Spotting Financial Irregularities Red Flags Every Board Member Should Know

While it's pretty much impossible for a co-op or condo board or employee to commit fraud on the scale of a Bernie Madoff or any one of the herd of shysters who have tromped through the news in recent years, building boards and managers certainly aren't above scrutiny when it comes to shady business practices. Building administrators are in positions of authority and handle large sums of money—often without a lot of supervision or oversight. Fraud and financial mismanagement in a residential building can have devastating effects on residents and building alike, but it’s more than just money; the dishonesty creates a breach of trust that can be very hard to repair.

One of the advantages of cooperative or multifamily housing is that by pooling resources, a group of people has orders of magnitude more purchasing power than they would individually. Only the mega-rich could buy an apartment building outright. A potential downside of this arrangement is that the aforementioned pool of resources may be very deep. The notorious bank robber Willie Sutton, asked why he robbed banks, said, “That’s where the money is.” Well, that’s true of co-ops and condos, too. 

According to Kathryn A. Formeller, an attorney with Tressler LLP in Chicago, the most common form of fraud in co-op or condo buildings stems from theft by a board member. "The most vulnerable position is the president or treasurer, as they likely have the authority to sign checks," she explains. "Secrecy, refusal to produce documents, or change in an individual's financial position are all potential warning signs."

How can you spot financial shenanigans—or just plain, honest mistakes? And what should you do if you suspect someone of shady dealings? Let’s take a look.

Kickback, But Don't Relax

Say a vendor puts in a bid to win a job installing new windows in your high-rise co-op building. It's a lucrative contract, so to sweeten the pot and make sure the job gets sent his way, said vendor pads his bid by $2,000 and promises to kick that sum back to board president once the ink has dried on the contract. This scenario is known as a 'kickback,' and it’s among the more popular forms of malfeasance.

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