Is HOA bank reconciliation required?

State laws and your governing documents dictate whether bank reconciliations are mandatory. In California, Civil Code Section 5500 requires boards to review the association's finances on a monthly basis. This includes reconciling the association's operating and reserve accounts. Similar provisions may exist in your CC&Rs or bylaws.

HOA Bank Reconciliation: How Can Your HOA Do This?

Q: What is bank reconciliation?

An HOA bank reconciliation is the practice of comparing your association's bank statements with your financial records, ensuring they match up. Typically, your HOA board would check your bookkeeping records, which include your financial statements, and compare them against your HOA's bank statements, which show the actual cash balance in your operating and reserve accounts.

Q: What is the purpose of HOA bank reconciliation?

The purpose of reconciling your bank statements is to confirm whether your actual cash balance matches your recorded balance and transactions. This allows your HOA board to identify any discrepancies and track your cash flow. If you notice a difference, you can investigate further to see if it was simply a recording error or a case of fraud. If it is the former, you can make the necessary changes to your accounting records.

Q: How do you do a bank reconciliation?

The process of HOA bank statements reconciliation is rather simple. It begins with the bank providing you with your association's bank statement. This statement will present all transactions related to the account, including a beginning and ending balance as of a particular date. To review your bank statement, check your ending cash balance. In theory, your ending cash balance should match your cash title as it appears in your financial statements. However, you must also account for any pending deposits and outstanding checks. To do that, take your ending cash balance and add any deposits in transit. You must also deduct any outstanding checks, which are checks that have been issued but have yet to be cleared by your bank. This should give you the adjusted ending cash balance, which should match your accounting records, plus any interest earned and minus any service fees or penalties.

Board members should familiarize themselves with the process of HOA bank reconciliation. This practice, typically done regularly, can be a powerful tool in helping prevent fraud within the association. With the prevalence of fraud and fund mismanagement cases, keeping a close watch on your association’s finances is becoming even more essential.

What Is Bank Reconciliation?

An HOA bank reconciliation compares your association’s bank statements with your financial records, ensuring they match up. Typically, your HOA board would check your bookkeeping records, which include your financial statements, and compare them against your HOA’s bank statements, which show the actual cash balance in your operating and reserve accounts.

State laws and your governing documents dictate whether bank reconciliations are mandatory. In California, Civil Code Section 5500 requires boards to review the association’s finances monthly. This includes reconciling the association’s operating and reserve accounts. Similar provisions may exist in your CC&Rs or bylaws.

What Is the Purpose of HOA Bank Reconciliation?

Reconciling your bank statements is to confirm whether your actual cash balance matches your recorded balance and transactions. This allows your HOA board to identify discrepancies and track cash flow. If you notice a difference, you can investigate further to see if it was a recording error or a fraud case. If it is the former, you can make the necessary changes to your accounting records.

An association’s finances typically fall in the hands of only select individuals, namely the treasurer, the manager, or both. Sometimes, the board president also handles parts of the HOA’s assets.

Every month, the treasurer or manager receives an accounting of its funds, including payments received and checks written. However, the association’s liquid cash is kept in a bank account. The reconciliated HOA bank statements depict the association’s actual cash transactions for a certain period, which includes all deposits, transfers, and withdrawals. It is a separate statement from the usual financial statements.

With bank reconciliation, your HOA board can compare what you have in your bank account with the money that your financial statements say you have. You can track whether payments went to the right vendors and when cash entered your account. All of this can help deter fraud.

When the HOA board reviews its finances monthly, people are less inclined to make fraudulent transactions. In an HOA, fraud typically occurs by changing the payee’s name on a check or withdrawing funds without permission. You can verify these details and identify fraud early on through a bank reconciliation.

How Do You Do a Bank Reconciliation?

The process of HOA bank statement reconciliation is rather simple. It begins with the bank providing you with your association’s bank statement. This statement will present all transactions related to the account, including a beginning and ending balance as of a particular date.

To review your bank statement, check your ending cash balance. Theoretically, your ending cash balance should match the cash title in your financial statements. However, you must also account for any pending deposits and outstanding checks.

To do that, take your ending cash balance and add any deposits in transit. You must also deduct any outstanding checks, which are checks that have been issued but have yet to be cleared by your bank. This should give you the adjusted ending cash balance, matching your accounting records, plus any interest earned and minus any service fees or penalties.

As a form of internal control, the person who writes the checks should not be the same person who receives the bank statements. This is to prevent that person from altering the bank statement before it reaches the rest of the board. Board members should not be afraid to ask questions and dig deep if there are discrepancies. Remember that the board’s fiduciary responsibility is to protect the association’s finances.

How Often Should You Do an HOA Bank Reconciliation?

Countless cash transactions can take place in a single month. Therefore, HOA boards should reconcile their bank statements every month. In some states, such as California, monthly reconciliations are even mandatory. Besides state laws, your board should also check your HOA’s governing documents for guidance.

Generally, banks will send the association’s bank statements at the end of each month. However, to save on costs, some banks have stopped doing this. Others have moved to a purely digital mode of sending bank statements, while others don’t since online banking has made it easier to check your statement at a moment’s notice.

Regardless, it is still best to ask your bank for a monthly physical copy of your bank statement. Online banking records are not kept indefinitely so that they will disappear in due time. On the other hand, physical bank statements allow you to keep a record of them indefinitely.

If your HOA has online banking capabilities, it is ideal to check your statement daily. While it is standard to do so every month, daily checks will allow you to identify discrepancies immediately and take swift action.

What to Do If the Bank Reconciliation Statement Does Not Match

Your bank statement’s ending cash balance will not always match your accounting records to the last decimal point. This is because there are other amounts you have to consider that have yet to be reflected, including deposits in transit, outstanding checks, penalties, and service fees. After considering all those things, your adjusted cash balance should equal your adjusted accounting records.

Your HOA board should investigate if your bank statement and accounting records still don’t match after adjustments. Check each transaction in your accounting records and match it with the corresponding transaction in your bank statement. While tedious, this practice will help you identify errors and determine what went wrong.

The Importance of Choosing the Right Bank

Homeowners associations should choose their banks wisely. There are other qualities to look for in a bank than simply a favorable interest rate.

When selecting a bank, look for one that offers online banking capabilities that allow you to check your account statement on demand. You should also go for a bank that provides physical bank statements every month. If you use HOA management software, choose a bank that can integrate its tools and features with your software.

Given the popularity of HOAs in the United States, many banks now have offers that specifically cater to homeowners associations, condominiums, and community associations. These banks tend to know how HOAs work and are familiar with their unique needs. This allows them to serve associations better.

The Importance of an HOA Management Company

As you can see, HOA bank reconciliation plays a critical role in protecting the financial health of an association. This is why HOA boards should understand how reconciliations work and what to look for when reviewing their bank statements. Of course, not all board members have the knowledge and experience to manage an association’s finances smoothly.

Clark Simson Miller offers expert financial management services to HOAs and condominiums, including bank reconciliation services. Call us today at 865.315.7505 or contact us online to request a proposal!

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