In recent months, we have seen problems with advance cash payments that raise troubling questions surrounding this practice engaged by property management in the condominium industry.

It’s that time of the year again – resident’s holiday party in December. The property manager will be making all the arrangements for this annual event. However, he/she estimates that he/she will need about another several thousand dollars to cover the expenses for this much anticipated social function – in addition to the food catering (buffet dinner for about 200 residents) which was paid for separately. So the manager requistions a cheque made payable to himself/herself in advance for several thousand dollars. BUT there is no supporting documentation to justify or back up the estimated cheque amount. Board director or not, would you sign this cheque? Believe it or not, the cheque for this advance cash payment was indeed signed. The million dollar question – what other expenses besides beverages could amount to several thousand dollars when full-service catering had already been invoiced separately to the condominium corporation?

Now what? The cheque is then cashed. The manager now apparently has several thousands of dollars in cash. Imagine the manager walking around with wads of your condominium corporation cash in his or her pockets to make purchases for the holiday party! Hmmm…does this appear to be a normal business practice?

Problem 1: Advance Cash Exceeds Estimated Cost
It gets better. What happens when the advance cash payment is more than the estimated cost of party expenses? What happens to the difference? Does the manager deposit the surplus back into the corporation’s operating bank account? Nope. As we have seen, some of the difference was apparently used for other expenses not earmarked for the holiday party, as the manager claimed. And some of it totally unaccounted for. No documented reconciliation of the advance cash payment was ever made. That is, no record was made of how the advance payment in cash was spent. Does this seem normal?

Problem 2: Advance Cash Not Used For Intended Expenditure
When asked “how was the cash advance spent?”, the manager presented cash receipts for most items spent for the holiday party, along with cash receipts for mail postage purchased for the owner’s budget mailing, cash receipts for gift items purchased as donations for a children’s charity, plus a hand-written piece of paper with an amount supposedly spent for pizza and a cash dollar figure that was paid to a corporation employee as a year-end bonus!

Problem 3: When Things Don’t Make Sense/Missing Receipts or Lack of Proof of Expenditure
Knowing that the corporation has a $500 petty cash float for small purchases, this raises a whole slew of questions. Why was the mail postage not paid out of the petty cash fund as it normally is? What exactly was the pizza for and where is the cash receipt for the pizza purchased? Why is an employee being paid a bonus with cash rather than a cheque? What do donated gifts to a charity have to do with a resident’s holiday party? Why were all these payments made with cash funds designated for the holiday party? Get the picture?

Problem 4: Unaccounted Cash Could Become Perpetual Problem
And what happened to the cash that was unacounted for? If no one is looking or no one cares to examine any advance cash payments made to the manager, it doesn’t matter, right? Picture this same practice of advance cash payments being continued throughout the year. Perhaps another 5, 10, 20 times or more. The first instance of unaccounted cash expenditure may seem small or insignificant. Multiply it by 5,10 or 20 times. The magnitude of the unaccounted cash is no longer insignificant. It adds up very quickly. Remember, it’s owner’s money out the door and nobody knows how it was spent.

Problem 5: Improper Recording of Expenses Leads to Inaccurate Records and Distorted Budget
It doesn’t stop here. When the advance cash payment was processed to cut the cheque in the name of the manager, it would have been posted to an expense account called Social Functions or some similar expense account, right? Well, remember the leftover cash that was not spent on party-related expenses but on some other expenses? Do you think the manager instructed the accounting department to reclassify the non party-related expenses from Social Functions to the proper expense account? Nope. So what does this do to the financial statements? You got it. Expenses are not correctly recorded in the books of the corporation. And when expenses are not properly recorded in the correct expense category, what does this do to the budget process? You guessed it. Using the current year’s expense as a base, the next year’s line by line expense budget will not be accurately projected. What you end up with is a distorted budget.

So what is the lesson here?

Advance cash payments should never be made payable to anyone. This includes property management, management employees, condominium board directors and condominium corporation employees. There is no plausible reason why anyone needs to receive large sums of cash in advance for any purchase to be made on behalf of the corporation.

The proper way for accountability and transparency is for management to pay for condominium purchases with a corporation credit card. In cases where the condominium does not have a corporate credit card, the manager can make the purchase with a management credit card or their personal credit card. Subsequent to the purchase, management can request a reimbursement for the purchase by making a cheque payable to the financial institition of the credit card (TD Visa, BMO Mastercard, AMEX Bank, etc), NOT payable to management or the manager personally. Why? Because the condominium corporation does not owe the money to management nor the manager. The money is owed to the bank’s credit company.

The cheque requistion for reimbursement for credit purchases made on behalf of the corporation should always be accompanied by supporting documentation such as an original receipt issued at time of purchase (no scans or photocopies). The original receipt will show the date and time of purchase, method of payment, type of credit card used and dollar amount. Additional original documentation detailing items purchased should also be attached. Remember, details matter.

No one, whether it’s a management cheque-signing official or a board director should ever sign a cheque without proper back-up documentation to support the cheque payment. Even if there appears to be supporting documents, no one should sign a cheque when there is an anomaly with the back up. Send it back to the manager and get an explanation for the anomaly. Use your common business sense to judge whether the explanation passes the credibility test.

Best Practices for Handling Condominium Purchases:

  1. Advance cash payments should never be made – payments should be made by credit card or cheque. Reimbursements for purchases made on behalf of the condominium corporation that were paid by personal credit card or management credit card should always be paid by cheque made payable to the bank’s credit company, not payable to management or manager personally.
  2. Reimbusements should only be made for valid corporation expenses. That means, items that have valid purpose or use in the condominium corporation. Be aware of personal-use items that could be used in a single-family home by employees or management who may be tempted to claim them as false condominium expenses.
  3. Only original credit card receipts should be attached to all cheque requisitions for payment to the bank’s credit company – no photocopies or scans.
  4. Additional original documentation detailing all items purchased should also be attached. Photocopies should be rejected because they could be submitted for reimbursement more than once.
  5. Prior to signing cheques, board signing officers should always review supporting documentation for validity, completeness and accuracy of documentation – refuse to sign if there are no documents or if documents are missing, send cheque back to manager and get an explanation for the anomaly.
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