To Authorize or Not?
Question: What are the advantages and/or disadvantages of designating the association’s manager (or management company representative) as an authorized signer on the operating and reserve accounts?
Answer: You are talking about two different accounts, and CPA Kenneth Bloom, a principal in Bloom, Cohen, Hayes, suggests a different answer for each.
On the operating account, giving the manager blanket approval to sign checks makes sense, he says, “and that’s the way it works with 90 percent of my clients.” Most of the operating expenses are routine and recurring (utilities, landscaping, insurance, etc.) and the amounts involved in individual checks are usually fairly small. Requiring a board member to co-sign all the checks “slows the process down,” Bloom says, and sometimes results in late fees, because bills aren’t paid on time. Board members should keep a close eye on association finances, he agrees, but they can do that by reviewing the monthly financial statements “and understanding them.” If trustees see questionable expenditures, “they should question them.”
While the risk of losing large sums through inappropriate operating expenditures is relatively small, Bloom notes, that isn’t true of the reserves. Notorious bank robber Wilie Sutton’s explanation for why he robbed banks (“because that’s where the money is”) applies to the reserves, Bloom suggests: It’s in their reserve accounts that associations are likely to have the largest sums and face the greatest fraud risks.
For that reason, he doesn’t think managers should have sole authority to withdraw reserve funds and most managers don’t want that authority, he says, because “their potential exposure is so great.” The best practice, recommended by most industry executives, is to require two signatures on reserve withdrawals, and Bloom thinks the manager should be one of them.
“That’s the optimal structure for reserves,” he suggests. Requiring multiple signatures in itself reduces the fraud risk, Bloom explains, because everyone would have to go along with it. But having authorized signers who are adversaries, or at least have different interests – which would be true of the manager and a trustee, Bloom suggests ── creates a stronger deterrent than you would have with two trustees.“Nothing is guaranteed,” he says, “but having the manager and a trustee look at every reserve disbursement minimizes the possibility of collusion.”
Condominium owners and board members typically assume that the manager poses the biggest fraud risk, but in fact, Bloom notes, “a board member is just as likely to steal from the association.” Nonetheless, some boards are so concerned about limiting their managers’ access to funds, they don’t want them even to receive bank statements – an unnecessary and counterproductive policy, Bloom believes. “The manager is supposed to maintain the financial records,” he notes. “If they don’t have access to the bank statements, they can’t do their job.” Managers who don’t receive bank statements also can’t easily spot theft by other board members, Bloom notes. He recommends requiring a duplicate set of bank statements – one for board members and the other for the manager. “That keeps everyone honest.”
He adds one cautionary note to the discussion of requiring multiple signatures on bank accounts: Most banks won’t notice if the required signatures are in place. “It will be up to the manager and the board to enforce this policy,” Bloom notes, “because the bank isn’t likely to.”