The new Association director is often thrust into the job with little idea of what his or her duties and responsibilities are, other than the conceptual knowledge that s/he is obligated to serve in the best interest of the Association. Unless s/he has been an active member of CAI (which is not likely if s/he is a first-time director), s/he is not even aware of the educational resources that are available for guidance in learning what a director’s responsibilities are. Further, many directors serve only a one-year term and therefore have little incentive to go through the effort of getting the education necessary for performing their job, since their term will be completed before they can even begin to learn everything they should know.
The purpose of this article is to attempt to provide guidance to the director on his or her financial responsibilities. The most important rule with respect to financial transactions is that they should be well-documented. While the Association may produce monthly financial statements and an annual budget, it is also important to document (preferably in the minutes of the Board of Directors) the following types of financial decisions:
Authorization for new bank accounts
Authorization of changes in signers of bank accounts
Approval of transfers of cash between accounts
Authorization for purchases of major equipment, or major expenditures
Approval of the annual budget
Acceptance of monthly treasurer’s report
Acceptance of monthly interim financial statements from the management company
Approval of the annual audit or review report and tax return
Authorization for an officer of the Association to sign the annual income tax returns
Documentation of board actions and responses with respect to the accountant’s management letter that accompanies the annual audit report
Collection actions (authorization to lien member property, authorization to foreclose on member property)
Documentation of board decisions regarding insurance coverage
Adoption of a conflict of interest policy
Authorization of contract for preparation of a reserve study
Authorization of reserve expenditures
Adoption of reserve policies
Adoption of Revenue Ruling 70-604 Election (This election should be made annually and should preferably be made at the annual membership meeting, then ratified at a Board of Directors meeting.)
Accounting is a complex, technical subject in which very few people have an active interest. However, the impact of financial transactions is something that permeates every aspect of our lives, and certainly that of a community association. While no individual can be given a complete accounting education in a short enough period of time to enable them to gain a complete understanding during their term of office, there are certain things that the director can and should do on a procedural basis that would allow him or her to adequately exercise the oversight of financial responsibilities of the members of the Board of Directors of an Association.
The director needs complete financial information in order to perform an adequate review of transactions. Accordingly, the monthly financial reporting package for a community Association should generally include the following documents:
Monthly financial statements
a. Balance Sheet on an accrual basis
b. Income Statement on an accrual basis with budget-to-actual comparisons ( The income statement should include both current month and year-to-date amounts.
General Ledger
Cash Disbursements Journal
Aged Assessments Receivable Listing
Copies of all bank reconciliations
Copies of all bank statements
Copies of paid invoices
While the above list may seem like overkill to some, these documents should be distributed to the board members prior to the Board meeting so that they have an adequate opportunity to review them and be ready at the time of the meeting to either approve the reports or ask the necessary questions. It is not reasonable to expect even a CPA to be given a set of financial statements during a Board meeting and on the spot, have to review, understand, and approve the financial statements and, by inference, the underlying transactions.
For the director to competently review this financial package, he must have a basic understanding of each of the documents.
The balance sheet is a statement that reflects the financial status of the Association at a specific point in time (generally month-end or year-end). Common components of a balance sheet are:
Assets
Cash – Petty cash on hand or in checking accounts, savings accounts, or other types of accounts with a financial institution
Assessments Receivable – Amounts owed by members to the Association as of the date of the financial report
Fixed Assets – Property acquired by the Association with a useful life greater than one year and of significant cost
Prepaid Expenses – Payments of expenses in the current period that will benefit more than one period, such as insurance, which is often paid in a single payment for an annual premium
Liabilities
Accounts Payable – Expenses incurred, but not yet paid
Prepaid Assessments – Dues/assessments paid in advance
Income Taxes Payable – Income taxes due for the current year and any prior years
Fund Balances
Operating Fund – Accumulated earnings or losses of the Association from the current and prior years.
Replacement Fund – Amount set aside for future repairs and replacements (this balance should have an equal amount of cash set aside to accumulate for major expenses).
The income statement reflects, for a period of time, the income and expense activities of the Association. A preferred format would reflect both the current month’s and year-to-date budgeted and actual activities. Revenues generally consist of member assessments, fines, vending machine, parking, or other income and interest income. Expenses would include operating maintenance costs, utilities, management company fees, and other administrative and operating fees. Amounts transferred to reserves are generally reflected as an expense of the operating budget, unless financial statements are prepared on a fund basis.
The general ledger is a document which underlies the financial statements and summarizes all activity by account. For instance, if three different checks during the month were written for repairs, they would be grouped into the repairs expense account (even though the checks were not in sequential order). The total of those three checks would represent the current month’s total repair expense, which should agree with the income statement. This document can be used by the director to research questions such as “what is in utility or repair expense this month?”, and “why is it so high compared to prior months or prior years?” The general ledger should provide sufficient detail for you to find the answer to that question.
The cash disbursements journal is simply a listing of checks in numerical order for the current month, listing the date, payee, and amount.
The other reports are self-explanatory.
The procedures that the director might employ in analyzing these documents should consist of:
Examine the balance sheet and compare it against prior periods to see that cash balances and assessments receivable balances appear reasonable. Note if there are any significant fluctuations between restricted reserves in the current period versus prior periods.
Examine the bank reconciliations and see that they agree to the amounts reflected as cash on the balance sheet. Investigate any differences. Also, make sure they agree with the bank statements. The bank reconciliation should begin with cash per bank and reconcile down to cash per financial statements and general ledger. The reconciling items will generally consist of deposits in transit and outstanding checks. Investigate and question any large or old outstanding checks.
Review the bank statements to ascertain that all interest income has been recorded in the financial statements.
Make sure that all bank accounts are recorded in the general ledger of the Association.
Examine the aged assessments receivable listing and compare it to the balance sheet. The total of assessments receivable should agree with the balance sheet.
Review the aged assessments receivable listing and question any assessments receivable that are more than 30 days old. The Association should adopt a strict collection policy that would consist of assessment of late charges, warning letters, filing of a lien, and ultimately foreclosing on member property for non-payment of assessments. There should be no exceptions to these rules, especially for directors of the Association.
Review the income statement comparison of budgeted to actual activity both for the current month and the year-to-date, and question any significant variations.
For any questioned income or expense items, trace the account to the general ledger and review the detail for that account.
Review the cash disbursements journal for the month and challenge the propriety of all expenses. For instance, if any checks are written to any director of the Association, find out why. If the management company is being paid more than their contractual fee, find out why.
It will take some time for the director to perform all of the above procedures, but it will provide you with insight as to the financial transactions of the Association, and a greater understanding of how your Association operates. While this may seem like too much work to be done on a monthly basis, you as a director have an obligation to the members of the Association to safeguard the assets of the Association. Only through diligence and a step-by-step procedural review of transactions can this be done.