Reduce risks in sect. title management

07 Feb 2013

Reports pointing to dishonesty during the financial management of sectional title schemes by managing agencies have trustees reviewing the agreements in place with their managing agents and insurers as well as their fiduciary roles as trustees.

A basic checklist should be ticked off when considering the appointment of a managing agency. The managing agency should have a valid fidelity fund certificate, issued by the Estate Agency Affairs Board (EAAB).

Martin Bester, managing director of Intersect Sectional Title Services, a sectional title specialist company in the Western Cape, says that this is by no means a bad thing. Bester is on the residential and sectional title committee at SAPOA and is an alternate member of the Sectional Titles Regulations Board.

He says a basic checklist should be ticked off when considering the appointment of a managing agency.  "Should the agency not comply with any aspects thereof then the trustees should seriously consider the merits of their appointment, if at all.”

He says it is critical that trustees ensure the managing agency has a valid fidelity fund certificate, issued by the Estate Agency Affairs Board (EAAB). Managing agents are estate agents by definition and by virtue of the nature of their work, therefore they must be registered members of the EAAB. Bester says if they operate on one or more trust accounts, they must contribute to the EAAB’s fidelity fund (based on the interest earned on the trust account balances). This fund is there to protect the body corporate against theft and or fraud resulting in a monetary loss of funds held in trust by a managing agency, provided the managing agency is registered with the EAAB and complies with the EAAB’s requirements, he says.

Along with a valid fidelity fund certificate, Bester advises that the managing agency should also have a professional indemnity (PI) cover. “The PI cover protects the managing agency against errors, omissions or wrongful acts that result in financial loss."  If the body corporate suffers a loss as a result of the managing agency’s error, then the body corporate may have recourse to the managing agency and he says it would be advisable for the trustees to ascertain and ensure that such cover is in place and that the managing agency is capable of dealing with such claims, bearing in mind that the managing agency has more than one client - any of whom could lodge such a claim.

Trustees should insist on monthly management accounts so that the cash movement, variance to budget and assets and liabilities can be scrutinised. They should also approve all payments made by the managing agency on behalf of the body corporate.

Bester says further recommended cover is for the managing agency to have its own fidelity guarantee.  This cover is in place to protect the managing agency against theft or fraud by any of its employees, resulting in a financial loss for the managing agency. “The reason a trustee would be advised to insist on this is so that he or she may be assured that the company has the resources to continue operating and providing the essential services that it does in the event of such a loss.”

He says the body corporate should have fidelity cover in its own policy to cover the loss of any monies whilst outside of the managing agency’s control, such as petty cash, cash recoveries and/or monies held by trustees or employees of the body corporate.

If the managing agency is registered, meets the EAAB’s requirement and has a valid fidelity fund certificate, then the body corporate’s funds, held in trust by the managing agency, are protected by the EAAB’s fidelity fund. The managing agency should have their own insurances to cover losses resulting from theft, fraud and errors.  Lastly, the body corporate should have its own fidelity cover, albeit perhaps for a minimal amount.

“What trustees should also be cognisant of, and ensure is present in the body corporate’s insurance policy, is trustees’ indemnity or liability cover,” Bester says.  “This is in place to cover the trustees if the body corporate become legally liable for costs as a result of their [the trustees] errors, as long as these acts are in good faith and subject to the various exceptions of the insurance policy.”

What else should trustees do or insist upon in order to reduce financial risks?

Bester advises trustees to insist on monthly management accounts so that the cash movement, variance to budget and assets and liabilities can be scrutinised.  Trustees should also approve all payments made by the managing agency on behalf of the body corporate.

The auditor plays a role in this process. The accounts of a body corporate are audited annually by the appointed auditor, providing the scheme has up to 10 units or more. If the scheme has less than 10 units, an accounting officer may be appointed to prepare the annual financial statements.  The preparation of the accounts for the audit is done by the managing agency and the auditor’s responsibility is to test the payments made by the managing agency against the invoices and statements of the creditors and the approvals of the trustees, Bester says.

The appointment of a managing agency, an insurance broker and of an auditor are important duties of the body corporate, and proper research done in this process can result in a reduction in risk and overall better corporate governance of the body corporate.

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