Reducing Financial Risk Management of a Sectional Title Scheme

Martin Bester, the Managing Director of Intersect Sectional Title Services

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

Martin Bester, Managing Director of Intersect Sectional Title Services, who sits on the residential and sectional title committee at SAPOA and is an alternate member of the Sectional Titles Regulations Board, says that this is by no means a bad thing and offers the following advice:

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

“Ensuring that the managing agency is in possession of a valid fidelity fund certificate, issued by the Estate Agency Affairs Board (EAAB) is critical,” says Bester.  “All managing agents are estate agents by definition and by virtue of the nature of their work, therefore every managing agent must be registered members of the EAAB and, as long as they operate one or more trust accounts, they must contribute to the EAAB’s fidelity fund (based on the interest earned on the trust account balances).  The EAAB’s fidelity 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.”

Over and above a valid fidelity fund certificate, Bester advises that the managing agency should also be in possession of professional indemnity (PI) cover.  “The PI cover protects the managing agency against errors, omissions or wrongful acts that result in financial loss.  Should the body corporate suffer a loss as a result of the managing agency’s error, omission or wrongful act, then the body corporate may have recourse to the managing agency and it would therefore 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.”

Bester goes on to advise that further recommended cover is for the managing agency to be in possession of its own fidelity guarantee.  This cover is put 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.”

“Whilst on the topic of fidelity guarantees, the body corporate too should have fidelity cover in its own policy to cover the loss of any monies whilst outside of the managing agency’s control, examples of this would be petty cash, cash recoveries and/or monies held by trustees or employees of the body corporate, for whatever reason.”

In summary - if the managing agency is registered with the EAAB and meets the EAAB’s requirement and is in possession of a valid fidelity fund certificate, then the body corporate’s funds, held in trust by the managing agency, is protected by the EAAB’s fidelity fund.   The managing agency should also have their own insurances to cover losses resulting from theft, fraud, errors, omissions and wrongful acts.  Lastly, the body corporate too 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,” says Bester.  “This is put in place to cover the trustees should the body corporate become legally liable for costs as a result of their [the trustees] wrongful acts, so long as such 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?

According to Bester, trustees should insist on monthly management accounts so that the cash movement, variance to budget and assets and liabilities can be scrutinized.  Trustees should also approve all payments made by the managing agency on behalf of the body corporate, and this could be done in a number of ways.
 
“The auditor too plays a role in this process.  The accounts of a body corporate are audited annually by the appointed auditor, providing the scheme is made up of 10 units or more (should the scheme be made up of less than 10 units then an accounting officer may be appointed to prepare the annual financial statements).  The preparation of the accounts for the audit is generally done by the managing agency and the auditor’s responsibility is, inter alia, to test the payments made by the managing agency against the invoices and statements of the creditors and the approvals of the trustees.”

“Therefore the appointment of a managing agency, an insurance broker and of an auditor are all important duties of the body corporate, and homework done in this process will result in a reduction in risk and overall better corporate governance of the body corporate,” concludes Bester.