ASSOCIATION FINANCIAL INFORMATION
Controls and Procedures Protect An Association From
Theft, Fraud And Embezzlement
 
by Enrolled Agent Steven J. Weil, Ph.D, EA, LCAM, Royale Management Services, Inc.
 
Association unit owners and Board members would be wise to pay attention to financial statements.  Here are a few of basic rules of compliance:  
 
  • The Florida Statutes require that association financial statements be provided to unit owners annually within 120 days after the fiscal year ends.  While owners are required to be notified of annual financial statements availability and should review these important documents, they are also entitled to review association financial statements and other records at any time during the year simply by making a request to the records custodian. 
  • Failure to provide such records can result in association fines up to $500 by the State.  
  • Purchasers of new units are required to acknowledge receipt of the financial report from the seller before taking title.  
  • With an annual majority vote by owners, the statutory reporting requirements for an audit or review may be waived for no more than two consecutive years.
Financial reporting is important not only because of the State requirements, but it also assists the Board in making informed decisions and allows unit owners to know the financial health of their association. To use this important information you need to know how to read and interpret it. With that in mind, this article will discuss the content of financial statements and the undeniable value of transparency in preventing theft, fraud and embezzlement.
 
Annual Financials Come in Several Flavors
 
The format required for providing financial statements depends on the size and annual revenue of the association.  Specifically:
 
Annual Revenue:
Less than $100,000 or less than 50 units  
Between $150,000 and $300,000 
Between $300,000 and $500,000 
More than $500,000
 
Type of statement required:
cash receipts and expenditures 
compiled 
reviewed 
audited 
 
Here’s how compiled, reviewed and audited statements differ in their thoroughness and degree of accuracy from simply a record of what funds come in and go out, which falls short of what is needed to provide a complete picture:
 
  • Compiled – basic aggregation in accordance with accounting principles
  • Reviewed – by a CPA who issues a report with limited assurance of accuracy
  • Audited – comprehensive, independent review with a CPA’s opinion, citing errors
 
(Note:  Even audited statements do not guarantee against theft or embezzlement.   They simply assure that the numbers shown on the financial statement are true and have been verified by an independent CPA.)
 
The Florida Administrative Code Requires Financial Statements to Contain:
 
  • Accountant’s or Auditor’s Report – a compiled, reviewed or audited statement
  • Balance Sheet – compares cash on hand plus reserves to what is owed
  • Statement of Revenues and Expenses – itemizes the income source and type of expense
  • Statement of Changes in Fund Balances – shows degree of change, plus or minus
  • Statement of Cash Flows – shows how funds were used over time with a net increase or decrease
  • Notes – gives a needed explanation of an item; possibly highlights a problem
Is the Annual Financial Report Enough?
 
It pays to have even more information available than the law requires annually. Monthly reports are a recommended roadmap for financial decision-making.  In addition to the required annual statements, such as the balance sheet and cash flow statement previously mentioned, these reports should be reviewed by the Board each month:
  • Income Statement – compares actual expenses with the budgeted amount
  • Accounts Receivable Summary – shows who owes what and may include funds from prepayments that have been made but not yet billed 
  • Accounts Payable Summary – shows what is owed by the Association and to whom
  • Detailed General Ledger – shows each invoice, check issued and payment received
  • Bank Reconciliation – shows deposits and checks plus the current balance
Controls That Help to Protect Everyone Financially
 
Sunshine is a great disinfectant.  Aside from reviewing the financial statements and bank statements monthly, here are some common sense safeguards to put into place in order to reduce theft and eliminate the need to consider rumors and innuendo about possible wrongdoing:
  • Require two signatures on all checks
  • Require that the invoice be presented with the corresponding check for signature
  • Accept no cash payments to the association
  • Do not maintain petty cash funds
  • Do not provide association credit cards to staff; set up an account with the store that requires approval for purchases
  • Use a card-based laundry payment system to eliminate theft
  • Board members should spot check payments to employees 
  • Verify vendor licenses and insurance
  • Review bank activity and or bank statements regularly
  • Use technology to foster transparency, e.g. secure web sites requiring a user ID for access 24/7/365; email communication; and telephone access for out of town Board members and owners to Board meetings
  • Institute a policy that uncollected funds are submitted to legal automatically after 60 days
   
Remember, Board members have a responsibility to the owners and to the association. They can’t fulfill that responsibility if they don’t have access to records.  If you are a Board member who is not getting the information you need to exercise your fiduciary duty, here’s what you can do:
  1. Make a motion at a Board meeting to require that information be provided to all directors. (This may not solve the problem, but it will get your concerns on the record.)
  2. Send a certified letter to management requesting the information and a records inspection as required under the Florida Statutes, Chapter 718. 
  3. If inspection is not permitted within 10 days, notify the Florida Department of Business and Professional Regulation by filing a complaint for failure to allow the required records inspection.