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MCL Nov/Dec 2013 - Understanding Financial Statements
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Understanding Financial Statements

Ignorance Is Not an Option

by Jeff Westendorf, West Property Management

Let’s admit most people get glassy-eyed when they see financial statements. One month after purchasing my condo, I attended my Association’s annual meeting. Sitting with a handful of fellow owners, we voted to approve the annual financial statements. There was only one problem – the balance sheet didn’t balance. Assets did not equal liabilities plus equity. As a trained accountant I could not convince the membership it was not possible the financial statements were accurate. The manager (not a CMCA or professional manager) could not answer why they didn’t balance. After all, he used QuickBooks and they must be accurate!

Fiduciary Duty to Understand
Associations are a business and Boards must act as a prudent business person. As Board members and Managers we have a fiduciary duty to ensure that the financial statements are not only complete, but accurate. Boards cannot make reasonable resource allocation decisions with inaccurate financial information. And let’s face it, most Board decisions are resource allocation issues – how much to spend on irrigation, lawn care, snow removal; how much to pay the manager, which lawyer can we afford, what is the cost of a adopting a new rule or policy, cost of capital repairs or deferring maintenance. Without accurate financial statements, Boards are simply making uninformed decisions, exposing their Association and maybe even themselves to criticism or mismanagement claims from fellow owners.

Know Your Manager’s Background
Your manager should be able to explain in detail your financial statements. Many managers come from real estate sales, construction management, human services training and other fields and may not possess formal training in accounting, financial statement preparation or analysis. Ideally, a manager has been trained as an accountant and has experience producing financial statements.

If your management company has an accounting department, you will want to make sure that your manager fully understands the various accounting processes and how they impact the financial reports. Every association is different and thus will probably have slightly different financial statement accounts and even format. Your manager should be able to tell you the difference between cash vs. accrual basis accounting, financial vs. fund reporting, factors and accounts impacting taxation, and be able to explain receivables, payables and any supplemental reports.

For example, when an association uses cash basis accounting, income is reported when it is received. Therefore, if someone pays dues early, the income is reported in the month the money is received. This would be prepaid dues (a liability for the Association). However, this liability would show only on accrual basis financial statements. Therefore, the Board should request a supplemental Owners’ Account Aging Report showing all the dues that are prepaid and likewise who is delinquent in order to ascertain future cash flows and collection issues.

Basic Review of Monthly Financial Package
Your monthly financial package, at a minimum, should include:

  • Income Statement – for the month and year to date
  • Balance Sheet – for the month end
  • Cash Flow Statement – only if you use accrual accounting
  • Owners’ Account Aging Report – showing prepaid dues & past due accounts
  • General Ledger – showing all accounting activity for the month
  • Bank Reconciliations – for each bank account
  • Copies of All Bank Statements – should tie to bank reconciliations
  • Supplemental reports – such as expense detail reports or capital project reports

In addition, a Board officer should review all invoices and countersign or approve all checks for the Association. Reserve Funds should be controlled by dual signatures of two Board members to safeguard funds. If there is a question about any expense, the Board should be able to review any invoice to ensure it was properly accounted for in the financial statements. In addition, Board members should verify that:

  • The income statement includes all income and expenses from the general ledger.
  • Net income or loss is recorded in the Equity section of the balance sheet.
  • Assets equal Liabilities plus Equity.
  • Balance sheet asset accounts agree to the bank reconciliations.
  • Bank reconciliations tie to both the balance sheet and also to the bank statements.
  • Reconciling items on the bank reconciliations are reasonable:
    • Checks are not more than 30 days outstanding;
    • Checks are made to vendors with whom the association does business;
    • Check amounts and dates are reasonable based on services performed;
    • Math is accurate!
    • Checks that have cleared the bank are accounted for in the expense detail and included in the income statement;
    • Deposits on the bank statement are reconciled to income.

The review of the financial package is not something that can be done at the Board meeting as the manager is presenting the financials. The prudent Board member will have taken some time to review the entire financial package prior to the meeting and then make sure that what the manager or Treasurer is saying during the meeting makes sense. A critical internal control is a vigilant Board that asks questions and does not accept an answer until it is proven to be accurate using independent documents like bank statements or invoices.

A Deeper Understanding
To deepen your understanding of your community’s financial condition, Board members should use the financials to engage in the following examples of discussions:
How are we doing relative to our annual or month to date budget?
What changes or modifications should we be making to our budget or financial plan?
What impact will those changes have on the Association, community members or our plans for the property?

Are reserve funds adequately funded? (note – you should use your reserve study to compare your current reserve fund levels to projected future needs.)
Should we make adjustments in dues or modify expenses in order to meet short-term and long-term needs of the community?

As you approve vendors and contracts, analyze the projected contract costs to your budget to know if you can afford that level of service or can add additional services.
Are there future projects or expenses that Management foresees affecting the community and what impact will they have on the Association?

Trust, But Verify
Board members have a fiduciary duty to understand and use financial information appropriately. All Board members, not just the Treasurer, should be able to answer financial statement questions for any homeowner and use this information in making decisions. If you can’t, then it is time that you ask your Manager or an outside resource to provide supplemental education so you can perform your minimum responsibilities.
To quote President Ronald Reagan, "trust, but verify” the financial statements presented by your manager; review, ask questions and deepen your understanding; only then are you ready to make prudent business decisions!


About the Author
Jeff Westendorf holds a Master of Arts in Teaching from Drake University and a Bachelor of Business Administration in Accounting from The University of Iowa. Jeff is currently the only Certified Manager of Community Associations in the State of Iowa and is the founder and owner of West Property Management in West Des Moines, Iowa. Professional experience includes public accounting, banking, secondary & higher education and non-profit management.

Published by Community Associations Institute — Minnesota Chapter, copyright 2013. All articles and paid advertising represent the opinions of authors and advertisers and not necessarily the opinion of either Minnesota Community Living or CAI–Minnesota Chapter. The information contained within should not be construed as a recommendation for any course of action regarding financial, legal, accounting, or other professional services by the CAI–Minnesota Chapter, or by Minnesota Community Living, or its authors. Articles, letters to the editor, and advertising may be sent to Chapter Staff Editor Joanne Penn at joannep@cai-mn.com, or at CAI–Minnesota Chapter, 1000 Westgate Dr., Suite 252, St. Paul, MN 55114.

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