Monitoring the Annual Budget
Q. Our Board is responsible for a $450,000 annual budget. We are concerned that we may need to be spending more time overseeing our manager with regard to financial matters in order to fulfill our responsibilities as a board. What guidelines can you give us on this topic? What laws govern us on financial responsibility?
A. As associations grow in size and sophistication, their funds become more vulnerable to market loss and theft. Though many associations are adopting policies to protect their investments from market loss, not all associations adequately protect their funds from theft--an oversight that could cost thousands of dollars.
An association's size often affects the manner in which board members and managers protect its funds. For example, small associations often use volunteer board members to run the association. They do not hire staff members or an outside management company. Therefore, volunteer officers are responsible for all of the association's fiscal matters. These associations depend on the honesty and integrity of the volunteers to protect funds.
Mid-size associations often hire professional management companies to oversee their financial operations. Though this arrangement works well for many community associations, it removes the board of directors from active participation in association affairs. Many times, board members react by taking on a passive role in the association's financial management. These community associations should carefully review all financial reports, bank reconciliations, and transactions that are processed by their management company.
Many large-scale associations hire their own employees to act as on-site managers and accounting staff. Employees that handle several different functions often have the opportunity to misappropriate funds. A community association can easily watch for fraud by requiring a board member or manager to review employees' work--especially before signing a check. Also, carefully review all financial records.
Associations of every size can limit their exposure to loss by implementing sound accounting procedures. Following are some suggestions:
1. Thoroughly review monthly financial statements. Consult with your CPA in order to develop a checklist to review important points. If possible, ask at least two board members to check the financials.
2. Ensure the association's accounting records are kept up-to-date.
3. Never sign a blank check.
4. Require a financial statement at the end of the fiscal year. This statement should be prepared by an independent accountant. An audit is not always necessary unless your documents require it. If the documents require it, consider amending them if your CPA tells you a lesser method is appropriate for your association.
5. Review the association's fidelity insurance on a regular basis. Ensure the association's funds are covered properly and that the association's fidelity insurance covers anyone who handles community funds--including volunteers. A new Virginia law that came into effect on July 1, 2007 requires that every association obtain and maintain a blanket fidelity bond or employee dishonesty insurance policy covering officers, directors, persons employed by the association and any managing agent and his or its employees. The minimum coverage is $10,000.
6. Adopt the following policies, if applicable in your particular management situation:
* Do not accept cash.
* Require the individual who opens the mail to stamp payments "for deposit only." The individual who deposits the payments should not open the mail.
* Require at least one board member to review all payables to ensure proper invoicing.
* Require different individuals to review association invoices and to write the checks.
* Review canceled checks for irregularities.
* Account for reserves on a separate ledger.
* Require two board members to sign expenditures or transfers from reserves.
* Ensure that transfers to the reserve account are made in a timely fashion. Virginia law requires a reserve study every five years and an annual review of the reserves to ensure that you are adhering to the established schedule. Failure to abide by this law could constitute negligence on the part of the Board.
* Properly document expenditures from the reserve account in the minutes. Require board approval for these expenditures.
To prevent fraud and theft, the board must actively protect association assets. No Board of Directors of an association can afford the costs of negligence with respect to financial matters.
Board members are fiduciaries which means that they have a higher duty of care in the handling and management of funds which are not only theirs but those of all other homeowners in the community. The Virginia Non-stock Corporation Act, under which most associations are formed, contains standards of conduct for directors and Virginia case law also articulates similar standards for directors acting in a fiduciary capacity. A director must make decisions after careful consideration about the care and usage of funds based on advice from professionals, such as accountants, attorneys, money management professionals, and insurance advisors. In financial matters, as well as other matters, directors must avoid any conflicts of interest.
If you will adhere to most of these guidelines and suggestions you should serve your community well with respect to its financial management.