You may not realize it, but your building may be hemorrhaging money. Not in the form of disastrous lawsuits or maintenance crises like a collapsed roof or exploded boiler, but in a steady trickle coming from your method of ordering supplies and keeping tabs on small, seemingly inconsequential bills or maybe even theft.
“Waste is a big problem and monitoring how much the staff uses of cleaning supplies is hard to keep track of,” says Michael Rutkowski, president of First Community Management, a management company in Chicago. “You also want to monitor your staff and train them properly to use the right amount of product. They’re always going to want to use more that they are supposed to use because theoretically it makes their job easier. Or if they can get the smell of a cleaning product stronger more people are going to notice that they were cleaning. That’s not necessarily a good use of product.”
“Theft can happen with larger items and it can be very difficult to see,” says Brad L. Schneider CPA, president of CondoCPA in Elmhurst. “Suppose it’s plumbing fixtures to replace toilets or sinks or windows, they look like normal items but they could be taking them and installing them in other places or installing them for residents for free and then asking for money on the side.”
Nickel-and-Dimed to Death
Smaller maintenance items and things like janitorial supplies are usually ordered by a superintendent, building engineer or other authorized building staffer, who may be unaware of what expenses are covered by the building and what is actually the responsibility of the shareholder.
“A way to counteract theft is to have a perpetual inventory system where you have a simple log-in and log-out sheet where you list out the major items, not the small, little things,” says Schneider. “I’m talking about tracking the ins-and-outs of the most expensive items. So if you order five things, you can see where they go and what units they were put into. And managers should review those sheets every so often—maybe quarterly. It’s basically having a little more oversight over the maintenance staff.”
Possible indicators that dishonest or wasteful purchases are being made by building staff or management are large expenses (over $1,000), redundant quantities of small items or wild fluctuations in ordering materials and supplies. One such situation described by Rutkowski concerns a maintenance employee. “There was an employee and he had the ability to charge stuff and it went beyond just charging cleaning supplies. He was charging equipment as well,” he recalls. “For example, he needed a new mop. It’s like, okay, we’re not going to micromanage it, but then it’s like, why did you get two new mops every month? What’s going on here? So the property manager and I went after hours to inspect the supply room to see where all of this stuff was and none of it was there. We eventually just questioned the guy and it turned out he was selling the stuff. He’d buy more than what he needed and resell it and pocket the money.”
“A lot of times you will see that the maintenance supplies and the financial statements don’t add up,” says Schneider. “Say you budget $5,000 a year for supplies and in half a year you spent $10,000. That’s an indicator that some sort of fraud or theft is going on and items are being used for other purposes.”
Most regularly-ordered items are usually purchased in similar quantities every time, so a large quantity that differs from past repeated orders may also be an indicator of waste or fraud.
“Yes, things change,” says Rutkowski. “But if you’ve seen wild fluctuations in the ordering of materials or supplies, that’s the number one indicator that there is theft going on.”
Organization, Accounting, and Kickbacks
According to Rutkowski, most loss and waste is a result of sloppy and or lazy organization. “A lot of managers I’ve seen over the years, they get into the habit of placing the same order on a monthly or quarterly basis and they are actually not going and inventorying what they actually need or what has been used or what isn’t needed,” he says. “It could also be improper training or management of the staff and how much they should be using.”
By law, board members are not allowed to use their position for personal financial gain through the recommendation of suppliers, institutions or contractors that could result in—or even give the appearance of, the granting of favors or gratuities to directors.
“In Chicago, kickbacks are one of the dirty secrets of the property management industry,” says Jim Stoller, president of The Building Group, which provides real estate management services in Chicago. “Many management companies have gone as far as institutionalizing it by setting up systems that require contractors and vendors to send them a fee based on the work done in their properties. The Building Group has a policy that prohibits the company, employees or building maintenance people from doing that.”
Kickbacks do occur occasionally, and are extremely difficult to account for because there is no concrete way to track them. Most management companies have a policy not to accept any monetary gifts or favors— however difficult that may be to control—especially around Christmas time or other holidays.
Checking & Balancing
In order to monitor cash outflow and ensure that jobs and supplies are bid out properly, the property manager or managing agent should establish a set of purchasing principles. First, of course, are considerations of price and quality. The cheapest option may not always be the best one, but a residential building is a business, and as such has a vested interest in getting the lowest price possible for goods and services. Secondly, no shareholder/owner, employee, former employee or members of their immediate family should be used as a supplier of any materials, supplies, equipment or services. Also, no shareholder/owner, employee, or family member should be given any materials, supplies or services at any price under any circumstances without the consent and approval of the manager.
Also, management companies generally advise their building staff members to get at least three competitive bids for any item over a set limit—$1,000, for example—unless the property manager and board treasurer both agree that competitive bidding isn't absolutely necessary. That could be because an emergency requires an item to be purchased immediately, or because the present supplier is working out well and offers competitive pricing, or—unlikely as it may sound in a city as large as Chicago--because there is simply only one supplier who provides a particular good or service.
Property managers and accountants both agree that no major purchases or bulk purchases should be made until plans for those purchases are reviewed by the building's finance committee and approved by the board. All purchases made out of reserve accounts should be approved by the finance committee and by the board.
The manager or department supervisor is to acknowledge receipt of goods or services by endorsing the purchase price on the invoice before the invoice is paid. Each department supervisor is responsible for controlling his or her department's inventory using daily, weekly, monthly, and annual inventory counts (depending on the type of inventory: office supplies, cleaning products, etc.) that are recorded and reviewed periodically. The manager is responsible for implementing the utilization of forms that reflect a business-like and orderly image, such as purchase orders, requests for quotation, and contracts.
In order to establish oversight and cost-controls in a building's day-to-day business transactions, a system of checks and balances must be put in place that keeps track of inventory purchases and other expenses, such as garages and parking. At most management companies, the manager approves purchase invoices on a daily basis as they are processed through the management office and creates weekly reports for checking and balancing the week's expenses. In addition, the co-op or condo's accountants review the building's expense records on a monthly basis prior to review by the board in order to ensure everything is in order.
Who Ultimately Oversees?
It is important to clearly define the financial authority of and outline various policies for the manager and staff to fulfill the purchasing, receiving and inventory control functions. It is the board's responsibility to outline the controls needed while the property manager is to be held accountable for implementing and conforming to those requirements.
The property manager should be ultimately responsible for overseeing building spending, although the board is in turn responsible for checking after the manager. The manager is also responsible for determining the need for and appropriateness of service contracts or agreements.
Often, supplies are ordered by the building engineer or super and each invoice is approved by the manager before payment is made. The board then reviews monthly expenditures, and makes note of anything out of the ordinary, such as a significant change in the total cost or quantity of an item.
“I really think that property managers should be responsible for overseeing purchasing and inventory of building supplies,” says Rutkowski. “It’s like with financials you don’t want an accounting person writing checks and making deposits and reconciling the bank accounts because there is no checks and balances. There should be someone watching the manager if they are doing the ordering.”
Protection from the Inside Out
“Employee theft insurance is available to condos as a form of protection against dishonest practices,” says Schneider. “It’s like a fidelity bond. If they steal money or if they stole things like a window then the condo would be covered, if they could prove it.”
In fact, the Illinois Condominium Property Act requires all condominium associations with six or more units to carry fidelity bonds, which covers policyholders for losses that incurred as a result of fraudulent acts by specified individuals.
If a board member, unit owner or a shareholder suspects that something strange is going on with the ordering process, Schneider suggests meeting with an accountant and developing an agreed upon set of procedures and start a forensic accounting investigation. “That’s when the board and an accountant will develop procedures that will get to the bottom of the problem in question,” he says. “Let’s say someone bought 50 sinks and they are not being installed. We can develop a set of procedures saying we can look at the maintenance requests and match those up for a period of time. If we’re looking at their controls over inventory, and start asking a lot of questions about inventory that in itself would probably stop any dishonesty because they see that there is oversight.
“Oversight has many different levels; number one is having an annual audit, number two is having board members who are active, who are looking at the financials and number three is having the manager looking closely at the invoices before approving them and keeping track of what is ordered. When there is oversight on many different levels there is not much of an opportunity for people to do dishonest things,” Schneider says.
Just as anyone would do with their own personal financial accounts, a building’s financials and purchasing practices should be checked and double checked to make sure they’re getting exactly what they pay for.
Christy Smith-Sloman is a staff writer for The Chicagoland Cooperator.