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Financial Statements 101: The Fundamentals of Financial Review for Volunteer Directors

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By:  Kristi Boren, CCAM, CMCA, AMS, Portfolio Account Manager, and Farrah Esquer, CCAM, CMCA, AMS, PCAM, President

One of the many tasks of a volunteer director is the review of the association’s monthly financial statements.  If you do not consider yourself a “numbers person” this may seem like a daunting task that you would rather leave to the treasurer or other financial gurus on the board.  Before you happily pass your responsibility onto your fellow directors, keep in mind that you have a duty to the association to perform a review of the financial statements on at least a quarterly basis.  You are not expected to be an expert, but you can become familiar enough with the financials to perform a basic review.

There are several key items that should be included in your monthly financial statements that you can review to understand the financial position of the association, as well as become alerted to any possible concerns.

Balance Sheet

Begin your financial review with a review of the association’s Balance Sheet.  The Balance Sheet will reflect the Assets, Liabilities, and Equities of the association.  This report will allow you to monitor the total funds invested in each banking institution to be sure funds are kept below FDIC limits.  Also be sure that any investments are maintained in either Money Market Funds or Certificate of Deposit accounts to attempt to ensure the safety of the principal.  The Balance Sheet will also allow you to review the association’s outstanding receivables and payables so you are aware of the association’s cash-flow position when making decisions about potential expenditures.  The reserve line items will also be detailed so you are aware of how much is available in each line item and how much has been expensed from each line item during the fiscal year.

Income Statement

The Income Statement will include a summary of the current month, as well as the year-to-date, income and expenses.

Budget Comparison

The Budget Comparison is a useful tool to monitor actual versus budgeted income and expenses.  The Budget Comparison will include a year-to-date as well as a current month comparison.  It is especially helpful to review the variance column in both the monthly and year-to-date sections of the report.  This will allow you to easily note any overspending or other issues, such as double-payments and possible misclassifications of expenditures.  Identifying overspending will allow the board to make any necessary mid-year adjustments to the budget, plan for upcoming projects, and plan the budget for the next fiscal year.

Accounts Receivable Aging Reports

The Accounts Receivable Aging Report will provide the details for the account receivables line item on the Balance Sheet and will include a breakdown of the delinquent owners and total amount owed.  The aging report should also include a notation of the collection status of each account so that the board can monitor the progress of the collection activity.  If no collection activity is noted, steps should be taken to pursue the delinquency.

Accounts Payable Aging Reports

If the financials are reported on a full accrual basis of accounting, the financials will include an Accounts Payable Aging Report which reflects expenses that have been incurred, but not yet paid.  This will help provide the board with an accurate reflection of the available cash.  If the accounts payables balance exceeds the cash balance, further review should be conducted to determine whether the situation is temporary or if it is a long-standing problem that may need to involve increasing the monthly assessments to meet cash-flow needs.

General Ledger

The General Ledger report should be reviewed to note the transactions that have posted throughout the month.  The General Ledger report will provide further details of the expenses and to which line item they were posted to ensure accuracy in the financial reporting.

Bank Statements

And last but certainly not least, the association’s bank statements as well as the corresponding account reconciliations should be reviewed for any possible discrepancies, such as checks that have not cleared for several months, checks that have cleared for the same amount, checks for large amounts, and checks that have cleared out of sequence.

Protecting the association’s financial interests is one of the most important duties of a board member.  Remember, if you are unsure of anything noted in the financial statement it is always best to ask questions and obtain clarification.  Make a point to meet with the accounting personnel or the association’s CPA to review the financial reports in more detail and become familiar with the reports.  CAI-OC also offers courses in financial management so you may sharpen your financial reviewing skills.


This article was printed in the January/February 2012 edition of the OC View, a bi-monthly magazine published by the Orange County Chapter of the Community Associations Institute (CAI-OC) and was re-printed with permission.  To learn more about CAI-OC visit their website at 



When Is a D&O (Directors and Officers) Claim a Claim?

By Jon Crain of Armstrong/Robitaille/Riegle

Many of you are already aware of the unique nature of the D&O (Directors and Officers) liability policy for being “claims made” instead of the traditional “occurrence” based policies.  Occurrence based policies state the carrier who is or was on the risk at the time the incident “occurred” is the carrier that will be responsible for handling the claim.  A “claims made” policy says that the carrier who is on the risk when the claim is made, or when the Association becomes aware of the claim, is the carrier that will be responsible for handling the loss.

The problem is determining what the definition of a “claim” is.   According to most D&O policies, a “claim” is “a written demand for monetary or non-monetary relief, commencement of a formal criminal, administrative or regulatory proceeding….”  Some may ask, “What constitutes a written demand”?  According to the dictionary, a “demand” is “to ask for urgently, to ask to be informed, to claim as just due.”

The problem we run into is when a Board receives a letter inquiring about an issue that could constitute a “demand” and the current D&O carrier does not get notified.  A month or two later, the D&O policy is renewed but placed with another carrier.  Several weeks later the party who sent the earlier letter now sues.  The current carrier upon doing their due diligence determines that they will not provide coverage because the claim (the letter) was not “made” during their current term.  The previous carrier also denies coverage as their policy is no longer in force.  The Association is uncovered and it could have been avoided.

Accordingly, it is absolutely critical that all Boards of Directors, Managers and Attorneys remit any and all letters that could be construed as a claim immediately to the D&O carrier via the insurance agent upon receipt.  This will put the existing D&O carrier on notice even if they no longer write the risk.  Should a suit eventually arise, they will have to step up and defend if the allegation is a covered event.

To summarize, with respects to the association’s D&O Policy, any written request, demand, inquiry, etc., that could lead to an allegation of a wrongful act down the road should be submitted immediately.

This article was printed with permission from Armstrong/Robitaille/Riegle.  To learn more, please visit their website at 


Tips for Choosing Drought Tolerant Plants

With the current emphasis on water savings, many companies and HOA’s are turning to drought tolerant plant material to help lower their rising water costs. These plants are great if properly selected and can dramatically effect your property’s irrigation needs. However, you can end up causing more harm than good if these simple steps are not followed.


The first thing you will want to look at is at the current irrigation system. A common mistake is to plant drought tolerant plant material in an area that has an irrigation valve which covers both the new drought tolerant plants as well as existing plants with higher water needs. This will create a situation where some plants are receiving too much or too little water, effectively eliminating any expected water savings. To achieve the maximum water savings group plants together according to their watering needs and ensure that separate irrigation valves water those areas.


As with any plant, you will need to pay attention to where the new plant material will be located. The soil type and sun exposure plays a large role in the type of drought tolerant plants that you will be able to use. Strategic planning is necessary to ensure the new plant material gets established. The success or failure of your new drought tolerant landscape (or any landscape for that mater) depends on the correct selection of plants for the intended area. Talk to your landscaper about the best plant options for the area you are planning on re-landscaping. Remember, there are even specific drought tolerant plants that are recommended for Fuel-Mod areas and slopes.

By taking these simple steps when planting new drought tolerant plant material, you can achieve maximum water savings and have healthier plant material.


Reprinted with permission from Vista Del Verde Landscape, Inc. For more information about water management and drought tolerant plant material selection you may visit their website at


Termites and Taxes

By Isaac Camacho of Accurate Termite and Pest Control

In Southern California termites are like taxes; we all get them and though they come in relatively small amounts at a time, they build up and consume our hard earned money. Just like tax evasion can get you into a whole lot of trouble, so can termite evasion. Approaching the unwanted critters with knowledge and expertise is key to resolving the problem correctly, effectively, and with minimal adverse effect to your pocket book. Here are some quick facts about termite control that can help you make the smart decisions.

Most termite control that is done in multifamily structures today is a form of localized treatments for termite eradication. When performed accurately and regularly, localized treatments can be an effective method of termite control for multifamily structures. Most of the work and cost associated with localized treatments is in the inspection itself. Once termite infestations are found, treatments are as simple as drilling into the infected wood member, injecting termiticide, and filling the drill hole. The majority of time and labor is spent in finding the problems. Hence, when acquiring a regular termite control contract, avoid having that any one building be inspected in it’s entirety more than once a year. Even after swarming, new termite infestations rarely become a major issue within the first year of a new colony. After the entire building has been inspected once, spot inspections and treatments as needed for one year is sufficient to get good control of the termite situation in the community.

Make wood repairs a part of your termite control program to reduce the likelihood of having major damage in the future. Performing regular wood repairs and treating under damaged wood is also a great method of keeping termites under control. Termites like their food (wood) as soft and moist as they can find it. By repairing and replacing old and damaged wood, you reduce the likelihood that a new swarm will choose your community as a new home. When planning wood repairs, plan to ask your termite company to treat under the damaged wood, this makes it very likely that you can treat right at the source of the problem. In short, plan to leave some money left over to handle wood repairs after termite inspections and treatments are done. Never acquire a contract for wood repair unless the contractor has already provided you the specs of work for each building. Allowing a contractor to extrapolate a wood repairs bid from only one inspection, or just a few inspections is a dangerous and costly thing. Termite inspection reports contain a lot useful information; use them throughout the entire project.

In a termite control program, the reports can be just as valuable as the service itself. Inspection reports will help you see where your largest problem areas are, how large the problems actually are, and how much damage is present on the property. Acquiring a termite control program is a great opportunity to receive a full-scale view of damage throughout the community all at once. Being able to “see” all wood repairs needed in the entire community all at once will give you the ability to plan and wisely allocate resources to areas according to where they are needed most first. Acquiring the right contracts at the right time will reduce future costs in repairs and sometimes treatment. Savings can be directed to termite prevention to secure and protect a good standing in termite control for a long period of time.

Termites swarm high and look for cool dark places to start their new colonies. This is why most major termite infestations are commonly found in eaves and attics. There are products and treatment methods available, which actually do work, and prevent termite infestations from reoccurring. The products work best on non-painted exposed wood such as the wood in your attics. Having your attics treated for termite prevention is the treatment of most value you could acquire when it comes to termite control. Do remember, however, that before termites can be prevented they have to be treated—always start at step one.

In short, termite activity is always changing and so are your community’s needs. What you may have been doing in the past is not always the best option today. Take the time to consider your trusted termite professional’s recommendations and options; get informed, and make the decision of best overall value.


Thank you to Accurate Termite and Pest Control for providing the blog article.  To learn more, visit


Is Your Community Prepared for Fall?

Written by Farrah Esquer, CCAM, CMCA, AMS, PCAM, President

Fall is quickly approaching and it is time to start thinking about those Fall landscape projects.  Fall brings a relief to the hot months of summer and the never-ending weeds.  Plants and weeds begin to show slower growth which cuts down the amount of time spent on pruning and pulling and allows time for more detailed, detailing and other projects.

General Maintenance

Hedge trimming that is oftentimes the most efficient way to keep up with the plant growth in the summer months can be replaced with lacing and hand-pruning of shrubs to give a more natural look.  Time can also be spent completing an irrigation audit and making the necessary adjustments to prevent overwatering and watering of hardscape.  This is also an opportune time to evaluate the irrigation system to determine if an irrigation retrofit is needed to separate plant areas from lawn areas to reduce water usage.  Laying mulch in planters and around tree bases helps to retain moisture in the ground during the Fall which allows irrigation to potentially be shut off for extended periods of time, due to the cooler weather.  Annual color at monument signs and other select areas can be replaced with Fall color in shades of orange, gold, and yellow.

Lawn Care

Fall is also the time when the summer lawns start dying out and need to be replaced with winter lawn.  This typically requires dethatching and overseeding the lawn with perennial rye.  In lieu of dethatching, aerating the lawn prior to overseeding may be an option in some circumstances.  Speak with your landscape company on whether the common area lawn can benefit from either dethatching or aerating.

Tree Trimming

Most species of trees can benefit from trimming during the cooler Fall months, especially the sap-producing trees like pine trees.  Be sure to request proposals for tree trimming in advance, if your community is not on an annual tree trimming contract and cycle.  As with shrubbery, the growth of trees slows during the Fall months which makes it an opportune time to complete lacing and trimming.  Trimming and lacing should be completed prior to the Spring when growth begins to increase rapidly and when the birds begin to build nests and lay their eggs.  Remember, many birds and nests are protected and cannot be disturbed.

Setting up an Annual Tree Trimming schedule can benefit the health of the tree and prevent hazardous situations for people and objects by preventing falling limbs.  Carrotwood trees, Ficus trees, and Coral trees should be trimmed annually.  Tristania trees and Sycamore trees can be trimmed every other year and pine trees should be laced every three years.

Happy Fall!

Thank you to Leslie Hogbin at Harvest Landscape for providing the information presented in this article.  To learn more about Harvest Landscape, visit their website at



Money Matters

Written by Farrah Esquer, CCAM, CMCA, AMS, PCAM, President

SO, YOU’VE JUST BEEN ELECTED or appointed to the board of your association. Let’s face it, you only agreed to take the position after being gagged, tied and tortured and promised it was only one meeting per month, right?

So, what’s next?

You are a member of a nonprofit com­munity, whether incorporated or not, and your most important responsibility is the financial well-being of the association. The members of the association pay assess­ments to the community to maintain the property and pay for insurance, contracted services, utilities and other needed materi­als and services. The board has a fiduciary responsibility to protect the assessments and assets of the association.

Community associations have been a target for fraud or misuse of funds because typically the directors are volunteers with regular jobs and busy lives. They depend on either in-house staff or a management company to take care of the day-to-day business including financial affairs. So how can the directors keep up with their busy lives and maintain control over the com­munity’s finances? Despite what you may think, it does not take a financial wizard to monitor the finances of an association.


The board must review the financial state­ments on a monthly basis. The financial statements should include at a minimum: a balance sheet, budget comparison re­port, income statement, check register, bank statements, bank reconciliations, journal entries, general ledger report and aging report. Signs of fraudulent activity include missing check numbers or check numbers out of sequence, missing bank statements, duplicate payments, payments to unfamiliar vendors or people or suspi­cious journal entries.

Do not hesitate to request additional reports or back-up information to sup­port any entries. Association governing documents usually require an outside CPA firm chosen by the directors per­form an annual audit of the records. Whether your documents require it, an annual audit is imperative to ensure good fiscal management.

The board should have administrative policies in place to reduce the chance of fraudulent activity in the first place. All checks should require two signatures, and only directors—and not management or staff—should sign reserve checks. No one should ever sign a blank check, and checks should never be made out to “cash.” Checks should only be issued when an in­voice (not statement) is provided with de­tails of the materials or services provided.

A copy of the work order that autho­rized the service should be included with the invoice. The invoice and work order should be presented with the check to the board, or an appointed director, for signa­ture. Directors should set aside time, other than at a board meeting, to adequately review and sign checks. Reimbursement checks, including those for petty cash re­plenishment, should never be issued with­out original receipts.

Whether you are interviewing poten­tial management companies, familiarizing yourself with the current management company or reviewing the procedures of in-house staff, here are some basic internal operating procedures that can help:

•           Each bank used by the association should be notified immediately of any changes in authorized signers.

•           The association should have a fidelity bond equal to three months of assessments, plus the amount held in the reserves, unless the association’s governing documents require a higher limit. Your insurance agent can help you determine the amount of coverage needed.

•           All employees handling cash should be bonded. Man­agement companies should carry a fidelity bond with a minimum of $250,000 coverage or higher depend­ing on the assets managed.

•           Incoming mail and payments should be opened and checks endorsed “for deposit only” by a person who doesn’t have access to the accounting functions.

•           Monies designated for future repairs and replacements shouldn’t be co-mingled with operating funds and need to be deposited into separate bank accounts.

•           The accounts payable duties and the preparation of the financial statements should be segregated and not controlled by the same person.

•           All payments and disbursements should be made by check, and checks should be pre-numbered, used in sequence and recorded in a check register.

•           All bank accounts should be reconciled after the end of each month by someone other than the person who receives or disburses cash.

•           Upper management, separate from the person re­sponsible for the preparation of financial statements or payables, should review and initial each financial statement.

•           Upper management, such as the community manager, separate from the accounts payable person, should review and authorize payment of invoices.

Seek additional advice from your accountant. Choosing an ac­credited or certified management company can ease the review process of the board; however, the board is still responsible for the monthly reviews listed above. CAI offers an Accredited Association Management Company (AAMC) accreditation which requires an audit of the accounting controls by an outside CPA firm. State-spe­cific trade organizations may offer similar accreditations.

You also should learn about the services provided by your banks. Most banks offer online services that allow read-only ac­cess to bank transactions, which can alert you should someone tamper with copies of the bank statements.


Adopt an investment policy that protects association funds and ensures financial stability.  The investment policy should state that the association’s fi­nancial goals are protection of principal, liquidity and yield, in that order. While the high interest rates of risky investments may be appealing, the board should invest conservatively to protect the principal funds. Whether your state requires a reserve study, the board should ensure that a reserve study update is completed every year and a reserve study with an on-site inspection is com­pleted every three years. A reserve study calculates the expected remaining life of each reserve component maintained by the asso­ciation, estimates the cost to replace the component at the end of its life and how much should be saved on an annual or monthly basis to meet the requirement.

Board members’ decisions affect the entire community. Take ad­vantage of educational seminars and board training offered by your local CAI chapter. Informed board members, an accredited manage­ment firm and a certified manager will help secure your community’s financial future and protect individual property values.


This article is reprinted with permission from the July/August issue of 2010 Common Ground, a bimonthly magazine published by Community Associations Institute, a national membership organization dedicated to fostering vibrant, competent, harmonious common-interest communities and from the July/August 2011 O.C. View, a quarterly magazine published by the Orange County Chapter of CAI.  To learn more, visit or

Farrah Esquer was awarded the 2011 Author of the Year Award by the Orange County Chapter of CAI for this article.


Spring (Get Ready for Summer) Cleaning Tips for Your Community

Written by Farrah Esquer, CCAM, CMCA, AMS, PCAM, President

With summer quickly approaching, communities should be getting their Association facilities in tip-top shape in preparation for resident enjoyment.  Patrick O’Brien of Personal Touch Cleaning Services recommends the following services be completed to keep the facilities in sparking condition:

Pool Furniture:  Clean and degrease straps and frames on traditional strap furniture two times  per year. The cleaning and degreasing will protect the furniture from cracking, rotting, and hardening.

Pool/Recreation Area Showers:  Tile shower floors and walls should be cleaned and scrubbed with a phosphoric acid solution and tile and grout should be sealed at least once a year.  Sealing of the tile and grout prevents soil and chemicals from soaking in and causing discoloration.

Restroom Floors:  Tile restroom floors should be cleaned using a floor machine and the tile and grout should also be sealed at least once a year. It is also recommended that floors be refinished every twelve to eighteen months.

Gas Barbecues:  Barbecues should be cleaned two to four times per year by disassembling and removing the racks and scrubbing the inside and the outside with a degreaser. Lava racks or Char-Diam rocks should also be replaced along with barbecue brushes, cables and clamps.

Tile Counters:  Tile counters/barbecue islands should be cleaned and scrubbed with a phosphoric acid solution at least once a year.  A tile sealer should be applied, along with a concrete sealer to any concrete portions, to prevent soil and grease from soaking in and discoloring or damaging the tile and concrete.

Concrete Barbecue Area:  The concrete barbecue area should be power-washed and steam cleaned to remove dirt, grime, oil and weathering stains as much as possible.  A penetrating sealer should also be applied to the concrete area.

Pool Deck:  The pool and spa deck, including the exterior of the restrooms, pump rooms and adjacent walkways, should be power washed and steam cleaned at least once a year to remove built up dirt, grime and weathering stains.

Refuse Containment Area:  The interior and exterior of the refuse containment areas should be power washed and steam cleaned at least twice a year to remove built up food stains, dirt, grime and weathering stains.

All power washing and steam cleaning must comply with EPA and local regulations.  The water used needs to be collected and disposed of in accordance with state and local codes via a reclamation system and adhere to the Best Management Practices (BMP’s) for the new State Water Quality Regulations & Urban Run-Off Pollution Prevention Requirements for Homeowner Associations.

It is recommended that Directors establish an annual maintenance calendar, which includes the scheduled maintenance outlined above at specified time periods throughout the year, in an effort to maintain the property keeping the Association’s budget in mind, and to have the facilities in tip-top shape for the summer months.


Community Associations and Homeowners Can Conserve Water

Written by Farrah Esquer, CCAM, CMCA, AMS, PCAM, President

Did you know that May is California Water Awareness Month?  Community associations and homeowners can do their part in conserving water.  Here are a few tips to help save money by reducing water usage in your community.

1.         Have “smart” irrigation controllers installed and maintained by a landscape company that specializes in such installations and can monitor and maintain the system.  Smart irrigation     controllers utilize sensors and weather information to automatically adjust the irrigation times to reduce overwatering.  Smart irrigation controllers can also be automatically turned off during rain or when the system detects a break in the line.

2.         Have the landscape contractor perform regular inspections of the irrigation system to inspect for leaks and to prevent overwatering onto the curbs and asphalt.  Minor adjustments to the irrigation system will not only save money in water costs, but also will save money in the cost to repair and replace asphalt.  Damage from irrigation systems is a major cause of damage to the asphalt.

3.         Consider conducting an association-wide landscape renovation project to replace existing landscape material with drought-tolerant plant material and adjust the irrigation appropriately.  Your Board of Directors should also consider reducing the turf areas and converting to planters if the turf areas are not used for recreation.  Watering large turf areas can cost your association thousands of dollars in water bills.

4.         Mulch around trees and shrubs in the common area to help retain moisture in the ground and help reduce the amount of irrigation needed.

You can save money and conserve water by:

1.         Taking shorter showers.

2.         Turning off the water when brushing your teeth.

3.         Installing dual-flush toilets and high-efficiency clothes washers.

4.         Checking your toilets regularly for leaking and repair leaks immediately.

5.         Running the dishwasher only with a full load of dishes.

6.        Operating the clothes washer with only a full load of laundry.

According to the Metropolitan Water District and the Family of Southern California Water Agencies at, taking a shorter shower by one or two minutes will help you save up to five gallons of water.  Turning off the water while brushing your teeth can save you three gallons of water per day, and by running a full dishwasher and clothes washer you can save between 15 and 50 gallons of water each time.

Community associations should work with their landscape contractor to develop water saving techniques.  Homeowners can learn more at