DETECTING & PREVENTING FRAUD & KICKBACKS
Summarized below is a workshop presented at the 17th annual Cooperative
According to Mindy Eisenberg, a CPA and certified fraud examiner who is a
partner in the firm of Eisenberg & Krauskopf, there are two broad categories
of management wrongdoing: the kind that happens on the corporation's books
and records, and the kind that flows under the table. Kickbacks are an
example of the latter, where you overpay for a good or service and the
vendor gives the extra money to your management company or your agent or
super, or even to a board member, as a "thank you" for hiring them.
In a typical example, the ABC Management Company would hire a plumber on
your building's behalf. The plumber charges $2,000 for the repair, and a
check for that amount is cut from the building's bank account. The plumbing
company then gives $300 in cash to your managing agent. Such an act is
difficult to uncover. There's a bill for $2,000, which the treasurer has
seen, there's a check that's been properly signed, and the board authorized
the expenditure. "No matter how many accountants and forensic specialists
you engage, you will have a hard time finding it," says Ms. Eisenberg.
PREVENTION IS THE BEST DEFENSE
While most managers are honest, and those who commit these acts are
certainly the exception and not the rule, says Ms. Eisenberg, it always pays
to be vigilant. The best defense against kickbacks is prevention, and there
are a few safeguards you can put into place:
1. Solicit sealed bids and open them before a group. Many boards allow
the managing agent to get all the bids and bring a summary of the bids to a
board meeting. This is asking for trouble. "You don't know that the manager
didn't tell a preferred vendor what the other companies were bidding," says
Ms. Eisenberg. "He could say that he has three bids at $1,500, so if his
vendor comes in at $1,200 he's guaranteed to get this project. Nor do you
know whether this work is worth $1,500, or even $1,200."
While it may be time-consuming, the board should gather some of the bids
itself. This will not only help head off a manager-vendor tryst, but it will
give the board a better sense of what the job should really cost. When you
receive the bids, open them at the board meeting. Never allow the managing
agent to open bids at his office and hand you a summary.
2. Hire an engineer. The bidding process is worthless unless there's a
level playing field. An engineer will draw up specifications that can be
sent to each bidding vendor, giving the board a reasonable standard for
comparison. You may not find this necessary on a smaller job, but it should
be your operating procedure on all larger expenditures. Another note of
caution: Don't rely solely on your managing agent to help you choose
engineers, and don't allow your engineer to gather bids from contractors.
3. Check prices. With smaller projects and purchases, legwork is the best
weapon against ripoffs. A board member should call various suppliers to find
out what they are charging for commonly-used items. If you suspect that
supplies are disappearing or not even arriving at the building, conduct
random inspections of supply orders when they arrive and periodically check
in the supply room to see how fast these items are being depleted.
4. Don't grow too fond of vendors. There are persuasive reasons for
establishing relationships with vendors and contractors. For example, if you
use the same plumber on many jobs, it is likely that you will get better
prices. But in using the same vendor or contractor year in and year out, you
can lose sight of market prices. To keep vendors on their toes, review one
or two vendors each year. If you find that the contractors you are using are
offering bids that are in line and competitive with other bids you receive,
then you will have a greater degree of comfort. In addition, "doing this
sends a signal to your present contractors that if they want to stay on the
property, they need to sharpen their pencils and come up with the best price
for you," says Ms. Eisenberg.
Overcharging could be indicative of fraud and kickbacks. If you find
overcharging, then you should begin looking into this possibility.
5. Don't rubber-stamp expenditures. When it comes to board approval of
expenditures, boards err at both ends of the spectrum. Some boards approve
all outlays without looking into them, while others take a magnifying glass
to every bill. The former opens you up to rampant abuse, while the latter is
too time-consuming and probably not necessary. The most practical approach
is to consent to routine expenditures, with periodic reviews, while looking
closely at larger or non-recurring expenses. This shows the agent that
you're watching the store.