When a Management Transition Goes Quietly Wrong

A management company transition should be routine: the old firm hands everything off, the new one takes over, and life goes on. But Carl Cesarano, principal at Cesarano & Khan, has spent years watching these handoffs quietly unravel, leaving boards scrambling months later when the annual audit comes due and nobody can locate records. Boxes get shipped, stored, and forgotten. Agents blame each other. And suddenly a building that's been operating for decades finds itself unable to produce a basic financial statement.

Cesarano breaks down the questions boards rarely think to ask during a handoff, and why a treasurer's diligence in the first few weeks can make or break an entire fiscal year. It's a study in what happens when "we'll sort it out later" becomes the plan, and a roadmap for making sure your building doesn't end up in the same bind. Habitat's Carol Ott conducts the interview.

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Transcript

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Carol Ott: Welcome to Problem Solved, a conversation about challenges facing New York co-op and condo board directors. I'm Carol Ott with Habitat Magazine. You are on your co-op or condo board, and after years with the same management company, you've decided it's time for a change.

A new management firm comes in, the old one leaves, and everyone expects the transition to be routine. But a few months later, the building CPA asks for the financial records needed to complete the annual audit, and suddenly no one seems to have them. The former management company says they turned everything over.

The new management company says they never received it. And your board is responsible for getting a financial statement produced for all your residents. Turns out this situation is not nearly as rare as you might think. And today I am talking with Carl Cesarano, principal at Cesarano & Khan, who has seen this exact problem play out many times during his career, auditing co-ops and condos.

What looks like an accounting problem is often something else entirely: a breakdown in governance during the transition between management companies. Carl, when a building ends up in this situation where the audit is coming up, but key records are missing, how does it usually come to your attention? 

Carl Cesarano: Carol, thank you for having me.

I appreciate the opportunity and the work you guys are doing to help the co-op condo community is invaluable. This is quite common when there's a change of managing agents. Typically the prior agent asserts that they sent all the books, records, corporate documents. Keeping in mind when managing agents change a lot of times it's viewed by the new agent as, everything starts the day that I took over.

However, the real issue is you're managing an existing corporation that could have been around forever, sometimes since the 1980s, depending whether they were conversions or original co-ops. And typically everybody disclaims. The new agent blames the old agent, says he didn't get records.

The old agent says, I gave records. Then a period of time goes by. So even if you want to take this to a higher legal level there is a hole in the whole story. What's the hole? Did anybody coordinate this transition? Was there a list of items? Did anybody do an inventory? If a lot of time goes by, who's right, who's wrong?

Sometimes it winds up that the new agent did get a lot of the items, or maybe all of the items, but they sent a van or a truck over, they picked up 50 boxes, for example, and all they did is put it in storage. 

Carol Ott: So let me just jump in here. Now it's time for the audit. Here's the board that's gotta produce the audit.

You're the building's accountant. So where does this leave you as a CPA? 

Carl Cesarano: It leaves us in a tough spot. A lot of it has to do with the common interest real estate model, having outsourced people maintaining your books and records and managing your property.

Everybody is a volunteer. It's typically folks who live in the building and they have lives and they don't have a lot of time for this. But where it leaves us is in a bad position because there's a lot of stress to get these financials out, to comply with their bylaws. Also for their annual meeting. Also for third party users, investors, banks brokers, buyers whoever these third party users are.

And they typically say I don't know what's wrong with the CPA or the CPA firm, but we do need data. In order to audit and to produce financial statements. The second part of the problem is it also talks about in the theory of auditing, like what's the governance? Who's in charge?

Like who is supposed to coordinate? 

Carol Ott: If you don't have the data or there's missing data, what can you actually do? Because you actually do have to produce a financial report. So tell me what you do, actually. 

Carl Cesarano: That's correct. In the case or cases where records happen to be at the new agent, but they did not go through the boxes or take an inventory we have to push them to do that.

These things have to be sorted out. Many times they don't do it. 

Carol Ott: If the data's not there, what do you do? 

Carl Cesarano: In the case where you get these bad actors, there's no data, sour grapes, whatever you wanna call it now, potentially, and it's happened to us a number of times. We've been doing this for 36 years.

It's not uncommon. We have to have books and records recreated. And one of the problems for CPAs is independence. So how do you recreate records and then audit the records? Basically, you're auditing yourself, so that creates an independence issue. 

Carol Ott: How do you recreate a record? I'm just curious.

Carl Cesarano: That's an excellent question. Assuming everything is exhausted, we go back and forth, but the time is of the essence. So what we would do is work with their attorney to get bank records, meaning bank statements. We would be having them write to vendors for invoices and contracts.

Now since we cannot process the data and audit our own data, we have used or we have had the board use an independent bookkeeping service that's familiar with this industry to try to recreate books and records. Once these books and records are auditable, and of course, we have a problem now with internal control, so we have to expand the scope of what we do tremendously.

We have to send loads of confirmations to different vendors. Anything we can confirm independently, we confirm. And then we are auditing these, for lack of a better term, alternative records, in place of the records that were maintained by the previous agent. 

Carol Ott: I just wanna jump in. A lot of buildings now, and a lot of management companies are using digital platforms for invoices and for payments, and you would think that given a digital platform this problem would disappear. Does it? 

Carl Cesarano: I would say that since things are digital, there is some relief. However if a company is terminated and, typically they give them 30, 60, 90 days and they decide, although we're contractually obligated, maybe we're not gonna do our job as good as we should or as normal, and things start to fail.

So you gotta remember, in addition, there's loads of other corporate documents that have been accumulated over the years. If you think of even any sort of remediation, roof, remediation windows, whatever that may be, boilers, guarantees, contracts. All these things should be-- actually, I can't say recreated, but we have to actually go to these third parties and get them, because this now goes beyond the auditing.

It's more about, you have to secure the guarantees and warranties that you had and have an understanding of what you have. 

Carol Ott: Do you think that board members need to secure this and have these documents? 

Carl Cesarano: That's a great question. A transition isn't complete when the boxes arrive.

It's complete when somebody verifies what's inside. So what we tell boards is we have created a transition checklist. We've created a scenario of who does what and when, along with the timetable. And then of course I realize that people may or may not have time and that they're volunteers.

But typically the treasurer, if you look at the bylaws, is responsible for this. And I would say, again, and I've spoke about this in a number of our different podcasts and articles, in common interest real estate, you really need to build a good team. And it's a team approach. You need a good attorney, you need people on the board who are gonna be actively involved.

 You need an accountant who could work with you, or a CPA. And of course, the new agent is an integral part of a good transition. So yes, if they resolve to change agents, they must do it in a systematic fashion. Typically, somebody sends them a letter, typically the attorney or the board. We're exercising our right to terminate you in 30, 60, 90 days, whatever that may be.

And then there's an expectation that people are gonna act professionally. But that doesn't always happen, and that's where everything falls apart, right? We need folks to act professionally, but we know that's not a guarantee. So all of a sudden time goes by. Nobody confirmed, checked, looked at a checklist, looked at a timetable ,made sure things happened the way they should in terms of the transition.

And then all of a sudden it's time to do the audit. And then it becomes why can't we get a financial statement? 

Carol Ott: What if you cannot get a financial statement? What happens to the condominium or the co-op if you just can't produce it because you don't have the records?

Carl Cesarano: The problem is it's almost like business in the sense comes to a halt, right? There's a number of third party users, if you're a co-op or even a condominium with a common interest real estate loans and do capital improvements. Basically they need financial statements. 

Carol Ott: If a board is listening to this episode and they're about to change a management company, I want you to tell me the one or two things the treasurer or the board should make sure that happens during this transition. 

Carl Cesarano: So what boards should really do is this has to be organized and coordinated. I, we did develop a checklist to do it, and we do give it out to boards but, again, it's developing the team approach. You may have your attorney terminate them via certified mail or whatever the appropriate means are, and then the board gets together. And they get together with their CPA and they get together with the new agent and the attorney, and we start thinking of all the different scenarios that could happen.

We do not want to leave this to risk. If we don't produce a financial, you're violating a debt covenant. You could have a technical default on a mortgage. People can't get mortgages, or end loans, buyers, brokers, they all start to panic and it kills shareholder- unit owner value. I think the first thing is for everybody to stay calm.

This is not the end of the world. You want to secure bank control. You want to make sure you get records. That includes not only historical records, the current year records that you know would be integral to doing the current year audit. Bank statements, check images, proof deposits, ledgers for the different owners to make sure who's in arrears, who's not in arrears.

The other thing is, having a timetable set up and then when the company that's being terminated turns over the records, no different than if you were, I don't know, a company who was receiving inventory. They're gonna look at a bill of lading, somebody is going to check to make sure what the bill of lading says is actually what's in the box.

And then it'll be logged into inventory. This would be the same approach. You would try to make sure that we have a log. Okay. Are these boxes labeled? Hopefully yes. What's in the box? Okay. This has 2025's complete activity, for example, including all canceled checks, receipts, any sort of backup.

And then somebody's actually gotta go through the box to make sure that's correct. 

Carol Ott: That's my question. When you said somebody, this is not the board. 

Carl Cesarano: Here's the thing. When the board meets with the new agent and with the attorney and with the CPA, that is what's going to be discussed.

See, the problem really is that boards are in a tough spot. It's an important job, but I actually feel sorry for them. They work for free, you are a director of a corporation or an association and that doesn't mean you don't have responsibility. Yes, in the best of situations, we would like the new agent to do it and to re and to report back.

And then the treasurer and the board could just make sure that the checklist of items is complete, something's incomplete. Then we have them call the old agent, or the attorney gets involved. 

Carol Ott: So it makes sense. You mentioned a checklist. I would guess that for boards who are thinking of transitioning, they would turn to their accountant and say, give me a checklist of what we need. And then they would confirm with the new company that the checklist has been met. 

Carl Cesarano: That's correct. That would be the best way to do it. And of course you have to set up a timeline. And again, it's a team approach.

Everybody has to be involved in this. Even if you want to take out the part about, okay, we need an audited financial statement. You cannot lose the books/ records of your corporation. They support your tax returns. There's other valuable information that, of a historic nature that needs to be preserved.

So it's very important. Unfortunately what I see many times is there's a heavy reliance on things are going to go right. Which, it would be nice, but at times it may be an unrealistic expectation. You really need to have leadership documentation and verification. That's what it really is.

Carol Ott: And with that, I wanna thank you. That's really valuable advice. 

Carl Cesarano: Carol, thank you very much for having me. I appreciate it. 

Carol Ott: Terrific. That was Carl Cesarano, principal at Cesarano & Khan. I'm Carol Ott, and this is Habitat's Problem Solved a series that dives into dozens of real world examples of everything co-op and condo boards face as they try to maintain and position their buildings for the future.

Experts provide cost saving tips, board focused strategy, and of course lessons learned. If you're a board member with your own story to share, we'd also love to hear from you. Please get in touch online at habitatmag.com or use the contact details in the monthly print magazine. Again, Carl, thank you so much for joining us today.

Carl Cesarano: Thank you.