For a crystal-clear picture of how an association is doing, there are few better  lenses than the community's budgets and financial reports. From an investment  perspective, they show the shareholders, managers, tenants, owners, and board  whether the property is solvent or not. If the numbers add up and the monies  coming in and out balance, you can safely assume everyone is doing their job,  and upholding their financial duty to the community. If the property is in the  red, it’s important to determine why that is, and what needs to be done differently to  turn the situation around and restore solvency.  

 Maintaining and updating the accounting of their property is one of the primary  responsibilities of a board—one that is all-too-frequently neglected, according to the pros.  

 Brad L. Schneider, CPA, president of CondoCPA in Elmhurst, says that there are  three main purposes of financial documents. “First, they assist the property manager and the board members in managing the  association in the short term and the long term. Second, financial documents  will show unit owners that the management and board are doing a good job and to  alleviate suspicions that there is anything going on that is not in the best  interest of the association. Lastly, they can be a good sales tool to help give  a good impression to prospective buyers that the association is on sound  financial footing and that it is run in a professional manner,” he explains.  

 It’s important to understand each financial document and its purpose so you can  have a better understanding of exactly what’s going on in your association. So here’s a little Financial Paperwork 101.  

 Financial Statements

 Financial statements show the income and expenses for an association. Steve  Silberman CPA, shareholder at Frost, Ruttenberg & Rothblatt, PC in Deerfield, suggests that these files be updated on a monthly  basis and smaller associations can get away with doing so once every quarter.  Reviewing and recording changes and discrepancies is important, otherwise the  process becomes almost worthless. What is the point of creating and maintaining  a budget if you are not sure of your incoming and outgoing expenses?  

 “What we recommend is that on a monthly basis an association's board should get  certain documents. Those documents include a balance sheet, an income  statement, a bank reconciliation, check register and a cash receipts journal, a  general ledger, there should be a replacement fund report and an accounts  receivable report. Those are things that they should get every single month,” says Silberman.  

 An important component of managing finances is completing an annual audit.  According to the Institute for Internal Auditors, “internal auditing bridges the gap between management and the board, assesses the  ethical climate and the effectiveness and efficiency of operations, and serves  as an organization’s safety net for compliance with rules, regulations, and overall best business  practices.”  

 “We always recommend that associations do have audits,” says Silberman. “What happens is often, especially with smaller associations, they don't see the  need to have a third party financial statement. They feel that their in-house  treasurer's or management company's financial statement is fine but it is  always good and we think it is part of their fiduciary responsibility to have a  third party financial statement. We recommend an audit, but if they can't  afford to do an audit every year, we believe there should be a review or  compilation done by an outside accounting firm.”  

 For Your Eyes Only

 It is also important to consider who can see which documents. Certain paperwork  should only be accessible to board members, while other files can and should be  viewable by owners and even prospective buyers, in order to disclose the status  of the association and expenses. It is important to note that being too  generous with who can see what can lead to problems and unnecessary unease, but  on the other end, being too secretive can lead to distrust in residents who  might suspect that the board or management has something to hide. In other  words, it is a very fine line to tread.  

 According to the Illinois Condominium Property Act (ICPA), the board must  provide a clear summary of income and expenses required by Section 18(a)(7) of  the ICPA. The board is required to supply each year an itemized accounting of  common expenses for the preceding year actually incurred or paid, along with a  list of specific items allocated to reserves, capital expenditures, repairs and  real-estate taxes. The tabulation must compare the income and expenditures to  the budget.  

 As a rule of thumb, Schneider suggests that only board members have access to  scavenger rebates, the annual report with the Secretary of State, common area  maintenance agreements and annual calculation documentation, parking tax  returns (if in Cook County and have outside parkers), and loan documents as  well as the monthly statements from the bank.  

 Owners and prospective buyers should be entitled to view the reserve study,  monthly financial statements, including the balance sheet and budget to actual  comparison, annual audit, (or compilation or review), year-to-date general  ledger, check register, monthly bank and investment statements, accounts  receivable listings, paid invoices, and copies of contracts.  

 For documents that are not readily available for owners, “unit owners can request additional documents and they can go back a few years,  but they need to have a purpose as to why they are requesting them. So if they  want more detailed records, they can request it and the board has to make a  decision within 30 days. And if there is a cost, the unit owner has to pay for  that,” says Silberman.  

 Managing Investments

 A solid and effective investment policy is another document that Illinois  associations should be prudent about updating and most importantly, having. The  investment policy is a written document that specifies how an association's  funds are being invested.  

 “We see many associations that do not have an investment policy at all. To us,  that is one of the key things, especially in the economy that we are in right  now, that there needs to be an investment policy,” Silberman says.  

 “It is important to have a policy that states the goals of the association—is it to fund reserves?” he says. “Is it to avoid or minimize special assessments or borrowing and what are the  investment products—are they more concerned with safety, liquidity or yield? Is there a criteria for  selecting the type of investments?”  

 “The investment policy is where your procedures should be on who is controlling  the account. Who is the signature on the account? You should put down who are  the check signers. This is so the new board coming in knows exactly who is on  those accounts and how many accounts you have. Too often new boards come in and  if they have CDs in fifteen different banks, now they don't understand who is  in the account. These are things that should be in the investment policy and it  makes things easier for the association,” he explains.  

 Reserve Studies

 Emergencies are going to happen and every association needs maintenance and  repairs and should be prepared with enough financial reserves to cover the  costs of these emergencies and repairs. To know what those costs are,  associations will typically hire an architect and/or professional engineering  company to complete a reserve study. A reserve study provides estimations on repairs and replacement costs for the  property.  

 For example, the engineer determines the roof has seven years life span left  before it needs to be replaced. The replacement cost is $100,000. To raise that  much money, the association needs to save a minimum of $14,000 per year (x 7  years) just to cover this replacement, assuming no other money is already put  aside.  

 The study is done every one to five years, and the cost depends on the depth of  the study. “A professional should update it every 3-5 years, but the board needs to review  it annually and they need to make changes to it because so many things happen  each year, that the study, if they are not looking at it and updating it  annually, the study is wrong,” says Silberman. “Maybe the study called for them to do a certain project but they were able to do  certain maintenance to delay that project. Now they need to readjust their  study and their funding. Let's say they are borrowing from reserves or didn't  get the money into reserves they were supposed to, now they need to relook at  this and readjust the funding for those items in the reserve study and that, we  see is not being done as often as it should be.”  

 Where's the Money?

 Many associations, especially smaller ones, only rely on one person to manage  the documents. While this makes everyone else's role easier, it is not the  preferable method of governance.  

 “It depends if you are managed or self-managed but the treasurer probably has  more responsibility in being in charge of the documents but he or she also has  the responsibility of making sure that all the board members are seeing these  documents,” says Silberman.  

 “I can't say it enough, the board has to be involved, it can't just be that one  person. Whenever we see just one person involved, that could lead to possible  fraud or possibly other board members not doing their due diligence in  understanding the financial documents. All of the board is responsible for the  financial information of the association.”  

 Financial Security

 Last year in Chicago, the co-owners of a defunct Chicago condominium management  company were charged with fraud for allegedly stealing more than $2 million in  assessment payments In Washington D.C., the FBI arrested the owners of a property management company  accused of defrauding an estimated million dollars from homeowners. And this  past spring, in Exeter, New Hampshire, a property manager was accused of  stealing $67,000 from three Exeter condominium associations. He allegedly  pocketed money meant to pay expenses. These examples are not meant to provoke  panic and suspicion among residents and board members but serve to show that  fraud can occur, especially during under-supervised and overly permissive circumstances.  

 So how does an association maintain financial security? There are a couple tasks  to perform to ensure the confidentiality and safety of your documents and  certify the integrity of employees and residents.  

 “Segregation of duties is very important. Most management companies except for  extremely small ones will have a segregation of duties. The person approving  the invoice for payment is different from the person preparing the check for  payment. The person signing the check will not be involved with the management  of the association directly,” says Schneider.  

 He also encourages associations to have the accounting performed by a management  company or accounting firm, which “will be a good way to give the whole process some type of oversight.”  

 The key word is oversight. Be sure to require multiple signatures on checks,  maintain records off-site, have more than one board member award a contract to  a vendor and make sure you have competitive bidding.   

 Lisa Iannucci is a freelance writer and a frequent contributor to The  Chicagoland Cooperator. Editorial Assistant Maggie Puniewska contributed to  this article.