What internal financial controls should a condo corporation have in place?

Operational controls in a condominium corporation are obviously important, but internal financial controls are even more crucial. In a mid-to-large condominium building, millions of dollars flow through management hands each year — but how much of that spending is properly supervised with strong financial controls? And how many condominium corporations implement even the most basic financial controls?

Following an examination of numerous instances of fraud, it is shockingly apparent that in a majority of condominium corporations, the only factor that may prevent wholesale fraud from occurring is the morals and conscience of the manager who handles the invoices as well as the board officers who sign the cheques. And thus the true vulnerability of all condominiums becomes apparent — one bad manager or one rogue director, in a business environment with weak or absent financial controls, can cause significant losses over time.

Many types of condominium fraud or corruption can proliferate when internal controls are weak or absent: placing family members on corporation payroll at inflated salaries; pilfering supplies for personal home use; filing false claims for personal expenses in petty cash; fraudulent reimbursement for credit card charges; ordering tools and appliances for personal use; skimming cash from holiday season gratuity donations to staff; and manipulating the annual budget in order to conceal improper spending within inflated budget sub-categories.

Here are some examples of strong internal financial controls in condominiums:

• All corporation cheques, regardless of amount, require detailed review of back-up documentation by a director, plus the signature of a board officer;
• All signed cheques and back-up documentation are then reviewed in detail by a second board member before getting handing back to management;
• Directors review and understand all components of the monthly financial statement package prepared by management and pay particular attention to the cheque register, bank account statements and all expense variances;
• Employees are made accountable for all work time on the premises and the safe-keeping of their tools, equipment and supplies;
• The code of ethics for directors specifies disclosure of conflicts of interest and strong sanctions for breaches of ethical conduct;
• A whistleblower policy is created to provide a safe channel for reporting suspected misconduct in the condominium workplace;
• The condominium’s annual budget is based on true prior-year expenditures in all sub-categories and not calculated as an overall flat-rate increase.

Judy Sue is a certified fraud examiner with experience in condominium fraud investigations, financial record-keeping forensics and recovery of fraud losses for victimized clients. William Stratas specializes in performance audits of condominium corporations, fraud technical forensics and fraud deterrence/controls programs for condominium corporations. They are co-founders of Eagle Audit Advantage Inc., and can be reached at help@eagleaudit.ca or 416-599-1212.