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Subject: Accounting for Fines and Violations
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JoeB23
(Florida)

Posts:13


02/04/2020 5:54 AM  
I closely review our HOA finances and noticed a new line item in the Liability section of our Balance Sheet titled, Deferred Income - Fines/Violations. I asked the HOA controller about this line item and was told it is used to track uncollectable fines and violations. He said residents and banks have been billed for the violations of HOA rules and the fines have been included on the B/S as an Accounts Receivable but instead of including all the funds as revenue he determines how much is likely to be uncollectable and tracks it as Deferred Income. When asked if there have been prepaid fines/violations collected that may be returned making these funds a liability, the controller said none of these funds have been collected but instead of including these potentially uncollectable funds as revenue, it is "normal HOA practice" to track them as a liability to avoid overstating revenues. This "practice" violates accounting principles as uncollectable receivables should be a contra-asset and included as part of the bad debt allowance. Is anyone aware of this "normal HOA practice" claimed by our controller? He also said the auditor has no problem with it. I realize this may be a minor issue but I often hear the controller make these comments about "normal HOA practice" and it does not sit well with me so I want to try to verify or discredit his claim.
CathyA3
(Ohio)

Posts:837


02/04/2020 6:07 AM  
This seems like a very reasonable way to account for potential income that may never materialize. You don't want it lumped in with assessments or other receivables. My Inner Accountant thinks it's fine.

Why do you believe there is a problem?
SheliaH
(Indiana)

Posts:3063


02/04/2020 6:07 AM  
I was treasurer of our HOA and we didn’t have this on our balance sheet. I’m not an accounting expert, but this doesn’t sound like a legitimate line item for a balance sheet. I understand and agree with accounts receivable being money owed the association – you can roll up delinquencies and fines in that because that number will change every month.

However, if you count fines as deferred income, people start looking for stuff to ding people with, which isn’t a good use of time. Your budget should be based on assessments only, along with things like prepaid expenses, inventory and fixed assets.

Our income/expense statement had a line item for miscellaneous income and that’s where fines would be listed if we had them (which we don’t). We would put reimbursement for legal costs incurred in pursuing delinquencies in this category.

I would politely ask this controller to show you examples from real HOAs, an article from an accounting expert or something else that supports his point. You don’t say if you’re a board member, but if you are, this would also be a good question for the association accountant. If there’s nothing that shows this is a typical business practice, the controller may need to come up with a better reason for doing this than “everyone does it.”

PS- can you use shorter paragraphs next time - this was a little hard to read
CathyA3
(Ohio)

Posts:837


02/04/2020 6:23 AM  
In addition, you're never going to have pre-paid fines. They're put on the books only after an owner has been sent violation notices and has failed to correct the violation. It's always after the fact - people don't hand the association money upfront because they intend to violate their CC&Rs. If they do happen to pay the fine before it gets recorded on the books - unlikely unless the HOA is sloppy about keeping up their records - then it would be including as "miscellaneous income - fines" or something like that.

The length of time that an HOA carries these unpaid fines on the books depends in part on their policies for fining and filing liens, and whether or not their state permits foreclosure based on fines. There is no hard and fast rule that applies to all HOAs.
GeorgeS21
(Florida)

Posts:2338


02/04/2020 6:24 AM  
Our POA, in Florida, has fined, via the FS process, for the first time, so this is timely.

My understanding of fine, is that if they are unpaid, the only way to collect, is via the court system ... usually Small Claims Court.

And, since FS does not allow them as the basis for a lien, it seems to me there is no absolute reason, absent the courts, to believe they will be paid - and, they may not have legal standing until such case is brought against the owner?

Ergo, to me, the fine would not be deferred income - unless the HOA always took these fines to court, and then had some expectaction of collecting.
JoeB23
(Florida)

Posts:13


02/04/2020 10:13 AM  
I have an extensive accounting background and have prepared hundreds of financial statements. If you are familiar with Balance Sheets, when you invoice or bill someone for a fine/violation, it is recorded as a receivable and is offset on the other side of the Balance Sheet as Revenue. Receivables that are not collectable reduce the receivable via the Allowance for Bad Debts, which is a contra-asset.

I know people don't normally prepay fines but also accountants don't treat a potential uncollectable debt as a liability either. Since the controller, who is also our accountant, said this is inappropriate from an accounting perspective but claims HOAs normally record uncollectable fines as a liability rather than Income even though there is no certainty that the fines will not be collected. He is only assuming they won't be collected.

I am not a Board member but will be running for the Board in March 2020. Our HOA has 1,912 homes and an annual budget of over $6 million. I just moved to this community and there is a lot of distrust with how our finances are managed, which is why I am actively involved. The HOA has an Accounts Receivable of over $300k for fines and violations, and claims it recently collected more than $80k from banks and homeowners to justify some of its unbudgeted purchases.



CathyA3
(Ohio)

Posts:837


02/04/2020 1:52 PM  
It's a good idea to have your HOA's books audited periodically, and this may even be a requirement in your by-laws.

Do you know if the books have been audited recently? If not, push to have this done. That way a professional, who presumably has seen plenty of HOA records, can give you an opinion on whether this is typical for HOAs and, if it's not, then a better way to do it.
GeorgeS21
(Florida)

Posts:2338


02/04/2020 1:53 PM  
Good question for us all!
JohnC46
(South Carolina)

Posts:9323


02/04/2020 2:52 PM  
We do not carry unpaid fines as owed. Fines are kept separately and when paid, do go down as Misc Income. That said in my HOA we are taking less than $200 per year. More noise than anything else.
JoeB23
(Florida)

Posts:13


02/04/2020 3:53 PM  
CathyA3, Yes our books are required to be audited annually by Florida Statute (FS) because our revenue exceeds $500k. Our controller said the auditor had no problem with the way the fines/violations were treated as deferred income but I do not believe the statement. I met with our HOA General Manager last week and reviewed the last seven years of audited financials but the deferred income line item for fines and violations is new and was not in prior year financials. Generally, auditors must remain neutral and will not give advice on accounting practices until the audit is conducted, which starts in March and will take about a month to complete.
CathyA3
(Ohio)

Posts:837


02/05/2020 5:50 AM  
I agree this needs to be explained since it's new. Annual audits make shenanigans less likely but not impossible.

It may be nothing more than the board deciding to get serious about violations and collections when they realized how much was outstanding and that the dollars hadn't been tracked properly in the past. The details about these things are typically kept confidential, and homeowners who are not on the board will not know about them. They may know the bottom line (ie. the total outstanding and numbers of owners involved) but they won't know the detail making up the bottom line.

Of course justifying additional spending based on dollars not collected is probably not such a good idea, unless the spending is on collection costs.
JoeB23
(Florida)

Posts:13


02/05/2020 8:49 AM  
CathyA3, I agree with you 100%. Not many residents, or most of our five Board members, do not understand accounting or financials so they just go along with what the accountant says. I am new to the community and educating residents on the financials so they can see for themselves what is going on. Audits don't always uncover deceptive practices so getting into the weeds of the finance details is the only of identifying where the problems are. Thanks for your feedback.
GenoS
(Florida)

Posts:3685


02/05/2020 8:46 PM  
Posted By CathyA3 on 02/05/2020 5:50 AM
The details about these things are typically kept confidential, and homeowners who are not on the board will not know about them.

Not strictly true in Florida. There are exceptions to what the homeowners may see if they ask. Monthly accounts receivable and aging owner account balances are not among those exceptions and if an owner asks to see those things then asserting that they are "confidential" will not fly in Florida.
JoeB23
(Florida)

Posts:13


02/06/2020 7:31 PM  
GenoS, you are correct. In Florida, only personnel matters and discussions with attorneys about ongoing litigation is confidential. I don't believe they are being kept confidential and didn't mean to leave that impression. It's just the treatment of the revenue as deferred is the issue. I have a Finance Committee meeting tomorrow and the controller will be there so I plan to bring it up again. The first time he said the auditor was okay with the treatment as a liability and the second time he said that is how the HOAs do it. We'll see what he says tomorrow.
GeorgeS21
(Florida)

Posts:2338


02/06/2020 7:37 PM  
Looks like our fines are recorded as revenue in the Other Income section of the Income Statement, and recorded as receivable on the resident's ledger until paid.
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