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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 



Why do I need to pay assessments and what happens if I don’t?

By Farrah Esquer, CCAM, CMCA, AMS, PCAM, President

As a member of a homeowner’s association, also known as a common interest development or community association, you are bound by the Association’s governing documents to pay assessments.  Assessments are established by the Board of Directors to assist the corporation in meeting its budgetary needs.  The Association is required to maintain the common areas such as landscape and pools and fund administrative expenses to meet legal requirements for annual audits and a reserve studies.  Depending on the Association’s governing documents, the Association may also be required to maintain the exterior surfaces of the buildings, and shared plumbing lines.

As a non-profit mutual benefit corporation, the Association depends on assessments from homeowners to meet common needs.  Delay or non-payment of assessments can result in the Association not being able to make payments to their vendors, incurring late charges, and deferring maintenance.  Deferred maintenance can expose the Association and Directors to legal liability for not meeting fiduciary duties.

The Board of Directors must also enforce the Association’s Assessment Collection Policy.  Delinquent homeowners can incur additional fees ranging from late charges to interest fees to collection costs.  Associations may place a lien against a property and can ultimately foreclose on the property or pursue a personal money judgment against the delinquent homeowner.  It is important to be aware that a homeowner may not withhold assessment payments if they feel that the Association has not performed its maintenance duties or any other obligation.  Cardinal recommends that homeowners become familiar with the Association’s Assessment Collection Policy.

If a delinquency occurs, a homeowner may request that the Board of Directors consider a payment plan to resolve the delinquency.  Payment plan requests should be submitted in writing to Cardinal for review by the Board of Directors.

The operations of the Association are solely dependent on assessments paid by the homeowners, and non-payment can result in increased assessments, special assessments, or the inability of the Association to meet its obligations.



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.