And how you can avoid these issues in your community
As a CPA (and HOA board member) who has been providing tax and audit support to community associations for over 15 years, I work mostly with communities and property management companies that are well-run and trying to stay that way. However, every once in a while I run into a situation that causes a double-take.
The envelope please…
Here is my Top 5 list of the craziest financial situations I’ve seen, as well as some simple tips to keep these from happening to your board or community. While I’ve presented this in a humorous way, they definitely caused some major hassle for the impacted associations. As they say on TV, the names (and some of the details) have been changed to protect the innocent.
#5 – Board members blow big bucks
Rather than making board members wait for business expense reimbursements, a community decided to issues debit cards to board members. While the cards were only to be used for approved association expenses, some board members went a little too far. For example, gas may be a potential association expense, but not when a Georgia resident leaves a trail of gas station expenses across the state of Louisiana. Home supplies, food, personal cell phones, and other items were also charged to the cards.
During a special financial review procedure called an agreed-upon procedures engagement, we saw the expenses, but no documentation or justification for the charges. The board members ultimately reimbursed the association for the non-business expenses. Just say no. Don’t tarnish your personal reputation over a tank of gas, and don’t issue debit cards to board members. The expenses are tough to track, and it’s difficult to hold people accountable.
#4 – The runaway property manager
After a property manager quit under strange circumstances, a community association decided to check their bank account to ensure everything was in order. Much to their dismay, the account was completely empty and the $200,000 that had been reported on their financial statements was missing. It turns out that the property manager was making up the numbers on the financial reports while siphoning money from the bank account. The money has not been recovered.
It’s critical that at least one board member (usually the Treasurer) with some financial experience reviews the financial statements each month. This includes bank statements and the corresponding statement reconciliation – the explanation of any differences between reported and actual balance (checks pending, etc.). Even the best of us make mistakes. Catch them early.
#3 – I’ll scratch your back, you paint my house
During another financial review, we saw what appeared to be an unusually high invoice for clubhouse painting. After 15 years, I’m probably better at quoting paint jobs than some painters, and this job was priced at more than double the going rate. When we initially questioned the invoice, we were told that, although the expense was higher than budgeted, the invoice matched the initial quote. We then approached the painting company, and the owner admitted that two board members’ homes had also been painted. The two board members paid back the association and were removed from the board.
Avoid any hint of impropriety, and any real or perceived conflicts of interest, by not doing personal business with community vendors. If you have no choice, be proactive and communicate with the board and neighbors. Those two board members also had very nice lawns…
#2 – The dues and don’ts of homeowner collections
A long-term resident of an association had not paid assessments in years and owed nearly $10,000 in dues, late fees, and interest. The resident had also been fined for a number of maintenance violations, including a mailbox in disrepair. When the case ended up in court the resident claimed:
- No communications were ever received due to the broken mailbox.
- There was racial discrimination.
- The board violated that state’s Condo Act.
The judge didn’t buy the mailbox and discrimination claims, and the community association was not covered under the Condo Act. The resident had to pay over $35,000 in fees, fines, and court costs. Remember that an association is a business. Act like a business, move swiftly on collections issues, and don’t let anyone bully you into breaking your own rules.
#1 – Going around the “block” with association tax returns
A self-managed community association had their annual tax returns prepared by some strip mall location of a national tax services provider. Over the course of three years, the association paid more than $5,000 in income taxes. A new board member questioned the expense, thinking that community associations were tax-exempt as non-profit organizations. The board member asked the right question, but for the wrong reason.
Community associations are considered not-for-profit, but they are typically not tax-exempt. Associations still must pay federal and state taxes on non-member income. When the tax returns were recalculated using the correct IRS forms and provisions, the tax due was actually $0. Yes, nothing! The association received a nice refund. File your association taxes. It’s never too late to start.
Keep this from happening to you
Board members, while these examples are pretty funny, remember that it’s your fiduciary duty to be aware of what’s going on with your community association financials. Have solid financial management processes in place, or ensure that your property management company does, and then verify the numbers each month. If you ever feel there is an issue with the financial statements, a homeowner, or even another board member, address it immediately. Finally, unless you have board members with property management experience, you should seriously consider hiring a management company.
Neal Bach, CPA