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Subject: Financial - accounting, process, and HOA chronology
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GeorgeS21
(Florida)

Posts:2902


07/19/2020 9:30 AM  
Hi All,

I’m on the Finance Committee in new neighborhood - 650 properties, private roads, lots of amenities - about $800,000 a year in revenue (assessments). Turnover between original and new management companies occurred Jan 1, 2020.

The new management company has nice folks who are trying really hard but has not been able to sort our issues, mainly due to a lack of tools and knowledge - this community was a step up for them.

So, the Board set up the Finance Committee to assist in sorting some of the issues - we are working cooperatively with the MC, with no bad blood, but they are clearly aware the end of their the one year contract is in December - and, yeah, we know the continuation or termination question needs to be resolved quickly. BTW - the management company has several neighborhoods - we are the largest by far. They have been using quickbooks, but may shift to more of an integrated package (name states with a capital B).

Basic history:
- community about 13 years old
- property management company used by the developer (a commercial development company) remained until mid 2019
- build and sellout occurred quickly - perhaps 2-3 years, HOA control for around 10 years, but really clear
- annual assessment remained the same from formation until 2014 (7 years)
- no one knows when the developer formally turned over to the HOA; there appears to be no “package”
- new management company is well intentioned with great people, but clearly over their heads
- we have a relatively large Reserve Fund, but it was begun in 2014 only when our detention ponds were noted as being in bad shape - especially for a new neighborhood
- the only Reserve Study is from 2014, and includes only eight items that were specified by the original management company
- Annual Meeting is held in December each year (financial year is Jan-Dec)
- Bylaws say: “The first annual meeting of the members shall be held within one (1) year from the date of incorporation of the Association, and each subsequent regular meeting of the members shall be held on the same day of the same month of each year thereafter, at the hour of 7 pm, or on such other date as the Board of Directors may determine."

Our “process" over the last year looks like”
- Jun 19 - agreement with outgoing management company for turnover on 31 Dec 19
- Jun 19 - agreement with incoming management company for turnover on 1 Jan 20
- Dec 19 - annual meeting with old management company and annual assessment same as last 6 years (increased only once in 2014)
- Dec 19 - financial report provided to owners by old management company (this would be estimated financials, right?)
- Jan 20 - new management company takes over
- ?? - audit requested from local CPA (FS 720 requires full audit for revenues over $500,000)
- Jul 15 - new industry standard Reserve Study approved by Board
- today - audit of 2019 not yet complete

It seems like the chronology is a bit confused with the annual meeting occurring prior to the end of the fiscal year (a leftover from declarant management?).

So, must an audit (per FS 720) be conducted prior to the delivery of the financial statement (per FS720)? Does our chronology make any sense?

A better chronology?
- Aug-Oct Board reviews financials and determines next assessment level to close budget
- Oct-Nov Board notifies residents of assessment level, confirms date of Annual Meeting, and provides estimated (unaudited) financial statement
- end of fiscal year (31 Dec) occurs
- outgoing board directs audit be accomplished
- audit accomplished and audited financial statement is prepared
- Annual meeting occurs where financial statement is delivered, new board elected, etc
- cycles starts anew

AND - I’m not an accountant, but I have read the many threads on this forum and others - should we be using accrual (or, modified accrual), or cash basis accounting? FS 720 notes the financial statements should be prepared per GAAP, but does not actually specify GAAP accounting system, which would dictate accrual. My sense is that due to our size and complexity, we should be using accrual accounting in order to have a good idea - at any time - of the financial status, how much is available for expenditures not in the budget, etc.

Thoughts on these two broad topics?

Thanks.
++++++++++++++++++
FS720 Excerpt -
(7) FINANCIAL REPORTING.—Within 90 days after the end of the fiscal year, or annually on the date provided in the bylaws, the association shall prepare and complete, or contract with a third party for the preparation and completion of, a financial report for the preceding fiscal year. Within 21 days after the final financial report is completed by the association or received from the third party, but not later than 120 days after the end of the fiscal year or other date as provided in the bylaws, the association shall, within the time limits set forth in subsection (5), provide each member with a copy of the annual financial report or a written notice that a copy of the financial report is available upon request at no charge to the member. Financial reports shall be prepared as follows:
(a) An association that meets the criteria of this paragraph shall prepare or cause to be prepared a complete set of financial statements in accordance with generally accepted accounting principles as adopted by the Board of Accountancy. The financial statements shall be based upon the association’s total annual revenues, as follows:
1. An association with total annual revenues of $150,000 or more, but less than $300,000, shall prepare compiled financial statements.
2. An association with total annual revenues of at least $300,000, but less than $500,000, shall prepare reviewed financial statements.
3. An association with total annual revenues of $500,000 or more shall prepare audited financial statements.
(b)1. An association with total annual revenues of less than $150,000 shall prepare a report of cash receipts and expenditures.
SheliaH
(Indiana)

Posts:3358


07/19/2020 10:30 AM  
Goodness, it would appear the new management company isn't the only group of people over their heads. Does anyone on your committee have an accounting background? If not, you may want to recruit a new committee member (or two and maybe three) who can give you guidance on what accounting method that would be best.

That said, our community uses the accrual accounting method for the reasons you note - you should be able to see in real-time how much is in the bank, whether all homeowners are paying assessments in full and on time, if all bills are being paid in full and on time, and if reserves are being funded according to the reserve study.

It appears the board has commissioned a new reserve study - that's good and I hope you can get it before the year ends, as you'll need it to help prepare the upcoming year's budget so you can begin implementing the funding recommendations. Regarding auditing, ours were usually done after the financial statement was prepared because you have to see what it says and then backtrack to ensure the numbers fit and were computed properly as well as all checks and balances followed to prevent mismanagement and embezzlement. The auditor should also give you suggestions on how to make your financial operations more efficient.

I often recommend looking at the CAI website to pick up educational materials on association issues, and this time's no different. There are books on best practices regarding reserves, budgeting, delinquencies, etc. Your board should consider purchasing a few for themselves and the committee, so everyone will be on the same page on definitions and why HOA accounting is done the way it is. You can also use the books to see what best practices could be adapted for your community. If you don't want to do that, there are lots of books you can buy at the bookstore (there a few left!) or online - for example, the "Dummies" and "Idiots" guides are good at explaining things in plain English.

I also note there are several CAI chapters in Florida - the website had links to some of them. Hopefully, one is in your area and you could contact them to see if there's someone from a neighboring community who's gone through what you're going through and offer suggestions. Good luck!
MarkW18


Posts:1290


07/19/2020 10:40 AM  
I am quite curious, IF you're the president of another association, why aren't you asking these same questions of them. As president, you should most, if not all the answers to your question.

First, you should know the different types of accounting and which type is generally used in HOA's that have management involved. HOA's don't depreciate assets and they don't have shareholders they pay dividends to.

Second, there are three type of financial reviews/audit. The most common is a Annual Review, then there is a Annual Audit and then your have a Forensic Audit. Con't want to be doing a Forensic Audit and the only real difference in a Review vs Audit is the price charged.

Third, your mention of Reserve Study. Last one in 2014, lots of amenities and yet only 8 items listed. Sounds to me as there is a disconnect.

Fourth, I'm not a firm believe in GAAP or whatever,as long as everyone understands, 1+1=2 and making sure your checkbook balances each month. What type of accounting is the current management using right now. You should know that. When the association files tax returns they have to designate a accounting system used.

Lastly, the software package you reference starting with a capital B (I thought all had or should be capitalized) specializes in property rental, not HOA's, just for your information.
GeorgeS21
(Florida)

Posts:2902


07/19/2020 1:26 PM  
The other Association, of which I am now, VP - I know the answers for there - I know the chronology - I know the accounting system in use - I know the software used by the management company.

I don't know the answers for the new one.

First - I don't know the system of accounting the current management company is using - apparently, my neighbors and the board don't know, either.

Second - FS720, excerpted, notes "An association with total annual revenues of $500,000 or more shall prepare audited financial statements." I don't know if this refers to a "statutory audit," but sounds like it - usually with an opinion.

Third - yep, that was my point wrt to the only reserve study - the management company apparently specified the eight items - the same management company that was left over from the declarant's development. Don't have any other info. They were off by about 50 components of infrastructure that should have been included - and, the product was a single page.

Fourth - I'm a firm believer in simply following the rules, hence the excerpt from FS 720, and the question about methods.

Lastly - the B I referred to is not all caps, and is also used for HOAs - I've read some of the training material, and viewed a couple of hours of their training videos.

We have accountants, former accountants, IT guys, education PhD, and gadflies like me, etc on the Finance Committee. I started working this about two months ago when I moved into this community. At that point there was no Finance Committee - I introduced myself to the prez (she knew me from the other neighborhood which is close) and lobbied her to support the formation, then assisted in pulling in a couple of folks, with a lot of help.

With the prez's OK and support, I met with a couple of other folks interested I helping out on a finance committee, met with a couple of the folks who were involved in informal infrastructure work, and then put together a briefing supporting an industry standard reserve study. Board agreed to pay for the study and also stood up a more formal Finance Committee. This is the usual sort of process stuff that most HOAs don't have set up - some owners have recoiled from the idea of having to speak truth to their neighbors - I don't mind doing this - as long as there is truth, which requires research and understanding of what norms and processes are commonly followed. Lots of little details left out in my narrative, above.
JohnC46
(South Carolina)

Posts:9678


07/19/2020 1:33 PM  
George

Most people run their personal finances on a Cash Basis whereas most businesses run on an Accrual Basis which Accountants/Auditors prefer. I do not terribly understand Accrual but basically in an HOA, the dues are accounted for before they are received. As an example let us say 100 homes at $200 per year. Thus dues should be $20,000 for the year and expenses listed for the year as per the Budget

Let us say $20K Income and $20K Expenses so a balanced budget. Now 6 months into it let us say all was per budget. An Accrual would show Actual to Budget so in a perfect word you would be 50% to Budget or on track so one could feel comfortable with the numbers. Now the catch comes when people pre-pay so you may show Income at say 70% after 6 months and Expenses at 50%. This often leads people to think the HOA has more money to spend than they have. As the year goes on Income to Budget will get closer to Actual. For some reason Accountants prefer Accrual Basis as they, unlike me, they understand it.

When I look at our Financials (Accrual Basis) I look more at Actual as in are we where we budgeted for, but that is how I think. I think Cash Basis. I have had Accrual Basis explained to me several times and I still do not clearly understand it. This is one reason a BOD needs a financial person rather then just anyone elected to the position. If only we could all have such a person.

I debated on posting this as, because of my not totally understanding it, I may be confusing things even more....LOL
MarkW18


Posts:1290


07/19/2020 1:47 PM  
Most HOA's will use the Modified Accrual Basis, meaning revenue is accrued when billed, not received and expenses on a cash basis, when paid, not received.
JohnC46
(South Carolina)

Posts:9678


07/19/2020 2:14 PM  
Posted By MarkW18 on 07/19/2020 1:47 PM
Most HOA's will use the Modified Accrual Basis, meaning revenue is accrued when billed, not received and expenses on a cash basis, when paid, not received.




Thank you. As I think more about it ours is a Modified Accrual Basis. Thankfully our PM handles it all including collections and bill paying. Our BOD get a Monthly Financial Report over 25 pages long showing everything down to the penny.

The PM (here in SC) uses a bank in NV that specializes in this. The Pres. and I (VP & Treasurer) each have a code number with the bank so we we can stop all payments to the PM if we ever saw any "funny" business. It requires us both using our code to stop payments. Our PM can only make deposits to our Reserves (different, local banks). The PM cannot withdraw from either account. Only the Pres and I jointly can and we have never had to do so.
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