Congratulations, you’ve been elected to your community association or HOA board! As a board member, you have a fiduciary duty to use sound business judgment in your role. That means you need to think like a business owner and not just a committee member – and that includes understanding the HOA’s financials.

As a new board member, you may find these five tips helpful for getting a clear understanding of your HOA’s financial status, the reporting process, and your role in oversight:

1) Review the most recent financial statements. Familiarize yourself with each document in the monthly financial report and its purpose. The most important documents to review are the balance sheet, income statement, and bank reconciliation. On the balance sheet, which shows the HOA’s assets and liabilities, look particularly closely at bank and reserve accounts and make sure the statement balances. When reviewing the income statement, focus on expenses and how they compare to the budget. On the bank reconciliation, you’ll want to make sure you can see that the bank statements, after outstanding checks and deposits, balance back to the HOA books.

You can ask for assistance from the treasurer or property manager if needed. Reviewing these statements will help you to get an overall understanding of your HOA’s financial status, as well as the statement preparation cycle and process. Remember, however, that you need only a general understanding of these statements, unless you are signing on as treasurer.

2) Conduct a financial and budget review. If, after reading the financial statements, you and other board members are uncomfortable with your HOA’s financial health, or if the majority of the board is new, it may be a good idea to have a CPA with community association experience analyze the budget and monthly financials for accuracy and integrity. Consider an audit, which is a detailed financial examination of your HOA’s financial statements and supporting documents, or an audit alternative, such as an agreed-upon procedures engagement. An agreed-upon procedures engagement is basically a “mini audit” of specific financial areas, such as cash receipts/disbursements or reserves.

3) Familiarize yourself with the reserve account and reserve study. A reserve study, normally conducted by engineers, looks at the useful life and replacement costs of these core community assets, and sets the funding needs for the reserve account. Contributions to the reserve account should be included in the annual budget. It’s a good idea to conduct reserve studies at least every three years. As you familiarize yourself with the reserves, confirm the reserve account balance matches what’s required in the study. 

4) Ensure your HOA filed a tax return last year. Community associations have to file federal tax returns as well as state returns (at least in Georgia). HOAs generally can file a Form 1120-H, relatively inexpensive for a CPA to prepare. Most HOA revenue, such as membership dues and late fees, is not taxable, but associations are still required to file a return even if they owe no tax. Make sure your HOA is in compliance with the IRS!

5) Review collection rates and procedures. What’s your HOA’s delinquency rate? Even with the pandemic, this should be somewhere between 5% and 7%, meaning 93% to 95% of dues are paid on-time. Familiarize yourself with collection procedures and any adjustments due to the coronavirus pandemic.

Remember, the board’s role is primarily oversight, which involves providing direction, approving major expenditures, and resolving issues. Let the experts – property managers, accountants, and lawyers – handle the details!

By familiarizing yourself with the financial basics, you’ll be better prepared for your new role as an HOA board member. Take a look at our white paper on effective HOA financial management. And if you have any questions along the way, please give us a call. We are here to help!