Budgets and financial reports provide a crystal-clear picture of how the  association is doing. From an investment perspective, they show how unit  owners, managers, tenants, building owners, board of trustees, etc., whether  the property is profitable or not. If it is profitable, you can rest assured  that everyone is doing a good job. 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.  

 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.  

 “My first suggestions lean on the legal side, because all condo associations are  technically trusts, so start by having a trust agreement and a master deed,” says Mark L. Love, CPA, a partner at Love, Jarominski & Raymond, LLP, in Worcester, Massachusetts. “A trust speaks to the point of ‘how many board members should there be,’ ‘what’s a quorum,’ ‘what’s the year end,’ and ‘what are the year-end financial requirements?”  

 A master deed includes all the provisions, rules and regulations that must be  followed by the unit owners.  

 Financial Statements

 Every month, a financial report should be generated to give an idea of where the  association stands. The report compares the actual budget to the projected  budget. In addition, it lists the bills that were paid and the monies that were  collected. In other words, anything financial that happened that month should  be presented in a financial report.  

 For example, according to the General Laws of Massachusetts, condominiums  comprising 50 or more units are required to have an annual review of their  financial statements conducted by an independent certified public accountant in  accordance with standards promulgated by the American Institute of Certified  Public Accountants (AICPA). In certain instances, such a review may be performed less frequently, but in no  case less than every two years. In still other instances, a condominium may opt  to have that independent CPA firm conduct an audit. “There is considerably more work associated with an audit, hence it costs more,” states Love. “As such, most of our association clients opt for us to perform a review.  However, a few do choose to have a full audit. They may opt to elect this  service for a variety of reasons, particularly when ownership is transferred  from the contractor to the association.”  

 “Associations also need an internal set of monthly produced financial statements,  such as a profit and loss (a component of the budget variance report) statement  and budget variance report,” says Kenneth A. Bloom, CPA, partner in Bloom Cohen Hayes in Needham,  Massachusetts. “The budget variance report determines how much they’ll charge the units. They also need a record system to account for cash receipts  and disbursements.”  

 “People want to know how actual expenses are faring relative to the budget,” says Bloom. “They are wondering, ‘How is it compared to what we expected?’ The budget variance report gives you that answer.”  

 For example, Bloom says, a budget might include $20,000 for snow removal, but if  it was a winter that didn’t see much snow, the actual expense used might only be $2,000. “You’ll see that the board is significantly under budget,” says Bloom. “However, if oil was budgeted at $250K and the actual is $245K, it might look  good that they came in $5K under budget. But if the winter was really cold and  oil prices skyrocketed, this number may not be right. Maybe invoices are  missing. If I’m doing the audit, I’m going to ask to see the billings for the year and make sure we have 12. This  report puts the numbers in context.”  

 Bank Statements

 Bank statements are needed for each and every cash account the association has,  including CD accounts, and a bank reconciliation, which is a process that  explains the difference between the balance shown in a statement and the amount  shown in the association’s own accounting records.  

 Tax Returns

 “Even though condos are, for the most part, tax exempt they still need to prepare  and file a tax return annually,” says Love. “Sometimes the board delegates the responsibility of completing it to the  management company and sometimes they want to do it themselves.”  

 Management Letter

 According to Love, a CPA firm occasionally writes an annual management letter. “It’s a letter that comes with suggestions on improving the accounting systems,  improving controls, cost savings and other efficiencies. It’s not meant to tell how to run the business, it’s meant to give ideas to consider for improving your business.”  

 Reserve Study

 Emergencies are going to happen and every association needs maintenance and  repairs. Associations 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 complete a reserve study. A reserve study provides estimations on  repairs and replacement costs for the property.  

 “Reserves studies are not part of the monthly or even annual financial reporting  process,” explains Jason Powell, CMCA, AMS, of Alpine Property Management in Boston. “Reserve studies should be done every five years or as needed, based on many  variables, but the resulting data is supposed to be used by boards to help  determine the annual operating budgets.”  

 For example, Powell explains that if a reserve study shows five years of useful  life left on a roof, it shows the likely expected replacement cost of the roof  in five years. “The subsequent annual budgets should have increase in reserve account funding  for the eventual roof replacement with a five-year goal,” he says.  

 Once it’s all gathered, who is responsible for taking care of the paperwork and who has  the right to see all of these papers?  

 “The management company and board share responsibility of keeping records,” says Powell. “If they are self-managed, the clerk or secretary and treasurer could share this  responsibility and an owner can make reasonable requests to view documents.”  

 Powell says that state law dictates who sees what. “Most of the monthly reports are not made available to non-board members unless,  as a reasonable exception, as requested,” he says. “The law only requires reasonable access, so many boards require owners to make  an appointment to view only, and/or to pay for copies. The annual budget must  be presented to owners a least annually around the end of the fiscal year, so  if there is a condo fee increase or a special assessment (or, supplemental  condo fee) owners should have at least 30 days’ notice and usually some sort of reporting is supplied to owners to help explain  the need for an increase in fees.”  

 He also explains that non-board members should not be allowed to view any  documents involved with executive session and or any protected documented, such  as confidential unit owner requests, correspondence or violation and  delinquency reports.  

 To some, however, letting unit owners have access to all financial documents is  a very controversial subject. “Their eyes glaze over,” says Bloom. “They don’t understand what they are looking at and it can be intimidating. They want to  see this or that, but they don’t know what they are looking for. It consumes a lot of the management company’s time as they rifle through documents. Under most laws, unit owners have a  right to review the documents of their association with certain exceptions.  

 “The primary exceptions are looking at who the delinquent unit owners are and  what they owe. It’s a privacy issue and the board has an obligation to make sure the information  they are providing isn’t used to harass someone.”  

 Bloom says that, as a rule, the management company has a responsibility to  maintain all the documents. “The problem is where there are self-managed associations and volunteers who are  trying to manage this stuff.” Massachusetts associations, for example, might want to hire a property  management company, he suggests.  

 If an association needs help gathering this paperwork, Love also advises having  an extremely capable treasurer on the team. “A CPA assists in year-end financial statements and tax returns,” he says. “Condo associations used to be nice restful sleepy residential communities, but  now they are small businesses and you need to execute your financial fiduciary  responsibilities and duties just like a small company would have to do.”  

 In addition to completed paperwork, make sure to keep accurate records and hold  onto the paperwork. The Internal Revenue Service suggests that all businesses  save financial records for a minimum of seven years. These records may be  needed for tax reporting purposes or to settle landlord/tenant disputes.  

 Financial Security

 Last year in Ohio, a property manager admitted stealing more than one million  dollars from homeowner and condo associations by generating fictitious  financial statements to cover up her illegal activities. 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. So how does an association maintain financial security?  

 “First, managing access to the records is one element,” says Bloom. “Not letting anyone come in and see what they want to see.”  

 Massachusetts has passed a Data Security law that states regardless of where  your business is physically or operationally, if you handle or store the  personal information of any Massachusetts resident, you are legally obligated  to protect that information. Failure to comply with MA 201 CMR 17 could result  in fines of up to $5,000 per violation, although "per violation" has yet to be  clearly defined.  

 It’s a good first step,” says Bloom. “You should also dispose of old records you don’t need anymore. If I owned a condo, the more associations move toward banking  services online or in remote locations and the report of payment of condo fees  coming electronically, the more I’d be concerned.”   

 Lisa Iannucci is a freelance writer and a frequent contributor to New England  Condominium.