Financial statements are intended to provide users – including members of a homeowners association’s board of directors, timeshare owners, lenders, vendors, and other interested parties – with the critical information needed to make decisions relating to the association’s financial position.

These reports are the primary source of information on an association’s financial performance and condition. However, many directors and other interested parties are not accountants. Here, we provide information to help you learn which information is critical when reviewing financial statements and to identify the warning signs that an HOA may be facing financial stress or the board of directors may be failing to fulfill its fiduciary duty.

10 questions to ask

1. Is the HOA following proper cash-management procedures to avoid excess FDIC credit risk? (Make sure not more than $250,000 is in any bank for any one association. This includes all of the association’s accounts in that same bank.)
   
   
2. Does the association’s operating account have sufficient funds to meet anticipated monthly expenses?
   
   
3. Do the “Total Accounts Receivable” on the balance sheet equal the balance due on the “Aged Analysis Report?” “Clearing” and “Other” should be zero. Any credit balances under “Accounts Receivable” need to be investigated.
   
   
4. Do total “Replacement Fund cash and investment accounts” equal “Total Replacement Reserves” under Fund Balances?
   
   
5. Do the “Total Replacement Reserves” equal or exceed the “Required Reserves” shown on the Supplemental Information on Future Major Repairs and Replacements”?
   
   
6. Do the “Prepaid Assessments” on the balance sheet equal “Prepaids” on the “Aged Analysis Report?”
   
   
7. Do the “Total Assets” equal “Total Liabilities and Equity?”
   
   
8. Does the amount in the operating fund equal or exceed the amount in “Unearned Assessments?” (The amount of unearned assessments is the balance of the budget for the remainder of the current fiscal year and is generally based on 1/12 of the budget per month. The amount in the operating fund should exceed the unearned assessments to ensure adequate funds for the remainder of the fiscal year.)
   
   
9. Does the current month’s “Operating Surplus/(Deficit)” equal the “Operating Surplus/(Deficit)” under the “YTD Actual” in the Fund Balance section of the Statement of Revenue and Expenses?
   
   
10. Are actual revenues and expenses consistent with budgeted revenues and expenses? For example, are the maintenance fee collections equal to what is budgeted? If not, are expenditures being reduced to reflect this fact?

10 warning signs to watch for

1. The auditor’s report has been modified. If so, the letter accompanying the report will contain a paragraph explaining the exception.
   
   
2. The HOA has received a letter of comment from the CPA firm indicating material weaknesses or significant deficiencies in internal controls (SAS 115).
   
   
3. If “Total Liabilities” exceed “Total Assets” there could be a liquidity problem. Liquidity problems may generate questions as to the association’s ability to continue as a “going concern.”
   
   
4. On the Statement of Cash Flows, cash flows from operating activities is negative (undesirable).
   
   
5. Expected principle payments on long-term debt over the next year are greater than expected cash flows from operating activities.
   
   
6. The HOA has failed to show its tax filing status or disclose its liability for income taxes. This is usually included in the footnotes.
   
   
7. The HOA’s investments don’t conform to legal requirements and gove rning documents. (Note: if investments seem risky or unusual, e.g., pork belly futures, this sign become especially pertinent.)
   
   
8. The footnotes don’t state that a study was conducted to estimate the remaining useful lives of common area components and the costs of future major repairs and replacements or if one has been done, replacement reserve fund balances are significantly less than required funding levels as shown on reserve study projections. If the association intends to fund future major repairs and replacements by special assessment or by borrowing, the footnotes should disclose that policy.
   
   
9. Services provided by board members, officers or developers are not disclosed in the financial statements. In other words, related party transactions should be disclosed including any balances due to/from related parties. The financial statement should reveal any potential conflict of interest.
   
   
10. When comparing budgeted to actual expenses are there any line items with material variances over 10 percent? If so, is the cause known and are other expenses being monitored to compensate for the identified overages?

Beth Moore, CPA, a partner and timeshare niche leader for Dixon Hughes Goodman LLP, has over 24 years of public and private accounting experience. Her team specializes in providing audit, accounting and tax services to timeshare developers and associations, and currently serves over 75 associations throughout the United States. Additionally, she is often called upon to serve as an expert witness in property owner association matters.