Q: I am on the Board of Directors of our 176 unit condominium association. Recently, I heard about some property managers in California who absconded with millions of dollars of community association funds. I want to make sure that our Association has taken all steps necessary to make sure that our assets are safe. What can our association do to protect ourselves?

A: Let me state at the outset that most property are highly professional and honest. However, in the past several years, at least three property management companies have gone out of business in this area, leaving in their wake a sad trail of unpaid bills and large losses from the community associations’ reserves and operating accounts which they managed.

Those who are elected as Directors of community associations must do their homework. Since you are on the Board, you have to fully understand how your Board and your property manager work -- and how you interact with each other. This is especially important in the financial arena, since budgets, association dues and assessments are the topics of primary importance to the owners. All too often, no one shows up at meetings when the Board is deciding such issues as hiring a new law firm, or adopting the rules and regulations governing the use of the swimming pool. But when the budget is up for discussion -- and there is a possibility that association dues may be increased -- the owners show up in droves.

There are many ways that you can protect your association funds.

First, make sure that your property manager – and the management company -- is appropriately licensed in the jurisdiction where your property is located.

Second, periodically investigate your property manager. Consider obtaining credit reports on the firm (and the property manager who will be servicing your association); this will, of course, require the permission of the manager, but since they want to keep your business they will probably not object to this scrutiny.

Third, keep control of your funds. Oversimplified, there are two pools of moneys in community associations: operating accounts and reserve accounts. All accounts should be in the sole name of your association.

Regarding the operating account, set a dollar figure above which the property manager will need the co-signature of at least one board member on all checks going out of that account. This may create a slight burden on both the property manager and the board member who has to sign checks. But, in my opinion, if you want to serve on the board, you should be willing to assume those responsibilities which will protect the funds belonging to the unit owners who elected you. And by the way, in effect these are your funds also.

There are routine checks that have to be paid on a monthly basis -- such as water bills, insurance, and trash collection. If you set a dollar limit (such as $2,500), the property manager can write checks up to that amount without a second signature. But any checks over that limit must be co-signed by at least one board member. Your bank will give you signature cards and these requirements should be spelled out in those documents. The bank is legally required to honor this requirement.

Regarding the reserve accounts, only officers of your association should be authorized to sign checks (or transfer funds) from those accounts. Community associations do not regularly transfer moneys from reserve accounts; it will not be a hardship on anyone to require that only officers be authorized to have access to those funds. At a minimum, two officer’s signatures should be required; you do not want to give absolute power to any one officer to sign these checks.

Fourth, make sure that the property management company has adequate insurance (fidelity bond) covering your association in the event of embezzlement, fraud or other activities which may cause your association a loss. The insurance industry will write "third party coverage" bond insurance which will give you protection in the event of a loss. The amount of the policy will, of course, depend on the amount of the reserves your Board has projected. Some associations have hundreds of thousands of dollars in reserves; clearly, third party coverage in the amount of $50,000, for example, is woefully inadequate for those associations.

Fifth, make sure that your association itself has the appropriate insurance coverage in the event of embezzlement, fraud or other similar activities of association funds. The policy should include wrongful acts of officers and managers. Carefully question your insurance agent to make sure that you have all of the available protections. And it is important to note that the Board – as well as the property manager – should be involved in all discussions with the insurance agent. This is a matter that is too important to leave to the discretion of the property manager.

Sixth, make sure that you (and not the property manager) hire an accounting firm to give you a full audit each and every year. Your association should give a letter of engagement to the accountant, and the accountant should report back to the Board, as well as to the manager.

Seventh, and perhaps most importantly, insist that the property manager give you and your board members a monthly financial status report, which will include copies of the actual bank statements received by the management company. You should also demand that the bank send a duplicate bank statement directly to the Board Treasurer. Review this material carefully every month within five days from receipt. Keep in mind that every board member has a fiduciary relationship to all the unit owners. I assume that you review (and hopefully reconcile) your own bank statements on a monthly basis; you should do no less for the unit owners who elected you.

Most property managers are honest and hard-working. However, one dishonest manager will unfortunately cast a broad brush of distrust on the entire industry. I do not believe that property managers will object to the various suggestions I have made, and indeed most community managers have already implemented these recommendations into their operations.

Several years ago, we learned a valuable lesson when a large property management company suddenly closed its door, and many community associations lost thousands of dollars: when there is money, there is always the possibility of corruption. Community association board members have the power to control -- as best they can -- the financial security of association funds, and the recommendations listed above should be implemented immediately.

Published: April 29, 2002

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Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts. Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.