Is Your HOA Meeting Its Responsibilities Concerning Financial Statements?

State laws and the governing documents for homeowners associations impose requirements for the preparation and distribution of financial statements for the association. Financial statements are documents that detail the association’s financial activities and identify the association’s income and expenses during a stated time frame.

Although the ultimate responsibility for preparation of financial statements falls on the association’s board of directors, as a practical matter they are typically prepared by accountants retained by the association or the association’s management personnel. Associations that are self-managed will have a designated person, such as the treasurer, prepare the statement, and associations that employ professional management will typically delegate the responsibility for preparation of the financial statement to the management company personnel.

The basic components of an association’s financial statements consist of: (i) bank statements; (ii) a general ledger that details the activity for each bank account (operating and reserve); (iii) an income and expense statement that details all money that came into the association and all expenses paid during the period of the statement; (iv) a reconciliation of operating and reserve accounts that reflects all account balances; and (v) a budget comparison.

Regardless of who performs the actual work in preparing the financial statement, once it is prepared it should be provided to the association’s treasurer for a review before it is passed on to the association’s board of directors and then the association members. The treasurer should review and thoroughly understand the components of the financial statement and then ask questions to the preparer of the statement to clarify any items of uncertainty. Then, the treasurer will be in a position to answer questions that may be asked by members of the association’s board of directors when the statement is presented to the board. The financial statements will then be presented to the association’s board of directors at a duly noticed meeting as part of the report by the association’s treasurer. The association’s board of directors then has a duty to review the financial statements and address any areas of concern. The financial statements are then distributed to members in accordance with applicable state laws and provisions contained in the association’s governing documents.

The frequency for preparation of an association’s financial statements is typically mandated by state laws and/or the association’s governing documents. Generally, the requirements for smaller associations that have annual budgets of less than a specific amount (i.e. $75,000) are less stringent than the requirements for larger associations that have revenues that are in the millions of dollars. Thus, smaller associations might review financial statements quarterly and larger associations review them on a monthly basis. In addition, an annual financial statement, which may be required by state laws or the association’s governing documents to be audited, is prepared at the end of the association’s fiscal year for distribution to the membership.

HOA management personnel should always be familiar with their state’s laws and the content of their association’s governing documents concerning the obligations for preparation of the association’s financial statements. When in doubt, it is wise to obtain guidance from legal counsel in the state where the association is domiciled in the form of a memo that covers the requirements imposed by state laws and those imposed by the association’s governing documents. That information should then be reduced to a written policy that is followed by the association’s management personnel from year to year.

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