Whether your community is a condo association or HOA, proper record-keeping is the difference between a healthy property and one headed toward peril. And while meeting minutes and election results require well-organized documentation, records such as bills, invoices, bank statements, receipts and taxes informs a community’s long-term financial health—and how these financial records are stored and accessed is critically important.

What You Must Know  

“Each board member should be familiar with their association manager’s monthly management report, which will provide cash balances, receipts and payments for the month and accounts receivable, a listing of residents who owe maintenance or common charges currently, and for over 30 days,” says Barry Korn, CFA and managing director for the New York City-based Barrett Capital Corporation. “Also, the monthly report will show income and expenses in comparison against the budget.”  

Board members, Korn adds, must understand that the management report is most often prepared on a cash basis opposed to an accrual basis, which is an annual audited financial statement. “The difference is that the building may have incurred expenses in a particular month, but if they haven’t yet been paid, those expenses will not show up in the monthly management report,” says Korn. “While the monthly report shows cash balances, it does not show liabilities. Thus, understanding the timing differences and liabilities are an important financial consideration.”

In the case of associations, says Karen Sackstein, CPA, of The Condo Queens, an accounting firm based in Fair Lawn, New Jersey, “The financial statements include the assets and related depreciation expense and accumulated depreciation expense and accumulated deficits, as the condo association holds title to all real and personal property. In a condominium association’s balance sheet, there is typically no real property shown, since the building and related improvements are common property that is owned by each condo owner based on their proportionate share of the common elements as maintained in the governing documents.” 

At a minimum, most pros agree, board members should have a working knowledge of budget status, reserve fund balances, unit owners in arrears and major upcoming expenses. But beyond these basic financial touch points, board members can get careless or be otherwise uninformed. 

“The most common mistake with record keeping is dependence on others to maintain historical information,” says one CPA. “Frequently, boards have a need to look back at financial documents that cannot be located. I actually had a board once lose the records for a certificate of deposit in the reserve fund. After the board members changed, it ceased to be reported as part of their reserves. When we brought it to their attention, they thought they were rich again!”

Record Safekeeping

As is the case with most boards, each member brings a different professional skillset to the table. Some may even be accountants or professional financial advisors -- but even if they aren't, says Korn, they should be able to understand the building or HOA’s annual financial report in general terms. “It's advisable for the building’s accounting firm and financial advisor to be able to clearly explain the ramifications of their building's financial position,” he notes. “Every board member should have a general idea of the expected capital maintenance expenditures anticipated over the next three to five years. Reserve studies...should be made annually so that board members’ can properly plan for ongoing maintenance expenses/common charges and the need, if any for financing and/or assessments.”

There are two basic requirements to ensure that a property’s financial documents are in fact being handled and stored properly: identifying who can view the records, and ensuring that the records are kept in a secure location. The latter issue may seem simple, but according to the pros, one might be surprised. For example, according to Robert Mayer, CPA and managing partner for the Long Island-based Prager Metis CPAs, LLC, important documents and records should definitely not be kept in a box in a board president’s closet. 

Korn agrees, and says that documents—including all financial records—are generally kept by the managing agent at its office. “When the building’s auditor performs its annual review, it will request necessary information,” he says. 

If the property doesn’t have an off-site management company, “Then the records should be kept locked in the property's administration office, especially any bank account or credit card numbers. Records should be kept locked, and access limited and papers should never be kept in open sight,” adds Mayer. “If they do not have an office, then the records should be kept in a safe deposit box at a bank.”

There's a third solution that's far better than a banker's box, and perhaps more convenient than keeping documents in a distant office, says Korn. “For a self-managed building, I suggest some form of cloud-based storage, so that the information is available to successive board members.”

And when it comes to accessibility of records and documents, electronic record-keeping doesn't stop with simple cloud-based storage. Many well-meaning board members labor under the often-false assumption that other board members or the managing agent are maintaining records. This can lead to redundant administrative tasks on one hand, and serious gaps in the community's financial and administrative record on the other.  

It can also create issues with the secure destruction of documents that are redundant or obsolete. While historically buildings or associations had a boardroom or office where actual filing cabinets of paper documents were filed, today’s electronic capabilities not only insure security and availability, but allow for orderly destruction. It also makes the transfer of custody from one board to the next much simpler and more secure. 

Other Considerations...

There are consequences for boards that do not properly manage and secure their community's documents. Industry experts implore boards to learn from the mistakes of others—and unfortunately, there are plenty of cautionary tales. When asked about theft of financial records, Mayer said there were too many examples to put on paper; however, he did share two instances from his own experience:  

“We have had situations where a treasurer had the building's bank statements sent to their home, mixed up the information and...used the property's funds to pay their personal needs,” says Mayer. “We've also had experienced bookkeepers who have had wire privileges and [used common funds] for non-property expenses.”

While technology has streamlined certain documentation services, it is a double-edged sword, especially for associations. The frequency of identity theft has significantly increased, and it's often very difficult to determine the origin of a hack or information leak. Nevertheless, it's part of a board's fiduciary duty to make sure residents' sensitive information is properly secured. 

Streamlining Operations

While technology advances can help boards keep better financial records and secure access to them, there are time-proven approaches (like professional audits) that can better prepare boards for the managing of these all-important documents.

“An annual audit of the property's books and records, if performed by a competent CPA, should reflect any defalcations—funds misappropriated by a person trusted with their charge,” says Mayer. “In addition, the management, as well as the board, should make sure that monthly reports are sent to the CPA to review. Unfortunately, the fees that some CPAs charge do not allow them to perform the proper and necessary work to prevent instances like fraud.”

To make the CPA’s job—and in turn the board’s—easier, many financial pros recommend maintaining the least number of bank accounts as possible. Additionally, board officers should be signatories on all bank accounts, and reserve funds should be centralized. To further simplify operations, boards can develop a collective calendar of deadlines to include date stamps for tax reporting, board meetings and insurance renewals, among other line items. 

“The best answer is to have an active board and committees to keep tabs on all transactions and monthly activities. No one individual should be able to execute financial transactions unilaterally,” says one pro. “Sometimes convenience is dangerous as well, such as having credit or debit cards for board members or employees. The temptations are too great, proper records are never kept, and when mistakes are made -- or when theft occurs -- it never gets resolved quickly, and rarely satisfactorily.”

Board Resources

While there are numerous education tools and industry portals for boards to access, the ability to tap these resources is dependent upon various factors, including how much a building or association is willing to spend on financial services and advice. 

“This should be a team effort,” says Korn. “The association manager keeps the records, the accountant reviews the records and the building or HOA’s financial advisor/mortgage broker should be involved to provide an independent credit assessment for the building for proper planning purposes.” 

Most boards have their own professionals, such as CPAs and attorneys. Each type of professional can provide a different type of advice. CPAs can provide advice about record retention; lawyers can provide advice about legal matters, contracts or mortgage refinancing; and managing agents can give examples about practices that are working well in other buildings.

For new board members, there is always a learning curve, which is understandable for a wide variety of board responsibilities, such as elections and fielding general questions from unit owners and shareholders. When it comes to finances, however, there is no room for error. To this end, industry experts say boards with accountants must tap that resource whenever the smallest of questions arise.  And whether a board is self-managed or has a financial advisor, all documentation should be thoroughly vetted and backed up.

Seminars, including those given by trade organizations or at shows such as The Nevada Cooperator's annual Expo, are another resource. Sackstein’s firm, for example, offers clients, especially new board members, a seminar on how to read and understand financial reports. “There is no one correct way of maintaining records,” she stresses. “Any system that allows easy access and retrieval will work, whether it is manual or electronically-based.” And as mentioned earlier, an association’s accountant is not always available. So when attending trade shows, board reps or managers look at some of the accounting systems or software being offered, and see whether they are more efficient than the systems they are using now.

No matter what, simple, basic practices-like good record-keeping, regular maintenance and good communication between the community association or HOA board and the building administrators are keys to keeping the community fiscally sound and on track.

W. Brad King is a freelance writer and a frequent contributor to The New Jersey Cooperator.