Are investors calling regarding their distributions or why financial reports haven’t been forthcoming? Recently, I investigated a matter involving the questionable acts of a property management company that allegedly commingled 40 + accounts involving 20 some properties located in several states. The affected accounts were listed as capital, operating and tenant deposits. The money taken via wire transfer was then deposited into a single money market account.
While the owner of the property management firm fessed up and admitted to what had happened, he may in all likelihood face civil penalties and criminal charges. Without mentioning the damage to one's reputation, the question then is, what needs to be done to correct the situation? Basically, time and lots of money.
I would advise sponsors to conduct periodic audits regardless if the property is being managed in-house or by a third party. Every three months at a minimum should an audit be conducted. Look for increases in operating costs, money disappearing from capital accounts without an explanation, ceased or decreased distributions to investors or the possible commingling of even tenant deposits from various properties.
The money spent on oversight is nothing in comparison to what it may cost to remedy a bad situation, not to mention the damage done to one's reputation and the ability to attract new investors.
Jerry Ipsen, a Certified Fraud Examiner (CFE) investigates allegations of wrongdoing, but also provides quarterly oversight by examining accounting reports and bank statements of property management companies. In ninety-nine percent of cases, one might find a mistake. However, evidence of intentional wrongdoing is seldom found. Saying that, wouldn't you agree that people do act differently when they know an audit is forthcoming. It’s the one time when a person gets complacent and does nothing that bad things happen, causing both reputation and syndication business to be destroyed or at a minimum, severely crippled.
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