The new Association Director is often pushed into work with little idea of what his duties and responsibilities are, other than the conceptual knowledge that he is obligated to serve in the best interest of the Association. Unless you have been an active CAI member (which is unlikely if you are a first-time director), you are not even aware of the educational resources that are available to guide you in learning what the responsibilities of a director are. is it so. Furthermore, many directors serve only a one-year term and therefore have little incentive to put forth the effort to obtain the education necessary to perform their job, as their term will be completed before they can begin to learn everything. that they should know.
The purpose of this article is to attempt to provide guidance to the director on his financial responsibilities. The most important rule regarding financial transactions is that they must 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 bank account signatories
- Approval of cash transfers between accounts
- Authorization for major equipment purchases or major expenses
- Approval of the annual budget
- Acceptance of the monthly treasurer’s report
- Acceptance of monthly interim financial statements of the management company
- Approval of the annual audit or review report and tax return
- Authorization for an official of the Association to sign the annual income tax returns
- Documentation of the actions and responses of the board with respect to the accountant’s management letter that accompanies the annual audit report.
- Collection actions (authorization to bind ownership of members, authorization to execute ownership of members)
- Documentation of board decisions regarding insurance coverage
- Adoption of a conflict of interest policy
- Contract authorization for the preparation of a reserve study
- Authorization of reservation expenses
- Adoption of reservation policies
- Adoption of the Election of Revenue Resolution 70-604 (This election must be made annually and preferably must be made at the annual meeting of members, then ratified at a meeting of the Board of Directors).
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 receive a comprehensive accounting education in a short enough period of time that they can gain a full understanding during their tenure, there are certain things that the director can and should do on a procedural basis that would allow him or her to adequately supervise the financial responsibilities of the members of the Board of Directors of an Association.
The director needs complete financial information in order to properly review transactions. Consequently, the monthly financial reporting package for a community association should generally include the following documents:
Monthly financial statements
to. Accrued balance sheet
B. Income statement on an accrual basis with budget-to-actual comparisons (The income statement must include both the current month and year-to-date amounts.
- Ledger
- Cash disbursement journal
- List of Aged Accounts Receivable
- Copies of all bank reconciliations
- Copies of all bank statements
- Copies of paid invoices
While the above list may seem excessive to some, these documents should be distributed to the board members prior to the board meeting so that they have a proper opportunity to review them and are ready at the time of the meeting to approve the reports or ask the necessary questions. It is unreasonable to expect that even a CPA will be delivered 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.
Tea balance sheet It is a statement that reflects the financial status of the Association at a specific time (usually at the end of the month or at the end of the year). The common components of a balance sheet are:
Assets
Cash – Petty cash available or in checking accounts, savings accounts or other types of accounts with a financial institution
Fees 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 of more than one year and of significant cost
Prepaid expenses – Payments for expenses in the current period that will benefit more than one period, such as insurance, which is often paid in one payment for an annual premium.
passive
Debts to pay – Expenses incurred, but not yet paid
Prepaid Assessments – Fees / evaluations paid in advance
Income taxes payable – Income taxes due for the current year and prior years
Fund balances
Operating fund – Accumulated gains or losses of the Association for the current and previous years.
Replacement fund – Amount reserved for future repairs and replacements (this balance should have an equal amount of cash reserved to accumulate for larger expenses).
Tea Statement of income reflects, for a period of time, the income and expenditure activities of the Association. A preferred format would reflect actual and budgeted activities for both the current month and year to date. Income generally consists of member evaluations, fines, vending machines, 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 operating budget expense, unless the financial statements are prepared on a fund basis.
Tea Ledger it is a document that underlies the financial statements and summarizes all activity by account. For example, if three different checks were issued during the month for repairs, they would be pooled under the repair expense account (even though the checks were not in sequential order). The total of those three checks would represent the total repair expense for the current month, which should match the income statement. The principal can use this document to investigate questions such as “What utility or repair expenses are there this month?” And “why is it so high compared to previous months or years?” The ledger should provide enough detail for you to find the answer to that question.
Tea cash disbursements journal is simply a list of checks in numerical order for the current month, with the date, the payment, and the amount.
The other reports are self explanatory.
The procedures that the principal may employ to analyze these documents should consist of:
- Examine the balance sheet and compare it to previous periods to see that the cash balances and the receivables balances appear reasonable. Please note if there are significant fluctuations between restricted reserves in the current period and prior periods.
- Examine the bank reconciliations and verify that they agree with the amounts reflected as cash on the balance sheet. Investigate the differences. Also, make sure they agree with the bank statements. Bank reconciliation should begin with cash by bank and reconcile to cash based on financial statements and the general ledger. The reconciling items will generally consist of deposits in transit and outstanding checks. Research and question large or old outstanding checks.
- Review the bank statements to make sure that all interest income has been recorded in the financial statements.
- Make sure all bank accounts are recorded in the Association ledger.
- Examine the list of aging receivables and compare it to the balance sheet. The total fees receivable must match the balance sheet.
- Review the list of old fees receivable and question any fees receivable that are more than 30 days old. The Association should adopt a strict collection policy consisting of assessing late fees, warning letters, submitting a link, and ultimately foreclosure of members’ property for non-payment of assessments. . There should be no exceptions to these rules, especially for Association directors.
- Review the comparison of the income statement of the budgeted activity with the actual one, both for the current month and for the year to date, and question any significant variations.
- For any disputed income or expenses, trace the account to the general ledger and review the details of that account.
- Review the cash disbursement journal for the month and question the correctness of all expenses. For example, if checks are issued to any director of the Association, find out why. If the management company is paid more than its contractual fee, find out why.
It will take some time for the director to complete all of the above procedures, but will provide you with information on the Association’s financial transactions and a greater understanding of how your Association operates. While this may seem like too much work to do on a monthly basis, you, as a director, have an obligation to the members of the Association to safeguard the assets of the Association. This can only be achieved through diligence and a step-by-step procedural review of transactions.