It is common knowledge that homeowners associations are vulnerable to fraudulent financial (i.e. embezzlement and theft) activities by those who are entrusted with the management of the associations finances. To protect against losses from such fraudulent activities association directors must be conducting financial reviews on a regular basis and be in compliance with their financial responsibilities.
A financial review generally consists of: (i) reviewing bank statements and preparing reconciliations; (ii) reviewing actual current operating revenues and expenses and comparing them to the current budget; (iii) reviewing current income and expense statements; and (iv) reviewing the check register, monthly general ledger, and delinquent assessment receivable reports.
State laws and/or an associations governing documents may contain specific provisions relative to the frequency, nature, and extent of financial reviews that the associations directors are responsible for performing. Thus, it is critical that an associations managing personnel be familiar with both, their states requirements, and their associations internal requirements, relative to financial responsibilities. While some jurisdictions and association governing documents may lack provisions, or have less stringent requirements relative to financial reviews by association directors, the better practice is to have a requirement for a monthly review, such as those that became law in California last year. California Civil Code 5500, which took effect on January 1, 2019, mandates that association directors review their associations financial records on a monthly basis. The review must include:
- A current reconciliation of the associations operating bank accounts;
- A current reconciliation of the associations reserve accounts;
- A comparison of the current years actual operating revenues and expenses and the current years budget;
- Reviewing the latest bank statements for both operating and reserve bank accounts;
- Reviewing the association’s income and expense statement for both operating and reserve accounts; and
- Reviewing the associations check register, monthly general ledger, and delinquent receivable reports.
Because some association boards meet less frequently than monthly (i.e. quarterly), or periodically miss some monthly meetings due to holiday breaks, or for other reasons, procedures should be in place to ensure compliance with monthly review requirements by such means as: (i) individual board members reviewing the documents monthly outside of a formal meeting of the board, and then ratifying the review at a subsequent board meeting; or (ii) creating a committee that consists of the treasurer and at least one other board member to perform the reviews outside of board meetings, reporting on the review to the board at the next meeting, and the board ratifying the review at the meeting. Each review that has been completed and the boards ratification of that review should be noted in minutes of board meetings.
HOA directors should be aware of their financial responsibilities relative to financial reviews and implement proper procedures and policies to make certain that they are in full compliance with all applicable statutes and provisions in their associations governing documents relative to financial reviews. By implementing the appropriate procedures and policies for conducting regular financial reviews, an association will greatly reduce, or eliminate, the chances of the association being financially damaged by the fraudulent acts of managers or other insiders who have been given too much opportunity to misappropriate funds from the association without oversight by the associations directors.