Follow the Money Proper Financial Recordkeeping

Follow the Money

 If you want to find out about the history of a town, region or country, head to  a museum or look it up on the Internet. If you want to find out about your  family’s history, look at your photo album, whether it’s in a book or online. And if you want to find out your medical history, good  luck!  

 But if you want to find out about past financial records of a condo or co-op  development, that history is comprised of all sorts of documents, financial  records, minutes of meetings, election results, invoices, and other records  that are kept from year to year. How are these records kept, and what are the  most important pieces of the “historical record” for board members and managers? The answers are complicated, but fortunately,  we have several financial professionals that have agreed to help us out.  

 What You Should Know

 To begin with, what is the minimum financial information that board members  should know and understand about their buildings? While boards need a financial  professional in their corner, that doesn’t mean that there’s not some basic information that they should know and understand on their own.  Obviously, the accountant or other expert can’t be there all the time!  

 Professionals interviewed by The Chicagoland Cooperator mentioned quite a few  important items as essential. These include shareholder or unit-owner arrears,  cash balances, unusual items such as special repairs or overtime, long-term  unpaid invoices, reserve activity and balances, profit-and-loss statements  (also called income statements), accounts payable, accounts receivable,  subsidiary ledgers, bank reconciliations, check registers, general journals,  open liabilities, expense and income vs. the budget, and major capital projects  coming up.  

 Many of these items are contained in a monthly report provided by the property  manager, which is reviewed by the treasurer or other board members each month. “We always try to tell board members, if this was your business, would you say  'Hey, I don't need to know about my business, I hired someone else to take care  of my accounting?' Of course you wouldn't, you'd want to be involved, you have  a huge investment in that business, and it's the same thing in an association.  This is a huge investment you have, you have to be active, and you have to know  what's going on,” says Steven Silberman, vice president and CPA at the certified public  accounting firm of Frost, Ruttenberg & Rothblatt, PC, in Deerfield and Chicago.  

 While the board president and treasurer are responsible for this financial  information, all board members should have a least a basic understanding in how  to read monthly reports, so the work of the property manager can be checked. “Some of the management companies have excellent accounting departments, and they  understand how to make journal entries, and record financial transactions,” says Brad Schneider, president of Elmhurst-based CondoCPA, which provides audit  accounting and tax services for community associations. “With some other companies, usually they're smaller, they may only have  bookkeepers that just know how to do accounts payable, accounts receivable  transactions, and when something comes out of the ordinary, they don't know how  to deal with it,” he says.  

 With all this information, there’s plenty of opportunity for mistakes and/or oversights by administrators or  boards. Here are some of them that have been known to happen:  

 A common mistake among boards and even some property managers is the use of  cash-basis financial statements. A cash-basis system only shows the cash  inflows and outflows. So if you’re tracking your finances only through cash, you’re only getting a quick snapshot of how much money is in the bank, and if a  regular payment hasn’t gone through, or a long-term budget item isn’t included, the snapshot can be quite inaccurate. “I'm a proponent, obviously, of accrual financial statements, because it's the  most accurate picture of your financial position,” says Chad Porter, CPA, at the certified public accounting firm of Kutchins,  Robbins & Diamond, Ltd., in Schaumburg. “The revenues are recorded when they're earned not necessarily when they're  received. A perfect example is if you receive a bunch of prepaid assessments in  December that pertain to the next year—my opinion is to reflect those in the ensuing year, and not immediately,” he says.  

 Changing Gears

 Another common issue can simply come from a changing of the guard. “When [boards] switch managers, it's always been an issue. When they switch  on-site managers, sometimes one might have a certain filing system, and when  another one comes on, when there's no overlap when the old one leaves and the  new one starts, a lot of times they can't find items that were filed,” says Schneider. “For instance, if there's maintenance agreements, a lot of times we see when a  new manager starts, that they may not be doing it the exact same way. So, as  time goes on the actual calculation is being done differently ten years later  than when it was supposed to be,” he says. If they were fired, property managers often leave with their ego  bruised. In those instances, some managers will deliberately leave the  transitional work unfinished and sloppy just to give the association a hard  time. The only way to avoid that situation is to try to get on the departing  manager’s case while you’re still paying them.  

 Unfortunately, bitter managers on their way out aren’t the only thing that can lead to missing records, and for that a control system  is necessary. Most property managers do their jobs quite well, but mistakes  happen; anything from not reconciling bank statements, not producing quarterly  or monthly reports on a timely basis, not resolving unreconciled items, and not  making sure that carrying charges are credited to the correct person’s account. “It would be a good idea that the board have some sort of written plan of how  long to keep records, for instance, seven years,” says Schneider. “Nowadays, with electronic records, it's important to continue to follow the same  policies. There's a lot of electronic filing systems and I think they should  follow the same purging of records—once they write out a policy, they need to follow it.”  

 Checks & Balances

 But an easier process can also lead to greater complications, and possible  issues of fraud. “There are more electronic ways to receive money, and the same thing for paying  out, there's more things you can put on automatic withdrawals that are  basically routine expenditures like utilities, or certain monthly contracts.  But again, you have to be very careful if you do these things because you have  to have controls on these things,” says Silberman.  

 We’ve seen what some of the problems can be. How can condo administrators  streamline their buildings’ financial profiles to make them simpler, more transparent, more efficient and  less likely to result in missed deadlines, missing paperwork and penalties?  

 Obviously, the board and manager should have a regular schedule to review  documents and reports and to discuss them. A checklist, with a schedule of  important due dates, will keep things running on an efficient basis—and boards need to be ready and able to double check the work. “Who's watching the records to make sure these are being done? Are these  authorized? Do you have a listing somewhere in your policies that these are the  companies that you have authorized? If you don't have a policy, is it one or  two people—or the board who should be authorizing which expenditures are going to have  automatic withdrawals taken out,” says Silberman.  

 It’s important to make sure that two board members are signatories on every bank  account, including those accounts maintained by management. Duplicate copies of  bank and financial statements can be sent to multiple individuals so that  responsible board members are kept appraised of the activity and can report  accordingly to board members. Many financial institutions will do this for  free. “When there's a fraud in the association, a backup for the invoice might be  missing. A lot of times, board members, or whoever is signing off, are  friendly. So if something is missing they feel pressure not to ask for the  invoice,” says Schneider.  

 In order to streamline payment processes with unit owners and service companies,  many banks have a lockbox center where the checks go to the bank, not the  management company. The bank opens the envelopes, credits, the accounts, and  sends an electronic file to the management company to update their records.  (The phrase “lockbox,” says Wikipedia, refers to the post office box, accessible by the bank, where  people who are paying—in this case, unit owners or shareholders—send their checks. A “lockbox” in common parlance is just a physical, secure, locked box where money was  stored, like a safe deposit box.)  

 Finally, it’s important to get more unit owners or shareholders involved and to set up  committees where they can volunteer. Otherwise, the same small group of  volunteers will have to carry the ball on everything, and they will be  overtaxed and overspent.  

 “It's all about giving the board transparency. I have a lot of boards, where if  things don't make sense to them, they may say ‘well, somebody stole the money,’ ” says Porter. “That's why I always say, you can have all the internal controls you want—there have to be different bells and whistles, and that's all important—but, I think the board's oversight is probably mitigating risk on top of any  control. But where they don't have a good grasp of why there might be a  variance, they need to be able have that answered with confidence,” he says.  

 What resources for boards and/or managers to get solid advice on how to better  organize and manage their financial records?  

 The information in this article is very minimal, but there are many resources  that are available to interested co-op and condo boards and property management  companies. “If they're self-managed, they probably need to consult with either an  accountant, or a management company, and decide what to do from there,” says Schneider. “They can also have an audit done, and if the issue is with the management  company itself, the audit should come up with recommendations on dealing with  the books. If they're self-managed and they're having problems with  bookkeeping, the two alternatives are 1) to get a full management contract, or  2) at least contract out their accounting.”  

 Seminars, including those given by trade organizations or at shows such as The  Chicagoland Cooperator Expo, are another resource. As we mentioned earlier, the  building’s accountant is not always available. So when attending trade shows, board reps  or managers should look at some of the accounting systems or software being  offered, and see whether they are more efficient than the systems they are  using now.  

 Simple, basic practices-like good record keeping, regular maintenance and good  communication between the condo/HOA board and the building administrators are  keys to keeping the community fiscally sound and on track.  

 Raanan Geberer is a freelance writer and a frequent contributor to The  Chicagoland Cooperator.  

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