The Board of Directors for your homeowners association has an immense financial obligation to the community. One of the HOA board's most important jobs is to keep legible and accurate financial reports and records. These reports and records provide an overview of your community’s revenue and expenses against its financial projections or budget.
The HOA board uses the financial reports and updates, to set fees, decide on when or if assessment increases are needed, and makes other important financial decisions that affect the entire community. Here are some important questions to help determine how the HOA board manages finances - and to make sure all runs well financially for your association.
1. Who handles the HOA’s finances?
Find out who handles the HOA’s accounting. Many associations use property management companies to handle their accounting and financial reporting; others handle it internally. Find out who is handling the HOA board’s finances so you can proceed with the following requests to the correct source(s).
2. Can you get a printed history of HOA dues for each year for the past 10 years?
Nothing tells the story of how a board is handling finances than to see it in action. A list of dues for the past 10 years will tell you how much has been collected by the HOA and will give you a good idea of what monies the Board has to actually work with. This is a good starting point to evaluate the HOA’s other financial aspects.
3. How often does the HOA create and analyze financial reports?
The three most important financial statements that you should be able to access are the balance sheet, the income and expense statement, and the cash flow statement.
The balance sheet is a financial report that totals up an association’s assets, liabilities and owner or shareholder equity. It’s a summary of the HOA’s financial position at any given moment.
An income and expense statement is a snapshot of the HOA’s revenues and outlays. For the time period, it will show either a net profit (income was greater than expenses) or a net loss (expenses were greater than income).
A cash flow statement addresses how cash flows in and out of the association by showing how income and changes in balance sheet accounts affect cash. It also analyzes these activities according to operating, investing, and financing activities.
Though it may not be easy to discern every detail of these financial statements, you can ensure if the Board is in compliance by looking at the dates of the reports to see if they are in accordance with state law.
According to California state law, the board must at least do the following on a quarterly basis:
- Review a current reconciliation of the HOA's operating accounts
- Review a current reconciliation of the HOA's reserve accounts
- Review the current year actual reserve funds and expenses compared to the current year budget
- Review an income and expense statement for the HOA's operating and reserve accounts
In addition, the board must review the latest account statements from financial institutions where the HOA’s operating and reserve accounts are located.
4. How large is the HOA reserve fund?
A reserve fund is a bank account or other assets that can be liquidated by the HOA for funding the future costs of maintenance and any unforeseen expenses that may crop up. For example, an HOA may set up reserve funds to cover unexpected damages from a storm or other unforeseen event. Other reserve funds may be designated for scheduled insurance payments. An inadequate reserve fund can lead to special assessments and angry homeowners.
5. How does the Board of Directors calculate assessments?
Sometimes, an HOA may try to minimize assessments on owners to make purchasing in their community more appealing. Even if proper assessment levels are in place, expenses can increase, and the HOA Board may refuse to make the difficult decision to increase assessments because they’ll get complaints from owners.
Also, some Boards don’t include the proper amount for the HOA reserve funds in their assessment calculation. Look at your state and governing documents’ reserve requirements, and make sure they’re budgeted correctly.
6. How is the HOA protected against embezzlement?
Fraud can happen, and an HOA can sue after the fact, but it can take years to recover funds. Two important aspects of protecting against embezzlement are regular audits by a CPA firm and fidelity insurance.
The board should have a regular CPA review, particularly when there has been a change in management or accounting services. The CPA reviews internal controls and tests if those controls are working properly. A CPA audit should also be able to detect suspected fraud.
The HOA should review their policies with the insuring agent to secure complete coverage under fidelity insurance. A Fidelity Bond is an insurance policy which covers the HOA if a board member or the management company embezzles association funds.
Just as HOA finances ebb and flow, so do the laws and requirements around them. The best thing an HOA board can do for its community is to hire a reputable property management company to minimize risks and make sure the finances of the association are being handled responsibly.