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.