Guarding Against Fraud and Mismanagement
July 6, 2023
What Can You Do to Help Protect Your Money
An Interview with Chaim Zeitchik, CPA
In light of the recent events, many people are looking for information and ways to better protect themselves. Chaim Zeitchik, CPA, culls from his extensive experience working at one of the largest firms in the country to share some insights.
Could you share a brief introduction about yourself?
I began my career as an auditor in the not-for-profit and government industry. After a few years, I transitioned to real estate, where I’ve been for a decade. Currently, I’m a managing director at CBIZ Marks Paneth and shareholder at Mayer Hoffman McCann PC.
CBIZ is one of the country’s top firms with offices nationwide, and our Manhattan office, where I’m based, has a strong focus on real estate. I specialize in providing accounting and attest services tailored to the needs of real estate owners, developers, management companies, and joint ventures. I’m also involved in developing our real estate group’s audit methodology and conducting training.
Can you tell us some advantages of having an audit?
Audits help make sure financial statements are free from material misstatements. Audits can spot discrepancies or errors in reporting, giving a clearer picture of the entity’s financial situation. This is important for operational efficiency, performance evaluation, and planning.
If there are compliance requirements, audits can help pinpoint non-compliance issues and recommend corrective actions. They can uncover legal disputes or gaps in insurance coverage. Evaluating these risks helps protect property owners and investors.
Audits play a crucial role in spotting fraudulent activities. By examining financial records and internal controls, auditors can identify signs of fraud or weaknesses that can be strengthened to prevent fraud.
So it seems like it would be a good idea for an investor to insist on an audit.
There are good reasons why an investor would want an audit. An audit is like a thorough checkup of the property’s financial health. It involves digging deeply into financial records, transactions, and accounts to make sure rules are followed. This gives investors peace of mind knowing that the financial information is free from material misstatements.
I would imagine a syndicator wouldn’t be too enthusiastic about an audit, considering it may be a hassle.
Having an audit boosts investor confidence because it gives an honest and unbiased evaluation of the syndicator’s financial statements. It shows transparency and that they’re serious about the accuracy of their financial reporting, which can actually attract more investors.
I have clients who don’t have an audit requirement (due to guarantees made or because of their net worth) but choose to do it anyway. If you’re aiming to attract serious private investors or land an institutional partner, not having an audit can make it harder to convince them to invest.
Isn’t an audit conducted after funding the real estate investment and completing the acquisition? What about investment decisions made before the audit?
Before making an investment, investors can review the operating agreement, which sets the rules and responsibilities of investors and the management team. Investors can request to include a requirement for an audit in the agreement, which will help set expectations for financial reporting, accountability, and oversight. It’s a way to make sure the investment is being handled responsibly.
A syndicator may not agree to an audit. The investor must then decide how much they trust the syndicator and how important having an audit as security is for them.
If an investor wants to proceed with an audit, and the syndicator agrees, what’s important to look for when selecting an accountant or auditor?
Here are some key points to consider:
- Find someone with the right qualifications (e.g., CPA). These credentials show they’ve received the appropriate education and training and maintain professional development. It’s important to see whether their firm is peer-reviewed, and if so, to check their review on their last inspection. That can provide evidence about their competence. You can go to the AICPA’s website and check this. A firm that undergoes peer review likely also has a strong quality-review department.
- Look for experience in your industry and whether they can also offer a range of services. You want someone who understands the ins and outs of that industry; they’ll have a better grasp of relevant challenges, regulations, and financial aspects.
- Make sure your choice is a firm recognized by major banks, lending institutions, and private equity firms.
Based on your experience working with all size clients, what can be a reason companies struggle or encounter problems?
There are many reasons, but I would highlight an issue I’ve observed in our community. It stems from positive factors, but as an auditor in the industry, this stands out to me. There are best practices in how a business should operate. Businesses want to do things right, but sometimes they may lack formally structured operations or knowledge of all the rules. Here in Lakewood, there’s a vibrant entrepreneurial spirit. Businesses are growing rapidly. But the bigger you get, the likelihood of not complying with some law increases because you might not be aware of all compliance requirements. That’s why it’s crucial to be connected to someone knowledgeable who can give you proper advice.
Recently, someone in real estate contacted me. He had a specific real estate business model and many questions. I provided answers based on my expertise, but he also had tax questions about opportunity zones and REITs. I told him, “I don’t know, but I can bring in different experts who specialize in this.” And we did.
We also introduced this person to a top real estate attorney from a major Manhattan firm known for real estate. The attorney answered his questions. When he had questions outside the attorney’s expertise, the attorney said, “That’s not my area; you should consult a transactional attorney,” which he did.
The bottom line is, use experts who specialize in what you need to get the best advice and guidance for your business. The days of being an expert in all industries are over.
What can a growing business do to make sure they are operating in the best way possible?
They need to pause and assess their growth. Businesses themselves will recognize the need to become more sophisticated and leverage the expertise of qualified professionals and the value qualified specialists bring if they want to be financially healthy.
I’ve met business owners in Lakewood, and their businesses are booming. But while their operations are doing incredibly, other areas are seriously lagging. This is in no way a criticism of bookkeepers and QuickBooks—they provide tremendous value—but there comes a point when a company should outgrow QuickBooks.
Have you had any interactions with people from Lakewood in industries besides real estate?
Yes. Many times, people reach out to me because they feel I’m a bridge between Lakewood and the corporate, or Manhattan, world.
Someone from our community who’s a big Amazon seller approached me for help with compliance and tax matters. I connected him with an expert who could provide services he needed. Amazon is a whole industry unto itself, with warehousing and fulfillment issues and different tax rules applying to different states and jurisdictions; there’s nexus issues that need a lot of unpacking. The expert I referred has 30 years’ experience specializing in nexus and residency matters.
Can you share any last thoughts?
I would emphasize two intertwined points I mentioned earlier.
First, businesses should conduct themselves in a formal manner. We need to follow the norm of business practices. This is aided by getting advice from qualified experts that help ensure compliance.
Second, companies need to be set up with proper internal controls. There should always be this thought that there’s an issur yichud with money; strong internal controls are necessary to prevent someone from being alone with the money. Audits are a great tool and security measure, but they aren’t foolproof and may not always catch fraud. That’s why audits should be complemented by strong oversight, investor education, and other preventive measures.
Audits play a significant role in providing an extra layer of scrutiny and detecting fraud early. Auditors review the company’s business model, finances, and transactions, looking for unusual activities. They confirm investments with third parties and do physical inspections if needed. Special attention is given to transactions involving individuals close to company management to prevent financial manipulation; these transactions are thoroughly checked to make sure they’re legitimate and properly disclosed.
Is this how your clients typically conduct their operations?
Absolutely. The business coming out of our community is tremendous; it shouldn’t be downplayed. But we shouldn’t be naive. If we continue to operate without making necessary upgrades, we’re leaving ourselves open to something like this happening again.
Chaim Zeitchik can be reached at email@example.com or 212-201-3264.