The accountants performing audits and reviews on the associations that I manage come to my office each year and among the questions that they ask is:
“Were there any related party transactions?”
I dread that question and with a clear mind I answer, “not to my knowledge”. Of course, if I knew of one, I would have to disclose it and I would.
Related party transactions, as you think about it, can become a problem to an association. It is much easier to deal with a contractor in the event that there are deficiencies in his work when there is not a relationship to protect. When the association's board of directors discusses the poor performance of a vendor and in the next breath a member says, “My cousin, Joe, said that he was going to buy a mower and can do a better job. Can we get a bid from him?” one faces not only a related party transaction but the possibility of a conflict of interest.
My natural response in such a case would be, “If your cousin would like to bid the contract, he will need workers compensation and liability insurance. Then he will have to make sure he has a big enough crew and equipment to do the job in a reasonable amount of time. If the Board of Directors awards him the contract, the membership will need to be notified both of the relationship and that other competing bids were requested. Any checks will have to be made out to a company name, not an individual.” This pronouncement gives the Board of Directors a chance to think about the issue further before taking any action and it allows a graceful way out of an otherwise uncomfortable situation.
Contractors that have all of the qualifications, insurance, equipment, personnel, licenses and references may be considered to bid contracts for the association. If these requirements are met and the contractor bidding a job happens to be an owner, a resident or have a relationship with the association or Board of Directors, there may not be a problem requesting a bid from same. However, the best practice in this type of situation is to disclose to all members any prior relationship with the contractor where the potential for a conflict of interest could exist. Other bids should also be requested and received. Board members should be careful not to share any dollar amounts that are bid by one contractor with other contractors.
Related party transactions are not necessarily a bad thing, but one should think carefully before entering into such. Remember, disclosure is the best approach to keeping everyone satisfied and comfortable with the arrangement.
Susan Sills, PCAM®
Association Manager
Management Advantage Inc.
Colorado Springs, CO
