Given the reality that community association boards are made up of diverse individuals with varied degrees of financial knowledge, it is important that the policies, procedures and guidelines necessary to ensure sound financial operations be spelled out clearly for all.
Management of a community association’s resources frequently involves the use of contracts to obtain the products and services required. Given such, one component of the board’s fiduciary responsibility is to ascertain that the association is not paying too much for the products and services it receives. The most effective way to ensure competitive prices is through bid requests to potential contractors. A bid request or request for proposal (RFP) is an announcement that an organisation is interested in receiving proposals for a particular project or service.
Because of the amount of effort the bidding process requires for both the community association and the bidders, the process should be used only for significant projects or purchases, and for ongoing services such as lawn maintenance. The board of directors should determine the minimum size of a contract that requires competitive bidding. Simply stated, bid requests and RFPs allow the board to solicit competitive prices for products and services, thereby ensuring that the community association obtains the desired services from a quality service provider at a reasonable price.
A community association’s governing documents and management contracts will define formal roles and responsibilities in the budget process. These roles should be communicated in a constructive manner to all involved to ensure that appropriate expectations exist. Below is an outline of the responsibilities of volunteers and professional staff typically charged with developing community association budgets:
» preparing a draft budget
» reviewing the draft with the treasurer, finance committee (if one exists), and the board
» revising the draft budget after changes are made
» mailing a summary of the proposed budget to owners prior to approval
» mailing copies of the completed budget to all owners and having copies on hand for prospective owners.
There are two commonly used bases of accounting – the accrual basis of accounting, which is required by generally accepted accounting principles (GAAP), and the cash basis of accounting, which is considered to be an other comprehensive basis of accounting (OCBOA). OCBOA is not in accordance with GAAP, which is most often used by community associations.
GAAP accounting provides uniformity among financial statements from different community associations. GAAP requires the use of accrual accounting for annual reports, because it records income when earned and expenses when incurred, so the resulting statements are more useful for comparing the results of the budget to the actual activity. GAAP requires the following set of year-end financial statements for community associations:
» assets – items owed to, or owned by, an association
» liabilities – the association’s debts to third parties
» members’ equity – the owners’ interest in the association’s remaining assets after providing for the discharge of its liabilities.
Statement of income and expense – the operating activities for a given period of time, usually one year, ending on the same date as the balance sheet.
Statement of changes in members’ equity (or fund balances) – reconciles the beginning and ending members’ equity with results of operations for the period.
Statement of cash flow – reconciles an association’s operating, investing, and financing activities from the basis of accounting used (generally the accrual basis) to a cash basis, to reflect what caused the changes in the cash balance during the year.
Notes to financial statements – footnotes that provide additional information to help the reader understand the association’s financial situation.
Financial statements are produced to:
Year-end financial statements help determine and outline a community association’s fiscal health. Experts suggest that a chartered accountant (CA) specialising in community associations prepare these statements. From the more authoritative (and most expensive) to the least authoritative (and least expensive), these are audits, reviews and compilations.
An audit is an examination of an organisation’s accounting records and procedures by an independent chartered accountant for the purpose of verifying the fairness of the presentation of financial statements. An association’s governing documents and the national financial regulations require an annual audit of the association’s financial records, which is in any case sound business practice. The audit should include, but is not limited to:
After the audit is complete, the chartered accountant will prepare an opinion report that states one of the following four outcomes:
Clearly, a community association should strive for a clean opinion or, if necessary, a qualified opinion. The third scenario – a disclaimer – usually occurs when the client organisation or the circumstances surrounding the audit restrict the CA’s ability to collect sufficient evidence to form an opinion. An adverse opinion is issued when evidence indicates that the financial statements do not fairly reflect the association’s financial position or operating results. Financial experts recommend that a CA familiar with community associations perform an audit annually.
A review is less thorough than an audit, thus a less costly analysis of an association’s financial activities. It provides the board with some assurance that the financial statements are consistent with typical trends without the detailed examination obtained in an audit.
A compilation is a presentation of financial statements prepared by an accountant, not necessarily a CA, but does not provide any level of assurance regarding the financial statements.
The association articles and law give associations the authority to collect levies. It is not unusual for a board to be responsible for millions of rand in levy fees. Given their fiduciary responsibility, association boards must collect levies in a timely, systematic manner. Each association should adopt, by resolution, the procedures for the collection of payments (dues or levy fees). The policy should be distributed to all members and uniformly enforced. Communication of the association’s budget is critical to levy collection because those members who understand the association’s financial position are more likely to pay their dues on time.
Investments involve the purchase of assets with monetary value for the purpose of generating additional value over time. A community association should have a written investment policy, a set of procedures, and checks and balances for ensuring that investments: