunday, November 14, 1999.
INTERNAL CONTROLS
FOR COOPERATIVES & CONDOMINIUMS
If you leave a door open, the old expression goes, someone
will walk through it. That's a lesson that some cooperatives
and condominiums learn the hard way, says Charles Zucker,
a partner in the accounting firm of Zucker & Shernicoff.
Just ask the board at a small building on Manhattan's Upper West Side.
Out of the blue, the co-op found itself in foreclosure for non-payment
of the mortgage, in rem by the City of New York for non-payment of taxes,
and dissolved as a corporation by the State of New York because corporate
franchise tax returns had not been filed for several years. The sponsor
had been responsible for taking care of all these filings and payments,
and the board had taken it for granted that he was doing his job. But
he wasn't. "You cannot assume that someone else is watching the
store," says Mr.Zucker, who admits that his own West Village co-op
has been remiss in this area: Mr. Zucker has been the treasurer of this
self-managed building since 1975. "That's wrong. It's not the way
it should be. There need to be all kinds of checks and balances, because
you never know when good people will yield to temptation and turn into
bad people."
GETTING ORGANIZED
The first step towards taking control of your building is to create
a comprehensive operational manual, says Mr. Zucker. This should cover
every small detail of running the building, from the location of the
water shut-off valve to the procedures for maintaining the building's
finances.The manual should be particularly strong on outlining the various
tax payments that are due each year, he says. "Have your accountant
help you develop a thorough checklist of all the filings that are due,
and keep track of when these filings are made."
"No board stays in power forever, nor should one set of people
stay in power forever," he says. "A good, thorough operational
manual will insure that the controls and procedures are maintained even
as the faces on the board change." In his own building, Mr. Zucker
has created a treasurer's manual that details when bills should be paid,
which tax filings are due and other details associated with the treasurer's
role. He keeps it with the checkbook."If something happens to me,
the next guy will be able to use common sense to find the manual, and
he'll be able to pick up right where I left off,"says Mr. Zucker.
DIVIDING THE RESPONSIBILITY
Another basic step is to make sure no single person or small group of
people on the board is responsible for everything, and that none of
the building's professionals or management staff is left to act unmonitored.
Mr. Zucker recommends breaking up the board's range of responsibilities
into four main areas, and assigning these areas to different people
on the board:
1. Financial. This is the treasurer's domain, and includes overseeing
maintenance/carrying charge collections, bill paying, and interaction
with the building's accountant for tax preparation.
2. Maintenance. This person would be in charge of overseeing repair,
maintenance and capital improvements. If the building has a managing
agent,this person would act as the board contact responsible for monitoring
the progress of any work in the building and reporting back to the
board.
3. Legal. This is generally the job of the board secretary, and includes
handling or overseeing such issues as share transfers and contracts.
4. Procedural. Each year, co-ops and condos must make dozens of different
filings with the City and State, as well as with the Building Service
Employees' Union. This person would be responsible for making sure
these are done correctly and on time.
There is a great danger in ignoring such safeguards. Mr. Zucker cited
the example of a condo on the Upper East Side had entrusted its managing
agent with paying bills, and had not bothered to check which bills were
being paid. Five years later, the building owed $100,000 in unpaid dues
to the Building Service Employees' Union. "The agent fooled the
board by showing union reports to the board but he never paid the dues,"
says Mr. Zucker. "The building is now negotiating a settlement."
LOOK AT EVERYTHING
According to Mr. Zucker, the most common problems can be avoided if
the board watches all the details. For example, many buildings get into
trouble because no one looks at the mail. "If someone at the foreclosed
West Side condo had simply opened the mail, they would have seen that
the taxes were not being paid," he explains. Trouble can also arise
with basic invoice approvals. "Most checks that are signed by the
treasurer do not need approvals, such as those for utilities and other
standard monthly payments," he says. "But all repair bills
should be approved by the board member in charge of the project before
being signed by the treasurer." The board should review all bills
over a predetermined dollar amount, he warns. This would at least limit
the amount of damage that can be done. Your board can set this dollar
amount at any level. Make sure the limit is clearly stated in the operational
manual. The best safeguard is if more than one person – at best,
an entire committee – reviews all non-recurring bills. For example,
the House committee should reviews all bills from contractors before
they are approved for payment. Requiring two signatures on checks is
not always a foolproof way to defend against theft. According to Mr.
Zucker, banks have become so automated that many single-signed –
and even unsigned – checks slip through.
ACCOUNT SAFEGUARDS
A basic rule for all cooperatives and condominiums is to keep the operating
account separate from the reserve fund. This means keeping them in separate
and distinct bank accounts and keeping them under the control of separate
people. In the foreclosed West Side building, for instance, the reserve
fund was the one element that the sponsor did not control. This left
the building $25,000 to help bail it out. Beware of wire transfers,
a method of paying bills that has come into vogue,says Mr. Zucker. At
one building, he notes, the treasurer paid all the bills by wire transfer
from the building's bank account. When he was relocated to the Midwest,
he took the PIN code with him and accidentally withdrew $9,000,thinking
he was making the transfer from his own account. "He paid back
the money as soon as the error was discovered, but this highlights the
type of danger that wire transfers can pose," he says. Finally,
keep an eye on the treasurer by making sure that he or she presents
the board with monthly financial reports. "All you need to see
is a simple statement, showing the maintenance collections and the bill
payments," says Mr. Zucker. "This should be seen by all board
members. If you know what's coming in and what's going out, then it
becomes difficult for someone to walk away with the store."
