Commercial property managers are susceptible to occupational theft (employee theft) at an increasing rate. According to a recent report by the Association of Certified Fraud Examiners, approximately 5% of revenue in the US is lost to occupational theft. Further, the average loss for firms with less than 100 employees is $154,000, whereas it’s only $100,000 for companies with more than 100 employees. A system of internal controls for smaller companies is just as critical in small companies as in large companies.
Due to the amount of different kinds of monies and funds that are handled by property managers, they are at an increasing risk of theft or diversion of funds. Some common claims are as follows:
Claims Examples
Manager Diverted Rent Funds
One of our property managers rented a space and never sent the lease to the home office. Each month he collected the rent in cash. - $17,000
Property Manager Submitted Phony Invoices
A property manager submitted phony invoices to home office to pay for work that was never done. Payments were made to a relative. - $270,000
Accountant Beats Dual Signature Requirement
A company with dual signature requirements for checks over $2,500 was faced with 43 checks issued for $2,300. Since the amount was consistent each month, the home office thought it was a fixed amount. It took over two years to discover the crime.
Property Manager in Collusion with a Vendor
A property manager in collusion with a vendor submitted inflated invoices for a construction project. The property manager received 10% kickback. - $2.7M
Best Practices for Cash Receipts
- Maintain a specific written procedure for the collection of rents and other funds, including any procedure regarding actual cash receipts.
- Maintain a separate bank account that should be used for each property.
- If the property manager must collect cash then use deposit only accounts.
- Payments should be made to a home office accounting department or a lock box. Receipts made directly to a property manager should be discouraged.
- If a cash payment method must be used then you should have a log book (in pen) and pre-numbered receipts must be used. An audit should be done of these periodically.
- A sign should hang in the office where cash is accepted stating that all cash transactions will be issued a receipt, and a limit of the amount of cash that can be collected.
- If money orders are used, make sure the sign says that money orders must be pre-filled.
Best Practices for Vendor Payments
- Create a pre-screened list of approved vendors for all services needed for the property, including vendors for after hours and emergency services. An onsite manager could recommend a vendor, but all vendors should be vetted and approved by the main office prior to the performance of any service for the property.
- Have an established requisition process which includes the use of purchase orders that are approved in advance by the main office. In circumstances where such prior approval is not possible, the onsite manager should prepare a purchase order and submit it to the main office the following business day.
- Vendors should be paid from the main office, if possible, and all vendor payments should require a corresponding, preapproved purchase order. If the onsite manager is to have any authority to pay a vendor, that authority should be limited to circumstances where such payments are permitted such as an emergency and a specific, limited dollar amount in their authority.
- Ideally, the person responsible for vendor payments should not be the same person who is authorized to sign checks or conduct bank reconciliations.
- The company should have a policy that employees who handle financial transactions, including purchase order approvals, vendor payments and bank reconciliations have no less than one full, continuous vacation week each year, to allow for a review of their daily work and compliance with company procedures.
Other Essential Controls
- All employees that handle cash or accounting functions should be required at least one full continuous week off each year.
- You should have a separation of duties between the person receiving funds and the person doing the bank reconciliations. There should also be a different person that is writing the checks.
For more information on this topic please contact one of our licensed representatives at 201-847-9175 or at info@axisins.com.
About Axis Insurance Services, LLC
Axis Insurance Services, LLC (AIS) is a licensed professional liability insurance broker located in Franklin Lakes, NJ with agents licensed nationwide. They offer access to high-quality insurance products in the areas of Errors and Omissions insurance (E&O), Directors and Officers liability insurance (D&O), Crime, Fiduciary, and Privacy/Network security coverage for today’s professional service firms. AIS works with all company types including commercial real estate firms, real estate agents and brokers, property managers, insurance agents, medical groups, practice managers, third party administrators, lawyers, accountants, architects, engineers and many others.
Axis Insurance Services, LLC is not affiliated with Axis Capital, Axis Insurance Company, its subsidiaries or affiliates in any way.
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