It can be tempting for HOA board members to try and handle all aspects of association management themselves. And the need for management can depending on the HOA, but there are a few areas where board members should be more cautious — like the community’s finances.
Although it’s up to your board whether or not you handle finances yourselves, and there’s a possibility it’s work out fine, there are also some major risks an association can face by trying to take on HOA finances without outside help.
Here are some of the main reasons your board should take caution if considering handling all finances alone:
Board Members Aren’t Financial Experts
The range of experience on a board can really vary, but unless you have members who are accountants or lawyers, most board members won’t have specific backgrounds in working with HOA finances — and there’s a lot to know. For example, if details like issuing 1099 forms to vendors at the end of the year, handling financial statements, or managing audits aren’t handled properly, the mistakes can end up being very costly for the association. Plus, most members aren’t used to the level of budget tracking and accounting processes that are involved with association management.
In addition, it’s not that uncommon for board members — especially new board members — to spend money that the association doesn’t actually have to work with. They might get too caught up with what homeowners are asking for and not realize the full financial position of the HOA that can affect it within the next five to 10 years.
Consider if an unexpected project or repair comes up, such as burst pipes during the winter or unforeseen roof repair. Unexperienced board members might be unsure how to weigh the best options for handling the cost. An expert can help them decide what the project warrants from a variety of options, such as borrowing from the reserves or executing special assessments, etc.
These financial details are important, since they can tell you whether or not your association is on the right track and show you any areas of cost or expense that need to be adjusted. The financial statements of your community should be able to give you a good picture of your current status, plus future potential.
Struggling with these types of situations and decisions means you may risk large penalties for the HOA, not to mention a lot of time wasted trying to figure things out.
Lack of Time Can Lead to Neglect
Most board directors have busy lives outside of the association, so they don’t have a ton of extra time to devote to management each day. That means their energy is limited and the HOA financials might not be the best area in which to spend it — since it will include keeping up with details about reserve studies, financial statements, and loan applications, just to name a few. And many board members won’t be able (or willing) to work the extra hours required to handle these thoroughly.
Overall, it’s important to be sure sufficient time is devoted to these areas so nothing is neglected. Working with a manager can help you pass off those otherwise difficult, boring, and confusing details to an expert ready to handle them.
There’s a Higher Risk of Fraud
Keeping up with your HOA’s finances also helps you identify any red flags that might indicate fraud has occurred in the association’s cash flow. To a board member without an eye for it, they might have trouble identifying what potential fraud looks like.
Conflicts of Interest
Sometimes situations can arise where a board of director might propose a transaction for the association in which they have a financial interest. This can lead to biases and conflicts of interest during important decision making about how money is spent. If board members are going to be handling board finances, it’s important to have any possible relationships or ties to possible financial transactions, such as contractors, consultants, or accountants, disclosed before services are decided upon.
You’ll want to, at the least, have a full accounting system in place for financial reports and for recording all transactions. That includes setting in place checks and balances, such as:
- Not allowing the same person who approves invoices to also write checks
- Requiring all important transactions and checks over a certain amount to have two signatures
- Cutting down on the use of cash transactions
- Not allowing the same person who records receipts to also make deposits
- Paying vendors and employees with a check
- Writing checks to the person you’re paying and not to “cash”
- Deposit checks daily (or store in a safe overnight) that are addressed directly to the HOA’s financial account
- Making sure all payments to the HOA are addressed to the association (and not a board member or manager)
Although it would be great if every HOA had board members with sufficient financial experience, it’s often difficult to find a full board willing, ready, and able to tackle the details involved with handling HOA finances. Self-managing in this area must include a strong team of volunteers ready to take on the responsibilities involved and support one another. Otherwise, the situation can quickly lead to burnout and too many problems for those who are trying to do it all.
So just as it’s a good idea to hire an HOA manager to handle the workings of your HOA, it’s also extremely helpful to have an outside firm handle your HOA finances — rather than leaving them to the HOA board of directors to handle.
At Clark Simson Miller, our accounting and financial management services include:
- Monthly detailed record of owner payments and delinquencies
- Completely customized financial reporting package
- Handling of association bill payments as approved by the board
- Protection of association funds through internal controls
- Annual budget preparation for distribution to homeowners approval by the board
- Regular and special assessments, late fees, and collection fees sent to homeowners
- Monthly bank statements sent to the board
- Preparation of 1099s, employer tax forms, and other forms and reports for governmental agencies
- Assistance to auditor for audit and tax preparations
- Coordination with board and attorney chosen by association to handle delinquent accounts
- Maintenance and management of reserve accounts
Read more about Clark Simson Miller’s HOA financial management services here.