Tips to Help Prevent Misappropriation of Cooperative Monies

As a housing cooperative, often many individuals forget that it is also a corporation subject to various legal fiduciary and accounting principles.  Over time, human nature begins to take precedence over these principles creating too many opportunities for the less scrupulous to take advantage of the corporate accounts.  The results of failures to properly govern and watch over those we entrust with the corporate accounts are devastating.  Simple key undertakings however, will tighten the ship and make it less enticing for someone to take financial advantage over your cooperative.  This article is not intended to be an exhaustive list of financial safeguards, rather, it is a guide to help you first, prevent misappropriation of funds and second, identify items that out of the ordinary.

The first place to review is your governing documents, particularly your bylaws.  Your cooperative should have provisions in the bylaws which dictate accounting methods and persons responsible for issuing payments from the corporate accounts.  In some situations, only one officer is required to sign a check on behalf of the corporation.  This is a no-no.  Always ensure that any checks written on behalf of the cooperative require no less than 2 signatures from your officers, unless, the board has chosen to delegate this task to a professional management company.  In the latter instance, the management company will be required to obtain permission from the board to pay out certain expenses over a specified amount.  Segregating the financial duties among several authorized persons makes misappropriation of cooperative funds far more difficult.

Ensure that individuals in charge of the accounts are trustworthy of such a responsibility.  This means adequate criminal and credit background checks should be utilized when seeking to employ an individual that will have access to the accounts.  Red flags will of course be any crime involving dishonesty or theft.  Credit reports which show several outstanding credit balances and charge offs are also a good   indication that temptation may be too much for someone in financial dire straits or that this person may be lazy and fail to pay the cooperative obligations.  Even if the person has a wonderful personality and could not possibly become a thief, do not put aside your duties for the cooperative corporation and look no further at his or her application.

Whether you choose to employ a professional management company or not, this decision is one which should be heavily weighed.  Although many cooperatives successfully perform “self-management,” it should always be considered in the best interests of the cooperative to at least employ a professional company for limited duties such as bookkeeping.  A good management company will be able to organize all of the financial documents, ensure proper payment of all outstanding liabilities, handle payroll for your site employees and package it into a nice monthly report.  Once the fiscal year is through, your management company will be able to work closely with your accountant in the preparation of the cooperative's yearly financial report.

Even if you do not employ a professional management company to handle your bookkeeping, you must still ensure that policies are implemented which require the responsible individuals to report to the board regularly.  Scrutinize the monthly reports and statements.  Your checks are numbered for various reasons but first and foremost remember they are sequential.   If checks are cashed out of sequence you will see it in your monthly report.  Immediately contact the bank and begin an investigation internally to determine why the checks are cashed out of sequence and where the missing check(s) is (are).

As a board member you are duly elected by your membership to ensure the corporation is run properly and in the best interests of every member.  Any failure to properly scrutinize the financial documents could not only cripple the corporation financially but it could expose the board to liability in failing to carry out its corporate fiduciary obligations.  Keeping a careful eye on the finances is imperative therefore; regularly check the cooperative's credit report to ensure creditors are properly paid.  This also helps maintain accurate financial reports by addressing inconsistencies early on and before they become a problem.

Another safeguard is to set up a positive pay arrangement with your bank where available.  This is an arrangement which allows you to submit to the bank an electronic list of checks written on a daily basis.  In the event a check is altered or drawn without your permission, the bank will not honor it.  This type of safeguard cuts off the bolder individuals that come to the board with a bona fide check payment, obtain the required signatures and then “wash” the check so the payment is directed for personal use.

It is all too often that funds are misappropriated by individuals thought to have been trustworthy.  In the end it is the board that determines the course of the cooperative and as such it is the board that must take the steps necessary to maintain and protect the corporation through implementation of strict policies and reporting requirements.  Review your governing documents and pay close attention to the accounting practices utilized.  Ask questions about cooperative financial transactions regularly and if you are not satisfied with the answers provided to you press the issue further until you are satisfied.  You owe it to your members.