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How can our NYC co-op board prove that someone is stealing from the building?

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Question:

I'm on my co-op board, and we are concerned about building money going unaccounted for. I've heard of forensic audits, but I'm not sure exactly what they are or how we'd go about initiating one. What's the best way to scrutinize our finances with an eye to getting back any missing money?

Answer:

A co-op or condo building's "first line of defense" financially is the board treasurer, according to Steven Wagner, a partner at the real estate law firm Wagner Berkow with decades of experience representing co-op and condo boards.

"The role of the treasurer on the board is a very important job, maybe the most important job, and needs to be taken very seriously by anyone who accepts that position," Wagner says. "They are the ones most likely to see, if they're doing their job, any irregularities in reports given by the management company."

The financial scrutiny shouldn't stop at the management report.

"The treasurer should also look at the source documents for the finances, not just the management report," Wagner says. "That means looking at invoices, looking at receipts from tenant shareholders, looking at bank statements, to ensure that all of the money is accounted for and there's no irregular activity."

Any unexplained irregularities merit further scrutiny.

"If something's not right or there's something that you don't understand, you need to get a clearer explanation," Wagner says.

For this, you should first consult your building's accountant. If the accountant can't explain the anomaly, he says, "Usually the attorney comes in after that."

"I would, as an attorney, always require that there be a 'fraud audit,' or 'forensic audit,'” Wagner says. "If somebody were to come to me and say, 'There's funds missing,' I'm going to need an expert for that case. That expert is either going to be the board's regular accountant or an accountant who is specially retained to carry out this fraud audit and make inquiries about the funds. If there is something missing, very often by identifying it you can get it back. But also you're going to need that person, if necessary, to explain and testify in court what's irregular and how much money is missing and where it went and prove it."

He recommends having your building's lawyer formally request the audit, as opposed to the board requesting it, because with a lawyer, what the accountant uncovers could be protected as attorney work product in the event that the financial issue winds up with you suing someone.

If the audit ends up uncovering fraud, Wagner says that the board should first notify the building's insurance company, as well as possibly the managing agent's insurance company, if the building is covered as an additional insured party and the managing agent's actions are at issue. From there, he likes to proceed with the goal of getting the money back as soon as possible, as opposed to trying to get the offender to formally admit guilt.

"It's been my experience over the years that if you catch a managing agent with their hand in the cookie jar, they want to make you whole very quickly so that there aren't other ramifications," he says. "My experience is the quicker you can get it back into your accounts, the better off you'll be."

For some background, Wagner shares a few frauds commonly perpetrated against co-op and condo buildings.

In one, the managing agent is authorized to spend without board approval for purchases under a certain dollar amount, and brings in a favored vendor repeatedly to do suspect work just under that amount.

In another, managing agents credit tenant shareholders' accounts for maintenance fees owed, then pocket the fees, crediting different apartment owners from month to month. "So the net effect is it looks like there was a payment, and the board doesn't know whether it was a credit or a payment," Wagner says.

In still other cases, management companies claim to keep the money of the various buildings they work with separate, but in fact keep them all in one account, and skim off the top.

Nor are all perpetrators managing agents.

"I have heard of at least one instance of a board member meeting with a vendor who was getting a tremendous amount of work, and that troubled me," Wagner says.

To preempt this kind of stealing, he recommends introducing controls such as requiring multiple signatures on checks other than essentials such as mortgage payments and building staff payroll. He also encourages boards to introduce outside vendors or use a sealed bidding process to ensure that the building is getting a reasonable rate.

"The board's annual meeting is a good time to check in with your accountant," Wagner says. "Ask, 'Have there been any irregularities that we should know about, anything you're looking into?'"


New York City real estate attorney Steven Wagner is a founding partner of Wagner | Berkow with more than 30 years of experience representing numerous co-ops, condos, and individual owners and shareholders.  To submit a question for this column, click here. To ask about a legal consultation, send an email or call 646-791-2083.