HOA accounting is probably one of the most complex, and most important, responsibilities of the association board. Preparing financial reports on a regular basis is important for many reasons. They help financial planning. They also promote transparency between board and members. Or they could simply be required by law. The frequency of preparation of HOA financial statements may vary depending on state laws, community bylaws, and the size of the association.
In this article:
The Complete Guide to HOA Accounting
If you are having trouble preparing community financial statements, the professionals at CSM are standing by to answer all your questions. We have years of experience working with thousands of residents across the United States.
What Is an HOA Financial Statement?
Simply put, an HOA Financial Statement is an official record that details all the financial activities of the community association. They form part of the HOA basis of accounting. Specific details that must be included depends on state regulations and community bylaws, but there are some basic details that should be included regardless of size or location:
- Balance sheet
- A statement of income
- Bank statements
- A General ledger that keeps track of all account activity
- Reserve fund reports
The most common mistake that people make when preparing HOA financial statements is not adding enough detail. Add every detail, no matter how small, so you have a more thorough insight and better decision making. When in doubt, include it. That’s always a good rule of basic accounting for HOA.
You should also put it into an easy to read format. These documents will be available to everyone in the community, most of which do not have advanced accounting degrees. For an HOA financial statement to be effective, it needs to be prepared so that anyone can understand the content. Making it too complicated alienates people and hinders community relations.
How Often Do Financial Statements Need to Be Prepared?
There is no standard frequency for HOA financial statements. It will depends on several factors. HOA state regulations, is one huge factor. So does the financial needs of the community, as it relates to its goals and its size. Of course, the more frequently you prepare the statements, the more helpful they will be for the board of directors. Newer HOAs or ones with more basic budgets can prepare one every month without much issue.
Large associations with many accounts or complex budgets often choose to prepare statements every year.
Maintain that frequency once you make the decision. Straying from the regular schedule only causes issues between the board members and homeowners. It leads to a feeling of distrust. When dealing with financial information, it is best to be open and honest in as much detail as is appropriate.
For smaller, self-managed associations, there might be trouble getting financial statements completed on time. If so, it is relatively inexpensive to hire an accountant as needed to prepare balance sheets. Doing this ensures that all the information will be completed in a timely manner. It also removes the need to take time out of community volunteer’s busy schedules. This alone relieves some of that stress from the board members as well.
There are also a multitude of services available from CSM to help homeowner’s associations organize and prepare their own financial statements. With the professional support of an experienced team along with state-of-the-art technology, even the most inexperienced association members will be able to navigate the complicated waters that is HOA financial management with ease.
What Is a Financial Statement Used For?
Properly detailed HOA financial statements are incredibly useful. They give the HOA information it can use to budget. It helps them set dues. Timely reports also helps them effectively allocate funds for projects and maintenance.
It is a requirement for any sort of financial planning. For starters, if records are kept consistently, association directors can look back on previous financial years to identify patterns that could affect the current budget and adjust accordingly. It is also imperative to keep track of money owed. If detailed records are not kept, it can be near-impossible to keep track of delinquent dues or know how much money is available to budget for community maintenance and new projects.
In some states, it is a legal requirement for HOAs to maintain and submit regular financial statements. It is a good idea to keep detailed records anyways as they will be extremely beneficial for all other aspects of homeowner’s association management.
Most importantly, having detailed financial statements readily available to all HOA members can promote transparency between the board and the community. If the homeowners can see what their money is going towards, they will be more agreeable and open with the board of directors. It promotes teamwork throughout the community.
Where Should the HOA Accounting Reports Go?
As with most things regarding HOA financial statements, it depends on state laws and community bylaws. Generally, there are three places that they need to be turned in:
- The HOA Board of Directors – the board of directors should receive a full, unedited report. They will need all available financial details in order to make informed decisions and plans regarding community maintenance and future projects.
- Community Members – Homeowners should also get their own copies of HOA financial statements. You may need to alter these reports to protect sensitive information, like the identities of delinquent members.You should include it in the documents sent to community members, If it will not cause an issue between community members. All HOA financial statements should be available upon request. It fosters transparency and trust.
- State Department – if a homeowner’s association is a non-profit, an annual report must be filed with the Secretary of State. Failure to do so could result in losing their “Good Standing” status. This may not be applicable to all HOAs.
The more accessible financial statements are, the better. Some community associations even opt to put their financial information on their website to allow homeowners to view it at any time. Of course, not all information needs to be publicly accessible, but you should include everything that can be included. Transparent financial processes help to promote teamwork and positive community relations between homeowners and association board members.
Who Should Prepare HOA Accounting Reports?
This answer depends on the size of the community. Smaller, self-managed associations may have an elected treasurer, financial officer, or president that is responsible for compiling financial documents. In such cases, it is a good idea to use a professional accountant to ensure that HOA accounting statements are prepared correctly before releasing them to board and community members. Remember, just because someone was elected treasurer, does not necessarily mean they have accounting experience. It is always best to hire a professional. Large homeowner’s associations have more complex budgets and will usually have a management company, such as CSM, that handles all financial data.
If statements are self-prepared by an elected community member, make sure that there is a backup of all financial records. In the unfortunate event that something happens and the preparer is no longer able to maintain their responsibilities, it can be difficult for the next person to learn their accounting methods or sometimes even gain access to the records.
Whether an HOA is made up of ten units or ten thousand units, it could be beneficial to hire a management company to ensure that everything is being run as efficiently and effectively as possible. When looking into property management companies, it is important to look for a company with a strong financial background. The entire community association becomes ineffective if the finances are not well kept.
Hire a company such as CSM to provide financial management assistance. It can only make life easier for the board of directors. It also gives community members peace of mind, with all finances being managed accurately and efficiently.
The Importance of HOA Accounting
To make a great plan, it is important to have all the information possible. Reliable, consistent, and transparent financial statements not only help the HOA board of directors make well-informed decisions. It also supports community health by allowing all community residents and stakeholders to be a part of the team. Keeping members in the dark only promotes mistrust and working with inadequate or no financial information can lead to dwindling reserves for community upkeep and new projects.
Creating an effective HOA is as simple as choosing an accounting process that works for your team. Keeping detailed records, and communicating openly and freely with the community about all financial information as well. For more information regarding HOA financial statements or HOA financial management in general, contact the professionals at CSM. We offer a wide variety of services to assist self-managed community associations at a fraction of the cost of other management companies. Call us today at 865.315.7505 or email us at firstname.lastname@example.org to reach our dedicated professionals.
- What Are The Standard Financial Statements For An HOA?
- The Best HOA Accounting Method: Cash, Accrual, Or Modified Accrual?
- 6 Tips To Have A Strong HOA Financial System