financial-statementsDo your (fiduciary) duty and review the books each month.

As the president of my HOA, I can attest to the fact that serving on a community association board of directors is a time-consuming task. Just dealing with the normal business of the community is challenging, and keeping an eye on the financials can be downright daunting. I’m also a CPA who specializes in working with community associations, so I’ve seen what can happen when the financials aren’t adequately reviewed. Several community associations have recently been the victims of mismanagement, theft, and even fraud.

HOA theft and fraud – it can happen to your community if you’re not vigilant

In one case, the (now defunct) property manager allegedly removed money from the community checking account while providing false information on the financial statements. In another example, the board suddenly realized that it didn’t have enough money in the bank accounts to operate the community. Both situations could have been avoided, or at least identified much earlier, with a regular monthly financial review.

30 minutes – less time than it takes for your morning coffee…

At least one person (normally the treasurer) with some financial experience should carve out 30 minutes every month to review financial statements provided by your accountant or property management company. While the chances of a major theft or fraud issue are slim, it’s much easier to fix mistakes and adjust the budget when you identify potential issues before things get out of control. If you’re the person reviewing those statements, here are 5 core things you should look at each month.

  • Balance sheet. The balance sheet presents the HOA’s total assets (normally just cash), including the balance in each bank and reserve account. The balance sheet should balance – no exceptions.
  • Income statement. This important document show how expenses compare with your budget, so pay close attention to any major variances, whether positive or negative. Make sure you get an explanation for each.
  • Bank reconciliation. While looking at the bank statements is important, you also want to see the explanation of how the statement balances tie back to the book balances based on any outstanding checks or deposits. It’s like balancing your checkbook…
  • Receivables. It’s tough to pay the bills without money. A 5-7% assessment delinquency rate is probably OK (ours is under 4%). If your rate is higher, you may to consider a more aggressive dues collections process.
  • Unpaid invoices. Invoices should be quickly paid, and a stack of unpaid invoices may be the sign of a management or budget issue. Is there enough money in the accounts to cover the invoices? If not, and there are no discrepancies, you may need to consider a dues increase or one-time assessment.

Reviewing these documents each month is critical to maintaining the financial health of your community. Each component tells a story, and can help you identify potential financial issues before they become catastrophic like in the examples I listed above. If your bookkeeper or property manager can’t or won’t provide this information, think about finding someone who will. Finally, make sure that your association has adequate fidelity bond coverage for financial misappropriation, and you’ll be covered in the unlikely event that someone steals from the community.

What if the HOA board uncovers a potential issue?

If you see a discrepancy, ask your bookkeeper or management company for an explanation and, if applicable, revised financials. Mistakes happen, and most can be quickly corrected. If you have greater concerns about the financial health of your community, it may be time to contact us and schedule a financial audit or other financial review procedure as soon as possible. You should really have an audit or audit-like financial “review” every 1-2 years.

Neal Bach, CPA