Written by Farrah Esquer, CCAM, CMCA, AMS, PCAM, President
SO, YOU’VE JUST BEEN ELECTED or appointed to the board of your association. Let’s face it, you only agreed to take the position after being gagged, tied and tortured and promised it was only one meeting per month, right?
So, what’s next?
You are a member of a nonprofit community, whether incorporated or not, and your most important responsibility is the financial well-being of the association. The members of the association pay assessments to the community to maintain the property and pay for insurance, contracted services, utilities and other needed materials and services. The board has a fiduciary responsibility to protect the assessments and assets of the association.
Community associations have been a target for fraud or misuse of funds because typically the directors are volunteers with regular jobs and busy lives. They depend on either in-house staff or a management company to take care of the day-to-day business including financial affairs. So how can the directors keep up with their busy lives and maintain control over the community’s finances? Despite what you may think, it does not take a financial wizard to monitor the finances of an association.
CHECKING IT TWICE
The board must review the financial statements on a monthly basis. The financial statements should include at a minimum: a balance sheet, budget comparison report, income statement, check register, bank statements, bank reconciliations, journal entries, general ledger report and aging report. Signs of fraudulent activity include missing check numbers or check numbers out of sequence, missing bank statements, duplicate payments, payments to unfamiliar vendors or people or suspicious journal entries.
Do not hesitate to request additional reports or back-up information to support any entries. Association governing documents usually require an outside CPA firm chosen by the directors perform an annual audit of the records. Whether your documents require it, an annual audit is imperative to ensure good fiscal management.
The board should have administrative policies in place to reduce the chance of fraudulent activity in the first place. All checks should require two signatures, and only directors—and not management or staff—should sign reserve checks. No one should ever sign a blank check, and checks should never be made out to “cash.” Checks should only be issued when an invoice (not statement) is provided with details of the materials or services provided.
A copy of the work order that authorized the service should be included with the invoice. The invoice and work order should be presented with the check to the board, or an appointed director, for signature. Directors should set aside time, other than at a board meeting, to adequately review and sign checks. Reimbursement checks, including those for petty cash replenishment, should never be issued without original receipts.
Whether you are interviewing potential management companies, familiarizing yourself with the current management company or reviewing the procedures of in-house staff, here are some basic internal operating procedures that can help:
• Each bank used by the association should be notified immediately of any changes in authorized signers.
• The association should have a fidelity bond equal to three months of assessments, plus the amount held in the reserves, unless the association’s governing documents require a higher limit. Your insurance agent can help you determine the amount of coverage needed.
• All employees handling cash should be bonded. Management companies should carry a fidelity bond with a minimum of $250,000 coverage or higher depending on the assets managed.
• Incoming mail and payments should be opened and checks endorsed “for deposit only” by a person who doesn’t have access to the accounting functions.
• Monies designated for future repairs and replacements shouldn’t be co-mingled with operating funds and need to be deposited into separate bank accounts.
• The accounts payable duties and the preparation of the financial statements should be segregated and not controlled by the same person.
• All payments and disbursements should be made by check, and checks should be pre-numbered, used in sequence and recorded in a check register.
• All bank accounts should be reconciled after the end of each month by someone other than the person who receives or disburses cash.
• Upper management, separate from the person responsible for the preparation of financial statements or payables, should review and initial each financial statement.
• Upper management, such as the community manager, separate from the accounts payable person, should review and authorize payment of invoices.
Seek additional advice from your accountant. Choosing an accredited or certified management company can ease the review process of the board; however, the board is still responsible for the monthly reviews listed above. CAI offers an Accredited Association Management Company (AAMC) accreditation which requires an audit of the accounting controls by an outside CPA firm. State-specific trade organizations may offer similar accreditations.
You also should learn about the services provided by your banks. Most banks offer online services that allow read-only access to bank transactions, which can alert you should someone tamper with copies of the bank statements.
PROTECTING YOUR FUTURE
Adopt an investment policy that protects association funds and ensures financial stability. The investment policy should state that the association’s financial goals are protection of principal, liquidity and yield, in that order. While the high interest rates of risky investments may be appealing, the board should invest conservatively to protect the principal funds. Whether your state requires a reserve study, the board should ensure that a reserve study update is completed every year and a reserve study with an on-site inspection is completed every three years. A reserve study calculates the expected remaining life of each reserve component maintained by the association, estimates the cost to replace the component at the end of its life and how much should be saved on an annual or monthly basis to meet the requirement.
Board members’ decisions affect the entire community. Take advantage of educational seminars and board training offered by your local CAI chapter. Informed board members, an accredited management firm and a certified manager will help secure your community’s financial future and protect individual property values.
This article is reprinted with permission from the July/August issue of 2010 Common Ground, a bimonthly magazine published by Community Associations Institute, a national membership organization dedicated to fostering vibrant, competent, harmonious common-interest communities and from the July/August 2011 O.C. View, a quarterly magazine published by the Orange County Chapter of CAI. To learn more, visit www.caionline.org or www.caioc.org.
Farrah Esquer was awarded the 2011 Author of the Year Award by the Orange County Chapter of CAI for this article.