5 Things HOA Board Members MUST Know About Accounting
Joining the board of directors for a homeowner’s association (HOA) is usually something residents do to be helpful to their communities, while also having some influence in the direction of the organization. Even though HOAs probably enjoy shaping their future, there are often a lot of administrative tasks and meetings for board members, and while many are routine can be managed with little additional training, one of the areas most board members shy away from is accounting.
Members don’t have to be CPAs, or even know much about bookkeeping; that’s often left to an outsourced professional. However, since board members are responsible for the HOA’s financial health, they must grasp some key accounting concepts.
Training on the responsibilities and the tactics related to HOA accounting is critical for board members to avoid mistakes that could be costly or have other negative impacts on the organization. Although HOAs operate similarly to many small businesses or not-for-profit organizations, there are some important nuances to consider in the accounting function for them.
Training Board Members on HOA Accounting
At Certum Solutions, we have worked with many HOA boards, and recommend that your training start with these five essential elements.
1. Why HOA Accounting is a critical responsibility of the board of directors. While this may seem like common sense, it shouldn’t be taken for granted that board members understand the potential negative consequences of improper HOA accounting, such as financially overextending the organization, creating problematic cash flow, or making decisions that are based on inaccurate records.
Another potential pitfall of poor HOA accounting management? Your HOA board has a duty to manage the association’s finances correctly. In some cases, members of the community might take legal action against your board for mismanagement. Although state laws and your governing documents might offer you some protection, court rulings may still find you personally liable for poor HOA accounting and financial management.
2. The type of HOA accounting your board of directors is going to use. There are three accounting methods to use, so it’s important to make each HOA board member aware of which one has been selected:
Cash basis. Using this method, the HOA will record income and expenses when there is an exchange of money.
Accrual basis. This method means that the HOA will record income as it is earned and expenses as they occur. Line items for receivables and accounts payable account titles will be included on your financial statements.
Modified accrual basis. The HOA will follow the accrual basis for reporting revenue and the cash basis for reporting expenses in this model.
If an organization wants to make a change, we can help the HOA determine which of these methods your HOA should use.
3. The financial reports your HOA must prepare, and the metrics that must be tracked, throughout the year. On a monthly and annual basis, there are several financial reports that must be prepared based on HOA accounting rules and generally accepted accounting principles (GAAP), including the following:
·A balance sheet comparing the HOA’s assets against liabilities and owner’s equity. This provides a complete look at an HOA’s net worth, including how much money there is in bank accounts. Ideally, to be “balanced,” this report should show that assets equal your liabilities plus equity (Assets = Liabilities + Equity).
An income statement showing the HOA’s income and expenses for a specified period (usually for the month). It’s important to keep track of all HOA revenues and expenses, so that the HOA remains in good financial standing.
An HOA general ledger (GL) forms the basis of HOA financial reports, tracking all accounting transactions. The GL lists transactions in numerical order based on the HOA chart of accounts. It is the basis of all HOA financial reports.
Other reporting your HOA may receive are an accounts payable report, cash disbursement reports, unpaid debt, and a delinquency report. There may be other reporting requirements based on the needs of the HOA, its bylaws, and the recommendations of an accountant or bookkeeper.
4. The HOA accounting best practices that must be followed by board members. Managing HOA finances isn’t always easy, particularly if board members don’t know where to start. These best practices can provide a good foundation for structuring the board’s oversight, including:
Being familiar with state laws regarding taxation.
The chart of accounts should be specific, so that it’s easy to allocate expenses and income as accurately as possible.
Make sure that credits and debits to accounts are made accurately as well, for these same reasons.
Keep a close watch on income and expenses, in order to keep the HOA cash flow position strong and eliminate surprise financial issues.
Ensure there are adequate internal controls to prevent fraud and embezzlement from the HOA.
Proper reporting and HOA board oversight of your HOA’s financials will help you avoid a tax audit. In addition to following best practices for HOA accounting, an HOA may also need to conduct an audit to either certify records or satisfy the requirements of HOA by-laws and taxing authorities. That’s why it’s important to maintain accurate accounting records for your HOA and review financial statements on a regular basis. Audits should be performed by a qualified third-party, such as a CPA firm.
5. How to work with the bookkeeping and accounting professionals engaged to support your HOA. HOA management companies often partner with an accounting professional or firm to ensure they are following best practices, receiving accurate financial reports, and avoiding an audit or other potentially problematic accounting issue. For example, Certum Solutions can advise HOAs on what to do if a homeowner who is part of the association goes bankrupt, or if the HOA is facing an IRS or other tax authority audit.
Questions about how to train new HOA Board Members? Ask us! Given the importance and impact of accounting for homeowners’ associations, and the responsibility that the board of any homeowners’ association has for proper security and operations of the HOA’s financial picture, every member must commit to understanding each of the five essential areas of HOA accounting listed above.
Need assistance with HOA accounting? Our experienced professionals will help keep your HOA board members aware of all compliance issues related to HOA accounting and help them to manage their HOA accounting responsibilities, effectively supporting their mandate to provide your HOA with strong financial guidance and stewardship. Contact us today.
