For a crystal-clear picture of how an association is doing, there are few better lenses than the community's budgets and financial reports. From an investment perspective, they show the association board, property managers, the unit owners/shareholders and tenants whether the property is solvent or not. If the numbers add up and monies coming in and out balance, you can safely assume everyone is doing their job, and upholding their financial and fiduciary duty to the community. If the property is in the red, it’s important to determine why that is, and what needs to be done differently to turn the situation around and restore solvency.

Maintaining and updating the accounting of their property is one of the primary responsibilities of a board—one that is all-too-frequently neglected, according to the pros.

“They key thing that I tell the boards is that they are management and they're in charge,” says John H. Stroemer, CPA of Stroemer & Company, PA in Fort Myers. “Just because they hire management companies doesn't mean they can wash their hands of their responsibility. The management company is nothing more than an agent that performs a task for the board—the board still has responsibilities over governance issues and they should review the financial statements on a monthly basis.”

It’s important to understand each financial document and its purpose so you can have a better understanding of exactly what’s going on in your association. So here’s a little Financial Paperwork 101.

Financial Statements

Financial statements show the income and expenses for an association. Cindy D'Artagnan, CPA, an accountant also based in Fort Myers explains that there are several basic documents which Florida associations should have and update, most on a monthly basis.

“A full set of financial statements should include a balance sheet, a statement of revenues, expenses, and changes in fund balances (or changes in owners’ equity for co-ops), a statement of cash flows, and explanatory notes. It should also include supplementary information regarding future major repairs and replacements which shows the estimated costs, estimated useful lives, and estimated remaining useful lives of common property,” she says. “In order to be in accordance with Generally Accepted Accounting Principles (GAAP), these statements should be on the accrual basis. Most associations or their management companies produce a balance sheet and statement of revenues, expenses, and changes in fund balances (or an income statement) on a monthly basis throughout the year. However, these are not always on the accrual basis and may require adjustments if presenting year-end GAAP statements.”

An important component of managing finances is completing an annual audit. According to the Institute for Internal Auditors, “Internal auditing bridges the gap between management and the board, assesses the ethical climate and the effectiveness and efficiency of operations, and serves as an organization’s safety net for compliance with rules, regulations, and overall best business practices.”

“When the end of the year comes around, the board needs to consider having an audit or a review done,” explains Stroemer. “Some places do audits every year, some boards might waive them every three years, but the Board of Statutes now states for condominiums that the board cannot waive their reporting responsibilities for more than three consecutive years. The state put that in there because you had boards that waived it every year and weren't following their fiduciary obligations.”

D'Artagnan also adds that certain parameters exist for audits, depending on the size and revenue of the association.

“In the State of Florida, a condominium with 75 or more units and annual revenues of $100,000 or more must have year-end GAAP financials prepared,” she says. “They must be audited, reviewed or compiled, based on the level of annual revenues. The owners may vote to waive the statutory financial reporting requirements, but only for three years in a row, with the required level of service provided in the fourth year. An HOA or co-op with more than 50 units and annual revenues of $100,000 or more must also have year-end GAAP financials prepared unless they are waived by the owners on an annual basis.”

For Your Eyes Only

It is also important to consider who can see which documents. Certain paperwork should only be accessible to board members, while other files can and should be viewable by owners and even prospective buyers in order to disclose the status of the association and its expenses. It is important to note that being too generous with who can see what can lead to problems and unnecessary unease, but on the other end, being too secretive can lead to distrust in residents who might suspect that the board or management has something to hide. In other words, it is a very fine line to tread.

“The state laws are that residents have access to all financial documents as long they allow the board or management adequate time to set up an appointment to gather the requested information. They really have access to everything,”says Robert Rosen, CPA of Gerstle, Rosen & Goldenberg, P.A in Boca Raton. “A reasonable time frame is generally interpreted as two weeks as dictated by the Florida statutes.”

Certain documents, however, should not be disclosed to all residents for personal and confidentiality issues. D'Artagnan cites that these include: e-mail addresses and fax numbers of owners (unless the owners have given the association permission to provide them with notices electronically), personnel records, any record protected by attorney-client privilege, information connected with the approval of a lease or sale, medical records of unit owners, personal identifying information such as social security numbers, driver’s license numbers, credit card numbers, electronic security measures used by the association and the software and operating system used by the association.

Managing Investment Policy

A solid and effective investment policy is another document that Florida associations should be prudent about updating and most importantly, having. The investment policy is a written document that specifies how an association's funds are being invested.

“The investment policy should be that all funds should be properly insured by the FDIC or SPIC and that all investments should be of a conservative nature, with a focus on mitigating risk with respect to the funds,” says Rosen.

He says that policies should include treasuries, CDs, checking accounts and money markets. “Anytime you get outside that realm you are increasing the risk for financial loss,” meaning associations should be wary with stocks and bonds which are less stable.

Reserve Studies

Emergencies are going to happen and every association needs maintenance and repairs and should be prepared with enough financial reserves to cover the costs of these emergencies and repairs. To know what those costs are, associations will typically hire an architect and/or professional engineering company to complete a reserve study. A reserve study provides estimations on repairs and replacement costs for the property.

For example, the engineer determines the roof has seven years life span left before it needs to be replaced. The replacement cost is $100,000. To raise that much money, the association needs to save a minimum of $14,000 per year (x 7 years) just to cover this replacement, assuming no other money is already put aside.

The study is done every one to five years, the cost depending on the depth of the study. “I believe they should have a reserve study done,” says Stroemer. “And annually, they need to either update the reserve study or they need to review their contracts so they can assess what the reserves should be. But hey, we have associations that will do a major reserve and they do an update every year and we have other boards that might decide to do a reserve study every three years or every four years. So, I mean there is no hard, fast rules or laws but it's good business practice to have reserve studies done at least periodically,”

Where's the Money?

Many associations, especially smaller ones, only rely on one person to manage the documents. While this makes everyone else's role easier, it is not the preferable method of governance.

“Generally the financial records are maintained by the management company or the on-site manager in addition to the accounting department of an association, which could be on the side of the managing agent or an internal accounting department,” says Rosen.

A good advisable practice would be to have the duties divided among a couple individuals. Stroemer says that it is common for there to be one person in charge of accounts payable and another running accounts receivable as well as a clerk that enters the information.

Financial Security

Recently, eight persons were charged in connection with fraudulently obtaining mortgages for the purchase of condominium units in Fort Lauderdale. In Washington D.C., the FBI arrested the owners of a property management company accused of defrauding an estimated million dollars from homeowners. And this past spring, in Exeter, New Hampshire, a property manager was accused of stealing $67,000 from three Exeter condominium associations. He allegedly pocketed money meant to pay expenses. These examples are not meant to provoke panic and suspicion among residents and board members but serve to show that fraud can occur, especially during under-supervised and overly permissive circumstances.

So how does an association maintain financial security? There are a couple tasks to perform to ensure the confidentiality and safety of your documents and certify the integrity of employees and residents.

Many industry professionals constantly stress the importance of maintaining a segregation of duties in order to mitigate accounting mistakes and potential fraud. “You have to set up internal controls, it could be a pretty extensive discussion, but basically, when you set up controls, you want to make sure that you have a switch called segregation of duties. So whoever touches the money should not touch the books and records,” Stroemer says.

D'Artagnan adds that “For self-managed associations, no one person should be able to approve invoices, write checks, sign checks, and maintain the accounting records. It is amazing to me that there are still associations that do this. Many management companies also perform all of these functions. If a board member is not signing, or co-signing checks, they should at least have some sort of formal approval process in place and closely monitor all financial activity.”

Additional good practices to uphold are to require multiple signatures on checks, maintain records off-site, have more than one board member award a contract to a vendor and make sure you have competitive bidding, says Rosen.

Lisa Iannucci is a freelance writer and a frequent contributor to The South Florida Cooperator. Editorial Assistant Maggie Puniewska contributed to this article.