New Law Shines Light on Importance of Good Record-Keeping
Byline: Jordan I. Shifrin
Perhaps you have heard the name, Sarbanes-Oxley. Is it a new comedy team, a disease, a new type of car or all of the above? Actually, it was an act of Congress adopted in 2002 in response to the Enron scandal. If you have been wondering why your accountant began to act a little funny in the head back then, it seemed like the accounting industry's reaction to this new oversight act ran from panicking to knee-jerking. Obviously, over time, things settled in and a new age of diligence and conscientious checks and balances has arrived.
How does this all affect condominium and homeowners associations? Even though board members are fiduciaries for the members of the association, this new law and stricter standards shines a brighter spotlight on association record-keeping, financial responsibility and independent oversight. Boards of directors of not-for-profit corporations are held to even a higher standard than "for profits" because, in addition to owing a fiduciary duty to shareholders, the primary source of revenue is OPM (other people's money) and as a result may involve even stricter scrutiny than a regular corporation.
Instead of using this as a pretext to never, ever run for a board, it should actually give the more conscientious board members fuel to support their arguments for outside audits and financial checks and balances that some board members may have resisted in the past because they did not want to spend the money.
If a board is diligent, then they have given themselves a bigger cushion as to indemnification and protection from frivolous claims. In order to comply with the spirit and the letter of Sarbanes- Oxley, a board need only make sure it does an annual independent financial review, as well put certain checks and balances into place for all board operations involving the spending of association funds and collection and investment of all revenues.
- Each director should become familiar with the association operating documents (articles of incorporation, declaration, by- laws, rules and regulations, minutes, contracts) as well as its financial operations (balance sheet, general ledger, bank statements, etc.).
- Review all legal and operating documents and determine whether they need to be amended or updated. Also, become familiar with what records the association needs to maintain, and when it can dispose of records that are no longer relevant or outdated and could create confusion.
- Make sure all local, state and federal government reporting is in compliance and timely filed, licenses are renewed, permits on file; secretary of state filings, tax returns, unemployment taxes paid (where applicable) etc.
- Adopt a code of conduct or ethics for individual directors and officers, review reimbursement and compensation policies, (Section 18(a)(16) of the Illinois Condominium Property Act addresses conflict of interest, and/or a proposed Code of Conduct for Directors, can be obtained from my office). …