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.
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.