Here’s a scenario:  It’s mid-December.  The board has assembled for their last meeting of the year.  The managing agent brings great news: due to several unforeseen factors, including the past year’s mild winter and savings resulting from converting to energy-saving technologies, the association is ending the year with a $10,000 surplus over projected expenses.  Should the board throw an extravagant holiday party for the residents?  Reward their hardworking staff with larger bonuses?  Install a hot tub?  Remember, this surplus is made up of residents' money. Can the board spend it on...whatever?

In a word, “No,” says Mark L. Love, CPA, an associate with the Massachusetts-based M Love & Associates, LLC. “Boards doing anything unilaterally in a bubble are asking for trouble.  There is no law against it, but there would be hell to pay if it’s done in a vacuum.  Our experience is that [unilateral spending decisions] are poor judgment.  Usually, there is a budget that drives everything, and if it’s not in the budget, the board would be well served by not spending the money.  That doesn’t mean they can’t bring it to the membership and suggest the expenditure and vote on it.”

Proprietary Rules and Propriety

Exactly how a board can spend common funds “is based on the law, fiduciary duty, and the governing documents – as well as also good management,” says Jeffrey Turk, an attorney and  partner at the firm of Turk & Quijano, located in Braintree, Massachusetts.  “Trustees must think about the long-term ramifications.  It’s also a matter of scale, which is a practical difference – not a legal one. Say $50, versus $15,000.”

Turk cites a situation he recently encountered with a 100+ unit condominium association client in Dorchester, a rapidly gentrifying neighborhood in greater Boston.  “The neighborhood was having issues with gun violence.  A task force was set up to do prevention programming.  One of the board members for this condominium serves on the task force.  Local people, businesses and organizations were donating money to get the task force up and running.  The condo association board voted to donate $10,000 to the new organization.”

Turk points out the conflict in the situation.  “On the one hand, this is supporting the common good of the larger community.  On the other hand, is this benefiting the personal interests of the board members who might be in favor of gun curbs and controls?  Board members owe a fiduciary responsibility to the association of good faith and fair dealings.  On the flip side, boards have some discretion. There’s the Business Judgment Rule, which means a court won’t second-guess business decisions made in good faith.  Is that donation in the association’s best interest?  It reduces crime, shootings, etc., but it’s a difficult thing to say.  We see this all the time when boards make charitable donations.  Board members aren’t self-dealing, but is it really in the interest of the association?  That’s where a board can get into trouble.”

In the end, Turk recommended that the board not make the donation.  Instead, while he wholly supported the task force and the work they set out to do, he suggested they encourage condominium members to donate individually.

Diverging From the Documents

Condominium associations and HOAs draw up annual budgets every year based upon prior years’ expenses and the advice of management and accountants.  Board members are expected to execute the plan as closely as possible while taking into account day-to-day changes in situations that may affect expenditures.  But sometimes stuff happens.

David Abel is the executive director of property management for FirstService Residential in Canton, Massachusetts. “It goes back to the documents,” he says of how boards can spend money based on their governing documents.  “It’s pretty clearly stated what they can and can’t do.  Some documents are better-drafted than others.  In my experience however, they’re fairly consistent – at least in New England.”

That said, Abel does allow that there can be situations requiring a more creative fix.  “There are gray areas,” hey says. “In my experience, it’s usually when there are damages to someone’s unit that have been caused by, say, a leak from a recently repaired roof.  The owner comes to the board and says that the damage was not his fault, and please fix his unit.  The standard insurance may not cover the damage due to unmet deductibles or such.  In some cases, I’ve seen boards say they feel responsible and will fix the damage for the resident.  Their logic is not necessarily in agreement with their documents, but they will do it because they feel it's the right thing to do.  The gray area is, how negligent were they [in deviating from the letter of their governing documents]?  Or were they not negligent at all?  Boards will sometimes not bother with the legalities of these situations and just pay for the damage—and that’s where they’re not compliant with their documents.”  Abel notes that this tends to happen more often in smaller, less-formal communities.  Larger communities tend to follow their documents more closely.

Safeguards Against Malfeasance

Even with the best of intentions on the part of board volunteers and managing agents, accusations of impropriety can and do arise.  It is important to set up the right processes to protect both the association and those who serve on the board. 

 Jim Toscano is president of Property Management for Andover, a management firm located in Lawrence, Massachusetts.  He has managed condominium properties for many years, and advises that the best system for both preventing the mishandling of funds and for providing proof that no malfeasance occurred is a multi-person money management policy that promotes transparency.  “You have to have different individuals taking on different tasks,” he says. “They can then detect fraud if it occurrs.  We have a person who monitors accounts for our condominium clients, another who does reconciliation, and two who sign checks.  That’s a total of four people involved in dispersing and monitoring funds.” No system is foolproof of course, but more eyes on the process means less chance that someone will be tempted to misuse or misappropriate funds, and offers a better chance of stopping any such malfeasance before significant damage is done. 

Requiring multiple signatures is a tried-and-true practice when it comes to maintaining transparency.  The question is whether those signatures should both come from the management company, or whether one should be from the association’s board. “Hire a certified, reputable management company that uses appropriate accounting practices,” Abel advises. “Massachusetts statutes require reviews for any association of 50 units or more on an annual basis.  Some boards want to maintain their reserve accounts themselves, and others don’t desire to.  We typically recommend that the association’s attorney and CPA advise them as to how to structure this.  Is it a CD?  How many signatures should be required to use the money? One? Two? Five?  We encourage two signatures on any check; either two board members, or one and a management employee.”

Abel, though, has more cutting-edge advice.  “We try to counsel boards not to use a checkbook.  There’s really no need to today.  You hire a management company to pay your bills – so let them!”  Most payments can be made online, and as Abel says, “The system should control risk.  We don’t permit our clients to sign checks at all for operating accounts.  For reserve funds though, we do have clients who hold checkbooks, and usually two trustees must sign.”

To protect the association, says Love, “You need to keep books, records, and a budget and have a CPA come in annually.  The trend has been toward transparency.  There should be a budget, a treasurer, someone within the association with some business acumen, monthly reports, and a CPA should come in annually to do taxes and year-end statements.  There are three kinds of statements: a compilation, a review, and an audit.  In a compilation, we use your numbers.  In a review, we review and validate your numbers.  An audit is much more serious, and a deeper investigation.  It’s usually done when a developer hands off a property to the condo association.

“There are a lot of telltale signs of malfeasance,” Love continues. “For instance, when someone is not transparent or forthcoming with information that’s been requested, or is argumentative about those requests.  That’s when you know something is not right.”

“Most associations,” says Turk, ‘if professionally managed also require their management company to carry a fidelity bond.”  A fidelity bond is a form of insurance protection that covers policyholders for losses they incur as a result of fraudulent acts.  “That’s a great way to make sure you’re covered,” Turk says. “The more checks and balances you have, the better.”

Best Practices

In the end, transparency seems to be the most important factor in maintaining a sense of propriety with regards to association funds for everyone involved, whether they're board members, management, or others.  Condominium association members and HOA members look to their board leadership for their honest custodial responsibility in protecting everyone’s interests.  While that hot tub or extravagant holiday party or generous appreciation of the association’s employees might make for warm fuzzies, it can potentially lead to disapproval on the part of others.  Board members should know – and respect – the limits of their position, says Love, who adds: “Limits are memorialized by getting voted out of office.”          

A J Sidransky is a staff writer and reporter for New England Condominium