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|MCL Nov/Dec 2013 - Understanding Financial Statements|
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
Know Your Manager’s Background
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
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 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
Are reserve funds adequately funded? (note – you should use your reserve study to compare your current reserve fund levels to projected future needs.)
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.
Trust, But Verify
About the Author
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 firstname.lastname@example.org, or at CAI–Minnesota Chapter, 1000 Westgate Dr., Suite 252, St. Paul, MN 55114.