Clear processes, strong accounting controls, clarity and accuracy of financial reports, and understanding the basics of reading financials and accounting are essential for Boards and general managers of self-managed communities.
Readers of monthly financial reports should understand what they should be looking for as much as what that are reading. Comprehending what you are looking at is an important control. What are you expecting to see compared to the numbers presented? Does it make sense? Does is compare to budget or to the same period last year?
Knowing your association’s basis of accounting is critical. If you do not know the basis of accounting, it is difficult to determine the completeness of financial reports. Under the full accrual basis, revenues are recorded when earned and expenses are recorded when incurred. More common is the modified accrual basis where revenues are recorded when earned and expenses when vendor invoices are paid. Under the cash basis of accounting, revenues are recorded when money is received, and expenses are recorded when they are paid.
For self-managed associations with limited personnel, segregation of accounting functions is challenging. To ensure an association’s assets are protected, we encourage boards to understand and be actively involved in setting controls and processes. Ideally the same person should not be performing functions that when combined with other functions provide an opportunity to authorize, review, approve and pay for transactions; or to receive funds, deposit funds, record receipts in accounting records. Providing opportunity is really the first control Boards can control. Try not to employ one person to do everything accounting-related.
We recommend that the treasurer and a second board member review bank account reconciliations each month. Inquire regarding unusual or old reconciling items. Access bank statements independently and compare to the bank statement presented by the preparer.
For disbursements, the Board should approval all contracts, review all vendor invoices and sign all checks. As a safeguard we recommend a second signature on all checks. The same person should not engage a vendor, approve vendor invoices, and prepare and sign checks. Control credit card usage and online purchases. Develop an authorization and approval system. Limit the number of credit cards and the spending limits. Review every online purchase.
Assessments and other billings should not be performed by the same person who is preparing bank reconciliations, making bank deposits, and posting receipts to owners’ accounts. We recommend that associations do not accept cash payments.
Hiring and terminating staff, setting pay rates, time and attendance record, processing payroll, signing pay checks, and accounting for payroll should all be monitored and reviewed. Depending on the association, the general manager or treasurer should authorize, approve and review activity.
Boards of Directors are charged with association governance. Implementing the strongest financial controls possible will help to prevent misappropriation of funds and provide for useful financial reporting. Boards should authorize, approve, review, ask questions, obtain supporting documents to support their fiduciary responsibility to the members.
Jeremy Newman, CPA
Newman Certified Public Accountant, PC, 2021