Condo Living

June 24, 2024 Published by Toronto and Area Chapter - By Cathy Connally, Charley Best

Can You Name the Top Risks Facing Your Condo Corporation?

From the Spring 2024 issue of CCI Toronto Condovoice Magazine.

What Could Go Wrong?

A typical condominium in the Greater Toronto Area may be 15 years old, have 200 residential units, 300+ residents, two or three elevators, some underground parking, maybe a gym, some form of security, a volunteer board and a full or part-time condominium manager. What could possibly go wrong?

To find out what could go wrong, we asked over 280 condominium managers who attended our webinars in late 2023, what was the “greatest risk” facing their corporations. (Their responses are above in the chart.)

As a board member, do the responses surprise you? Do you share a similar opinion with the condominium managers?

That brings up a related topic. When was  the last time you, your other board members, and your condominium manager sat down and formally assessed and prioritized the risks facing your corporation? If the answer is “Well, we’ve never formally done that, but we do talk about priorities at our board meetings,” you are not alone. Most condominium managers we polled have never been involved in a formal risk assessment process for the corporations  they manage – nor have they been trained in how to assess risk and implement the related mitigation (reduction) planning. 

Effective risk management starts with strong board governance (note: Weak board governance was listed as #3 in the Greatest Risk poll). The board, on behalf of the owners, and as defined in The Condominium Act of 1998 has the ultimate responsibility to “… control, manage and administer the common elements and assets of the corporation …” and is expected to “… exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

But before we go any further, what do we mean by a risk to the corporation? Well, a risk is something that prevents, or makes it difficult, to achieve a goal or to maintain the smooth functioning of a particular process. For example, operating budget overruns, because of poor project management on a lobby upgrade, or elevator downtime because of ineffective maintenance. When these risks are actualized, they put the corporation at risk, and they are often unforeseen, which can increase costs.

Some of you may be thinking – “But we do a Reserve Fund Study (RFS) every three years. Isn’t that sufficient in terms of addressing risks to our corporation?” . Risks and “surprises” evolve on a random schedule and need to be tackled more aggressively before they happen. The three and five year updates to reserve fund are required, but the risks documented are only part of the total risk assessment needed. That frequency does not allow active risk management of the corporation’s total risk picture.
 
In terms of managing risk and related controls, what would be a straightforward and prudent approach that a board could adopt. Start right here with “Can you identify the top risks facing your corporation?”

Typically it will follow these steps:

1. Set a Mandate at your next Board Meeting
The board should initially discuss the reasons and objectives for assessing risk and related controls including:

• Being proactive to minimize costly surprises.
• The external auditor will legally rely on the board and condominium manager’s statements on risks and controls of the corporation as a foundation for their annual audit.
• Discuss recent examples of risks that materialized.
• Set a date to review the top risks.

2. Formal Risk Identification
Set aside a dedicated board meeting to assess risks. This is a great investment. It will make regular meetings more productive and ensure that the team is on the same page, regarding the risks facing the corporation.

• Review recent events and documentation such as invoices, maintenance
• records, security logs, etc.
• Brainstorming between board members and the condominium manager to get the benefit of everyone’s perspective and experience.
• Make a list of the risks identified.

3. Risk Ranking: Impact, Likelihood and Prioritization
With the risks, or hazards identified, discuss the severity or impact of each potential risk if it was to happen, in terms of safety, financial impact, resident convenience and legislative compliance. Then apply a likelihood or probability to each risk. This is a terrific team exercise – dare we say it can also be fun if not sobering! See the example in the next chart.

• Review the impact of each risk if it were to happen – how would it impact residents and the corporation in terms of safety, financials, resident convenience, corporation reputation and legislative compliance?
• What is the likelihood, or probability, of the risk event transpiring?
• Calculate the impact and probability of each risk. The top three to five risks
• should start to reveal themselves. You may be surprised.
• Develop an action plan to address the most critical risks.

4. Implement Risk-related Controls and Reports
It is then important to implement controls to either a) eliminate the risk altogether, b) to monitor whether the action plan keeps the risk at an acceptable level, or c) whether other assistance from experts is required.

• Develop controls to eliminate or reduce risk. Document the controls and train required staff.
• Ask the condominium manager to provide an activity report at regular intervals at board meetings to assess progress.

5. Ongoing Monitoring and Risk Updates
The ongoing monitoring of risks and periodic risk assessment updates allow the corporation to be proactive in addressing the inevitable challenges that will come your way.

• Monitor and report formally on risks on a regular basis.
• Update the risk assessment and rankings as new situations and requirements arise, but at least annually to meet external auditor’s requirements.
• Graphical reports and charts help board members and condominium management staff to quickly understand progress and risk “hot” spots.

“But wait! This seems like a lot of work,” you’re thinking.

It is a bit of effort at the beginning, but let’s look at a few compelling reasons to implement risk assessment and controls in your corporation in the very near term.

Reason 1
Protect the Value of Your Corporation
An ounce (28 g) of prevention is worth a pound (454 g) of cure. It’s cheaper and more productive to be proactive in managing risks than it is to react to “surprises” that blow up your budget. Put another way, “Manage risk, or risk will manage you.”

Reason 2
Annual External Audit
Your annual external audit is undertaken under the Canadian GAAP standard for non-profit organizations. That standard specifies that the auditor needs to evaluate the risks and controls, particularly for the financial statements and the reserve fund. Your auditor will ask the board and the condominium manager to complete and sign documentation regarding risks and controls as part of the annual audit.

Reason 3
Insurance
You are less likely to need to access your insurance if the corporation is more proactive about addressing risks. This means that you are most likely monitoring areas of concern and, for example, performing maintenance to prevent larger problems.

Reason 4
Liability and Reputational Risk
A board and condominium manager that act in a “reasonably prudent manner” in protecting the common elements and assets of the corporation are less likely to run into legal issues. A well-documented and executed risk management plan including detailed controls, speaks to a well governed corporation.

Finally, what about timing?
When would be an optimal time to conduct a formal review of risks and controls? On an annual basis, before you begin your next budgeting cycle. Why then? The identification and ranking of risks and related action plans will have an influence on how you allocate funds during the budgeting cycle.

So, about those top risks?
When was the last time you assessed risks and controls for your condominium corporation? If you don’t have an answer, then the path is clear, start now to protect and build the value of your condominium corporation as well as reduce liability for condominium managers and board members.

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Cathy Connally,
President, Condo Partner

Charley Best,
Vice President, Condo Partner