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Subject: What are the risks to a POA with no accounting system
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RogerJ1
(Texas)

Posts:97


02/05/2020 9:44 AM  
I know it is not prudent and leaves holes in budgeting etc. not have any accounting system, but I am wondering if there are any direct risks to a POA/HOA that has no accounting system.

By no accounting system, I mean no ledgers, and no accounting. The Treasurer just shows bank statements as his financial statements every month - does not even reconcile it with any outstanding checks. At the end of the year, he just adds checks written for various categories and lists those as expenses per those categories. He lists any incoming amounts, mostly assessments, that were received as revenue. There is no record of accounts receivable or equivalents for an amounts before assessments are collected, nor any payables on known amounts that are due.

I assume those opens the door to risk since there would be no accounting controls or anything, but I can think of no direct problems it causes. Does anyone know of any?

AugustinD


Posts:2948


02/05/2020 9:57 AM  
I just looked at the Texas Residential Property Owners Protection Act. The only concern it raises is when an owner makes a request to review the "books" of the Association. But even then, the statute is generous to the HOA, using qualifying phrases that indicate the HOA need only provide the books 'to the extent the books are in the possession of the HOA.'

Roger do your governing documents require that the HOA generate an annual budget; a monthly profit-and-loss (income and expense) statement or anything else?
CD6
(Texas)

Posts:22


02/05/2020 9:57 AM  
Sounds sketchy to me.
I would want some kind of checks
and balances in place at a minimum.
We use QB and after a short intro
it isn't hard to use at all.
AugustinD


Posts:2948


02/05/2020 10:02 AM  
On the other hand, the Texas Nonprofit Corporation Act has some stern warnings:
---------------------
Sec. 22.353. AVAILABILITY OF FINANCIAL INFORMATION FOR PUBLIC INSPECTION. (a) A corporation shall keep records, books, and annual reports of the corporation's financial activity at the corporation's registered or principal office in this state for at least three years after the close of the fiscal year.

(b) The corporation shall make the records, books, and reports available to the public for inspection and copying at the corporation's registered or principal office during regular business hours. The corporation may charge a reasonable fee for preparing a copy of a record or report.

Sec. 22.354. FAILURE TO MAINTAIN FINANCIAL RECORD OR PREPARE ANNUAL REPORT; OFFENSE. (a) A corporation commits an offense if the corporation fails to maintain a financial record, prepare an annual report, or make the record or report available to the public in the manner required by Section 22.353.

(b) An offense under this section is a Class B misdemeanor.
----------------------

I do not think what the treasurer is doing at the OP's HOA qualifies as "books." Does the treasurer prepare an an annual report? If he does not do more than what the OP describes, I would be concerned state law is being violated.
SheliaH
(Indiana)

Posts:3063


02/05/2020 10:49 AM  
When you don’t have an accounting system, how do you know all the homeowners have paid assessments in full and on time? If someone’s delinquent, how do you know when the delinquency started and how much is owed, especially you have penalties for returned checks, late fees, etc.? How do you know if vendors have been paid and if they were paid the right amount? Do you know what’s in reserves and if any withdrawals actually went towards major repairs and improvements to the common area?

These are just SOME of the risks to the HOA and I really don’t know why anyone would have to ask a question like this. Put another way, how would you know where your money was coming and going if you didn’t keep records? How do you know for certain the treasurer is even capable of adding 2+2? This question belongs in the “in other news - elephants are heavy” category.

A bigger question for you – why on earth have the homeowners in this community put up with this? It’s not entirely the treasurer’s fault – the documents should have clear instructions as to the duties of the board and its officers, and if homeowners don’t read it and hold themselves and each other accountable, they shouldn’t be surprised if they find money is missing or misappropriated and don’t know when or how it started.

Y’all need to put a stop to this right now – if the association doesn’t want to hire a bookkeeper, it can at least invest in some accounting software or use some Excel spreadsheets to start keeping track of the money. And get a few books on HOA finance – the Community Association Institute’s website has several resources you can invest in. You’ll also need to put together some policies and protocols regarding association finances. Good luck – you’ll need it.
RogerJ1
(Texas)

Posts:97


02/05/2020 10:56 AM  
Posted By AugustinD on 02/05/2020 10:02 AM
On the other hand, the Texas Nonprofit Corporation Act has some stern warnings: ....

I do not think what the treasurer is doing at the OP's HOA qualifies as "books." Does the treasurer prepare an an annual report? If he does not do more than what the OP describes, I would be concerned state law is being violated.




He causes it an "annual report" but I would argue that nothing he presents would be construed as such in financial circles. All he presents, as far as an annual report, is a beginning cash balance, receipts, which are pretty much all received assessments, and cash paid expenses, which are checks written broken up in a few categories - examples, mowing service on front ditches of subdivision, utility expenses for power usage for some street lights and irrigation water pump. Then he lists a cash balance. Some of his expenses and revenues categories are very sloppy too. For example, he intermingles savings and checking balances together at the beginning in the starting cash position and then again at the end in ending cash balance, but between those two he breaks them out into two separate assets, and please note that assets is my word in my writing here, he does not call them assets nor have any balance sheet as I recall. He list under revenue, cash transferred from checking to savings, then under expenses he lists that same amount as an expenses from checking - I assume that makes sense to no one but him.

He also got those two things, checking vs savings mixed up in his annual presentation. For example, last week when he went over his report, he stated multiple times that we had XXXX cash in the savings and XXXX cash in checking, when XXXX was clearly those two accounts combined, basically stating we had twice as much cash as we really did. He was not trying to deceive anyone - just sloppy approach to it in my opinion.
RogerJ1
(Texas)

Posts:97


02/05/2020 10:57 AM  
Note above typo: causes = calls. There are probably some others - sorry.
GeorgeS21
(Florida)

Posts:2338


02/05/2020 10:58 AM  
This is crazy talk, Roger.

Of course there must be an accounting system of some sort - complexity isn't always necessary, but what you describe is ... well ... crazy.
BarbaraT1
(Texas)

Posts:305


02/05/2020 11:18 AM  
The risk is that the treasurer can rob the association blind and no one will notice until he's taken it all.
RogerJ1
(Texas)

Posts:97


02/05/2020 11:44 AM  
Posted By RogerJ1 on 02/05/2020 10:56 AM
Posted By AugustinD on 02/05/2020 10:02 AM
On the other hand, the Texas Nonprofit Corporation Act has some stern warnings: ....

I do not think what the treasurer is doing at the OP's HOA qualifies as "books." Does the treasurer prepare an an annual report? If he does not do more than what the OP describes, I would be concerned state law is being violated.




He causes it an "annual report" but I would argue that nothing he presents would be construed as such in financial circles. All he presents, as far as an annual report, is a beginning cash balance, receipts, which are pretty much all received assessments, and cash paid expenses, which are checks written broken up in a few categories - examples, mowing service on front ditches of subdivision, utility expenses for power usage for some street lights and irrigation water pump. Then he lists a cash balance. Some of his expenses and revenues categories are very sloppy too. For example, he intermingles savings and checking balances together at the beginning in the starting cash position and then again at the end in ending cash balance, but between those two he breaks them out into two separate assets, and please note that assets is my word in my writing here, he does not call them assets nor have any balance sheet as I recall. He list under revenue, cash transferred from checking to savings, then under expenses he lists that same amount as an expenses from checking - I assume that makes sense to no one but him.

He also got those two things, checking vs savings mixed up in his annual presentation. For example, last week when he went over his report, he stated multiple times that we had XXXX cash in the savings and XXXX cash in checking, when XXXX was clearly those two accounts combined, basically stating we had twice as much cash as we really did. He was not trying to deceive anyone - just sloppy approach to it in my opinion.




I completely agree with all your wrote. The problem is that what I described is what is being done, and has been done since 2016 when the current Treasurer became the treasurer - also, the accounting before then, while more detailed was very elementary also. The problem is that few to no members care nor does anyone on the Board. I have an accounting background. I am aware of the control risks that no accounting presents but again, no to few care about those risks.

What I am trying to learn from my query here is if there are any tangible problems, such as IRS problems, or law requirements, that the above might cause - i.e. more actionable problems. If so, then I could use those examples to convince members that this is a problem.
DouglasK1
(Florida)

Posts:1489


02/05/2020 12:58 PM  
Posted By GeorgeS21 on 02/05/2020 10:58 AM
This is crazy talk, Roger.

Of course there must be an accounting system of some sort - complexity isn't always necessary, but what you describe is ... well ... crazy.


Sadly, that could even happen with an accounting system. When I was treasurer I tried to explain to the rest of the board about controls and cross-checks and told them it was important for them to review my numbers, compare against bank accounts, etc. They just said they trusted me, and luckily for them I had no interest in stealing from the association, but embezzlement happens and they would be ripe for the picking with the wrong treasurer.

Escaped former treasurer and director of a self managed association.
SheliaH
(Indiana)

Posts:3063


02/05/2020 12:58 PM  
If these homeowners have to have someone explain to them that the current system can allow vital things to be overlooked, expose the association to fraud and embezzlement (because the treasurer might do things like make up vendors and channel money to himself), thus putting THEM at risk for sky-high assessments because there’s not enough money to pay for lawn care or fund reserves (perhaps because no one’s thought about setting one up, let alone getting a reserve study), I would say you have much bigger problems and wonder how they became homeowners in the first place.

You want examples, why not start with goggling HOA embezzlement to see what sort of things can and have happened when the money gets funny – and what may happen to your community if someone doesn’t get a grip and start doing some bookkeeping that makes sense. You can share those stories with the homeowners to start with. Since part of the HOA assessments is supposed to be deposited into reserves, google underfunded HOA reserves and share some of those stories. And “what happens with a homeowner association is broke?”

You can also appeal to their common sense, although I wonder about that too if this has been going on for four years and no one’s said anything until now. Someone once said being in an HOA is like walking into a bar and becoming business partners with everyone there. You don’t know these people – some may be spendthrifts, others are misers, a few may be sociopaths and the rest are various shades of clueless.

Nonetheless, you are all business partners and in order to have a successful business, everyone needs to know where the money’s coming from, where it’s going and ponder ways it can be spent more effectively. An HOA may be a non-profit, but it must be run like a BUSINESS. That means at any time, people should be able to open the books and understand what’s happening, so you’ll have enough money to pay the bills, protect yourself against significant losses (that’s what the association master insurance and reserve funds are for) and improve the property.
DouglasK1
(Florida)

Posts:1489


02/05/2020 12:58 PM  
Posted By DouglasK1 on 02/05/2020 12:58 PM
Posted By GeorgeS21 on 02/05/2020 10:58 AM
This is crazy talk, Roger.

Of course there must be an accounting system of some sort - complexity isn't always necessary, but what you describe is ... well ... crazy.


Sadly, that could even happen with an accounting system. When I was treasurer I tried to explain to the rest of the board about controls and cross-checks and told them it was important for them to review my numbers, compare against bank accounts, etc. They just said they trusted me, and luckily for them I had no interest in stealing from the association, but embezzlement happens and they would be ripe for the picking with the wrong treasurer.



Sorry, meant to quote Barbara's post.

Escaped former treasurer and director of a self managed association.
BillH10
(Texas)

Posts:458


02/05/2020 1:14 PM  
Roger, to answer a portion of your question directly:

The IRS will not come looking for the Association, a small HOA like yours is not worth their time. I personally believe the vast majority of IRS 1140-H forms filed are scanned into the computers and never looked at again.

We have no POA/HOA Governing Agency in Texas, they will not come looking for the Association either as there is no "they".

If you are not filing the annual No Tax Due Report with the Comptroller of the State of Texas, they may come looking for the Association and require you make filings for previous years. Lets say no filings have been made since 2016, the Association could be out of pocket $200-$300 or more for filing and late filing charges paid to the State. There may be other expenses as well if there is no office of the Comptroller nearby.

Since the Accounting "system" in use may not capture the information needed for the No Tax Due report, the Association could be made an example of by the Comptroller's office with resultant 'big bucks' spent on a CPA and legal counsel for defense.
JohnC46
(South Carolina)

Posts:9323


02/05/2020 1:21 PM  
Roger

How large is your association and budget? If small enough, a lengthy/complex accounting system might not be needed. A simple, one page spreadsheet could suffice. This is what our Declarant presented every year and all were happy.

Since turnover (5 years) we have an MC who uses a very in depth accounting system. Our monthly reports are over 0 pages long and sent to each BOD Member (5). Any owner can request a copy of anything they want, including the full report each month. In 5 years, only once did an owner request a monthly statement.

At our Annual Meeting our MC hands out a Balance Sheet and an Income/Expense Sheet, about 3 pages. We still get people asking for the "old, simple to understand" spreadsheet.

Sometimes, simple works although it does not even look like Rodger's Treasurer is even presenting that.
RogerJ1
(Texas)

Posts:97


02/05/2020 1:42 PM  
Posted By BillH10 on 02/05/2020 1:14 PM
Roger, to answer a portion of your question directly:

The IRS will not come looking for the Association, a small HOA like yours is not worth their time. I personally believe the vast majority of IRS 1140-H forms filed are scanned into the computers and never looked at again.

We have no POA/HOA Governing Agency in Texas, they will not come looking for the Association either as there is no "they".

If you are not filing the annual No Tax Due Report with the Comptroller of the State of Texas, they may come looking for the Association and require you make filings for previous years. Lets say no filings have been made since 2016, the Association could be out of pocket $200-$300 or more for filing and late filing charges paid to the State. There may be other expenses as well if there is no office of the Comptroller nearby.

Since the Accounting "system" in use may not capture the information needed for the No Tax Due report, the Association could be made an example of by the Comptroller's office with resultant 'big bucks' spent on a CPA and legal counsel for defense.




Thanks for this information. I will look into it - although now the rabbit hole grows. Also, it might not apply since the Association is a 501c4 but I will research it.
BillH10
(Texas)

Posts:458


02/05/2020 1:51 PM  
Roger, are you absolutely certain the Association has received the IRS 501c4 classification or is this something someone has told you? Have you seen for yourself the documentation the IRS would have provided?

The receipt of This classification by the IRS is very difficult, involved, and takes quite some time. It generally requires the assistance of a CPA and/or possibly a tax attorney.

We have taken a client through the process, the association in which we reside is about 4 months into the process now. Based on your description of the accounting processes in use since 2016 in your association, which would not pass the IRS smell test, the classification would have to pre-date 2016.

I do not believe 501c4 classification relieves a Texas business of the requirement to file a No Tax Due report but I am not absolutely certain of that.
RogerJ1
(Texas)

Posts:97


02/05/2020 1:54 PM  
Posted By JohnC46 on 02/05/2020 1:21 PM
Roger

How large is your association and budget? If small enough, a lengthy/complex accounting system might not be needed. A simple, one page spreadsheet could suffice. This is what our Declarant presented every year and all were happy.

Since turnover (5 years) we have an MC who uses a very in depth accounting system. Our monthly reports are over 0 pages long and sent to each BOD Member (5). Any owner can request a copy of anything they want, including the full report each month. In 5 years, only once did an owner request a monthly statement.

At our Annual Meeting our MC hands out a Balance Sheet and an Income/Expense Sheet, about 3 pages. We still get people asking for the "old, simple to understand" spreadsheet.

Sometimes, simple works although it does not even look like Rodger's Treasurer is even presenting that.





2019: Income, of which over 97% was current and prior year collections of assessments, was $38.2K. Expenses were $19.8K.

He listed budgeted income of $30.7K and budgeted expenses of $30.2K. Please note there is little to no analysis to form a budget. It is roughly the same budget from year to year and from what I can gather. There are a few items where the actual expenses are much lower than the budgeted amount and it is that way every year, but he includes those higher amounts in the budget "because it was done that way previously." To me that situation opens up the door to misuse cash because the membership approves what I just described as a budget and I do not really think many, if any, would question if some of those expenses jumped up to the budgeted amounts.
MarkW18
(Florida)

Posts:748


02/05/2020 2:10 PM  
Seriously dude, no accounting system?
RogerJ1
(Texas)

Posts:97


02/05/2020 3:05 PM  
Posted By BillH10 on 02/05/2020 1:51 PM
Roger, are you absolutely certain the Association has received the IRS 501c4 classification or is this something someone has told you? Have you seen for yourself the documentation the IRS would have provided?

The receipt of This classification by the IRS is very difficult, involved, and takes quite some time. It generally requires the assistance of a CPA and/or possibly a tax attorney.

We have taken a client through the process, the association in which we reside is about 4 months into the process now. Based on your description of the accounting processes in use since 2016 in your association, which would not pass the IRS smell test, the classification would have to pre-date 2016.

I do not believe 501c4 classification relieves a Texas business of the requirement to file a No Tax Due report but I am not absolutely certain of that.




No I am not sure. I know it files that way with the IRS at least up until 2015. Per the 990-EZ listing that the IRS shows in its public documents, the IRS describes it as "Nonprofit Tax Code Designation: 501(c)(4)" For 2016 through 2018, the Association has filed a 990-N, the "postcard" filing, instead of the 990-EZ and the public record of the 990-ns do not indicate the specific tax exempt classification as the 990-EZs, used in 2015 and several years prior to that, do.

I looked over minutes to meetings in the Association's early years. From 1983 until 1985, a period for which I think I have all the minutes as the minutes indicate what meeting it was as in 1st of 198X, 2nd of 198X etc., I found one meeting, the first of 1983, where under "old business" it was mentions IRS tax exempt status was being sought. I found no more mention of it. I do not have minutes between the beginning of 1985 until the beginning of 1988. I suspect it happened in that period. I can still get into contact with one of the principal people from that period, who would likely know the details, but at this time, do not want to bother him.
RogerJ1
(Texas)

Posts:97


02/05/2020 3:09 PM  
Posted By MarkW18 on 02/05/2020 2:10 PM
Seriously dude, no accounting system?




Seriously nothing other than I am explaining. Although there was a 3 to 5 year period about 15 years ago, when the CFO of a major public company was the Treasurer, where even the monthly financial statements were presented with detailed Powerpoint presentations that made one question how much time he had on his hands. Now the extreme opposite of that.
MarkW18
(Florida)

Posts:748


02/05/2020 3:40 PM  
I don't put a lot of credence into someone who thinks the association his mom is the member is actually a 501(c)4. Are you really a social welfare group???
SteveM9
(Massachusetts)

Posts:3599


02/06/2020 7:54 AM  

He causes it an "annual report" but I would argue that nothing he presents would be construed as such in financial circles. All he presents, as far as an annual report, is a beginning cash balance, receipts, which are pretty much all received assessments, and cash paid expenses, which are checks written broken up in a few categories - examples, mowing service on front ditches of subdivision, utility expenses for power usage for some street lights and irrigation water pump.


I see nothing wrong here.


For example, he intermingles savings and checking balances together at the beginning in the starting cash position and then again at the end in ending cash balance, but between those two he breaks them out into two separate assets, and please note that assets is my word in my writing here, he does not call them assets nor have any balance sheet as I recall. He list under revenue, cash transferred from checking to savings, then under expenses he lists that same amount as an expenses from checking - I assume that makes sense to no one but him.

He also got those two things, checking vs savings mixed up in his annual presentation. For example, last week when he went over his report, he stated multiple times that we had XXXX cash in the savings and XXXX cash in checking, when XXXX was clearly those two accounts combined, basically stating we had twice as much cash as we really did. He was not trying to deceive anyone - just sloppy approach to it in my opinion.




Sounds like he has no idea what he is doing. Time for someone else to step up to the plate and volunteer. Not someone I would want in charge of my money.
MarkW18
(Florida)

Posts:748


02/06/2020 8:35 AM  
Based on the several posts that this Roger Dodger has posted over the past week or so, I really don't think he has any idea what an HOA is or how it is to be run.
MarkW18
(Florida)

Posts:748


02/06/2020 8:36 AM  
OH, just an observation.
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