REPORT #4

Financial
Operations
 best
practices
R e p o r t # 4

Financial
Operations
Published by
the Foundation for Community Association Research
Acknowledgements
Panel Members
F. James Ahlberg, cpa
Gayle Cagianut, cpa
Mark Cantey, cpa
Gil Cross, cpm, cmca ®

Jerome Fien, cpa, rma, psa

Howard Goldklang, cpa
George Hukriede, rs™, cpa
Bill Owens, cpa
Gary Porter, cpa
Linda J. Schiff
Ed Thomas, cmca , ams , pcam
® ® ®

R. Honey Wheeler, cmca ®

Copyright and Use Permission

© Copyright 2014. Foundation for Community Association Research.
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Falls Church, VA 22042

Readers are encouraged to download and reproduce the Best Practices Reports for community association
managers, board members, individual homeowners, and community association-related industry profession-
als without permission of the Foundation for Community Association Research provided the following terms
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“This document is designed to provide accurate and authoritative information in regard to the subject matter
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the American Bar Association and a Committee of Publishers.

ISBN 978-0-941301-65-7

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 F i n a n c i a l o p e ra t i o n s

best
practices
Community Associations Institute (CAI) and the Foundation for Community Association Research are dedi-
cated to conducting research and acting as a clearinghouse for information on innovations and best practices
in community association creation and management.

What are Best Practices?

The Foundation for Community Association Research is proud to offer function-specific
Best Practices Reports in the community association industry. The Foundation has devel-
oped best practices in select topic areas using a variety of sources, including, but not
limited to, recommendations from industry experts and various industry-related publica-
tions. The outcomes of the Best Practices project include:
• documented criteria for function-specific best practices;
• case studies of community associations that have demonstrated success; and
• the development of a showcase on community excellence.

The benefits of benchmarking and developing best practices include: improv-

ing quality; setting high performance targets; helping to overcome the disbelief that
stretched goals are possible; strengthening cost positions; developing innovative
approaches to operating and managing practices; accelerating culture change by making
an organization look outward rather than focusing inward; and bringing accountability
to the organization because it is an ongoing process for measuring performance and
ensuring improvement relative to the leaders in the field.

The Foundation’s entire catalog Best Practices Reports is available at www.cairf.org

as a free download and for sale in CAI’s bookstore.

3
Section one

Overview and Introduction

Financial Operations
It is CAI’s purpose to foster vibrant, responsive, competent community associations that
promote harmony, a sense of community, and responsible leadership. Given that the fiscal
health of the association has a direct impact on every member of the community, proper
management of financial operations is an important element of building better communi-
ties. While the responsibility for an association’s finances rests with the board, there are
numerous areas where advice should be sought from qualified financial professionals.
The board of directors, particularly the treasurer, is ultimately responsible for asso-
ciation’s funds and may not abdicate their fiduciary responsibility. Given the reality that
community association boards are made up of diverse individuals with varied degrees of
financial knowledge, below are basic guidelines that should be followed to ensure sound
financial operations.

Banking
• Maintain the association’s funds, including the replacement fund (commonly called
reserves) and operating fund, in separate accounts in the association’s name and
ensure that the board has direct access to the account.
• Maintain an operating cash balance of approximately two months expenses.
• Reconcile the association’s bank statements and investments monthly (or at least
quarterly) with the statements going directly to the board member reviewing them.
The board member charged with reviewing the bank statements should not be
responsible for payment of bills and/or signing checks.
• Require the full board to review copies of bank statements and investments on a
quarterly basis.
• Require at least two board members’ signatures to gain access to reserves.
• Require at least two authorized signatures on all checks over a predetermined
amount as established by the board of directors.

Planning
• Establish a long-term financial plan for the association’s assets (cash, accounts receiv-
able, replacement fund, investments, etc.) that is reviewed and revised annually.
• Develop written, board-approved investment policies and procedures.
• Commission a reserve study and/or update current reserve study at least every three
years and review the report annually.
• Prepare a long-term operating budget covering the next three to five years.
• Include reasonable reserves for future major repairs and replacement of common
facilities in assessments as determined by the association’s most recent reserve study.

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Disclosure
• Provide homeowners with reasonably detailed summaries of budget and reserve
information on an annual basis, with further information readily available.
• Request financial statements from the manager or accountant at least quarterly.
(Please note: some associations may opt to view these statements more frequently.
Further, state law may dictate the frequency with which financial statements must
be prepared.)
• Inform homeowners that the annual financial statement, which is prepared in accor-
dance with the basis of accounting used by the association, is available for review by
owners and prospective purchasers within the time frame established by the associa-
tion or specified in applicable statutes and governing documents. This report may be
a review, a compilation, or an audit. If possible, a copy of this report should be sent
to all members of the association. If copies are not sent to members, the board should
publicize, through the association’s newsletter, that copies are available upon request.

Policies/Record Keeping
• Develop a written, board-approved collection policy for enforcing owners’ assess-
ment obligations. Be sure to follow applicable state statutes regarding development
and enforcement of the policy.
• Establish that the board must approve all write-offs of delinquencies in a timely
manner.
• Solicit competitive bids for services and require board authorization for all expendi-
tures over a predetermined amount.
• Request timely updates and reports from the association’s manager and accountant.
• Keep detailed meeting minutes paying close attention to all fiscal matters.
• Conduct payroll audits to ensure all employees are legitimate and paperwork is cur-
rent and complete.
• Require approval of invoices, by a board member other than the check signers, prior
to payment.
• Establish and maintain a policy regarding archiving the association’s permanent
financial records.

Budgeting
• Assign budget items in the month during which the expenses are expected to be
incurred rather than dividing total yearly expenses by 12 (for each month of the
year).
• Require board approval for checks in payment of non-budgeted, non-recurring
expenses in excess of an established limit.
• Compare income statement with the budget on a periodic basis (at least quarterly).

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Budgetary Responsibilities
A community association’s governing documents and management contracts will define
formal roles and responsibilities in the budget process. These roles should be commu-
nicated in a constructive manner to all involved to ensure that appropriate expectations
exist. Below is an outline of the responsibilities of volunteers and professional staff typi-
cally charged with developing community association budgets.

Board of Directors
Most boards of directors are responsible for establishing, approving, and monitoring
the community’s budget. Although they have the power to establish a budget, most will
delegate preparation authority to their manager or accountant. When directors review a
proposed budget, they should consider the following:
• State statutes and requirements established in the association’s governing documents.
• Owners’ needs and expectations (the balance between mandatory and discretionary
items).
• Committee and owner feedback.
• The need to reconcile income and expenses, otherwise known as balancing the bud-
get.
• Financial forecasts (e.g. budgets) and analyses of past financial activities prepared by
the manager or accountant.
• Capital budget and reserve study requirements.
If the board has the power to approve the budget, the manager should provide all
owners with a summary copy of the proposed budget before the board officially adopts
it. Owner input is a key component of the budgeting process. Owner input regard-
ing the budget leads to less animosity over budget priorities and the opportunity for
increased resident involvement in other aspects of the community—thus, building a
sense of community.

Treasurer
The treasurer is usually charged with the responsibility for the preparation and review
of the draft budget. He or she typically delegates the initial preparation of the budget
to the manager or accountant. If applicable, the treasurer will then review the draft of
the budget with the association’s finance committee.
The treasurer should consult all committee chairs and invite owners to comment on
the budget to ensure support. Owner participation and support is especially important
where a vote of owners is required for any of the following: a large required increase in
assessments, special assessments, major improvements, or funding reserves. Again, funding
of reserves should be based on the results of a reserve study. (For more information on reserve
studies, please consult Best Practices Report #1: Reserve Studies/Management.)
The treasurer usually presents the proposed budget to the owners in some forum as
agreed upon by the board. It may be presented at an open community meeting or sent
to the owners with a request for feedback by a specific date. Frequently, community-­

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governing documents require that an open meeting be held before the board adopts
a budget.

Owners
Some states and some community documents require that the budget be passed by a
vote of the owners. The preceding section explains the value of owner involvement in
reviewing the proposed budget—even when the board is responsible for final adoption.

Manager
The manager’s formal budget responsibilities are usually enumerated in the manage-
ment contract. Even if precise responsibilities are not specified in writing, the board
may expect the manager to:
• Prepare a draft budget.
• Review the draft with the treasurer, finance committee (if one exists), and the
board.
• Revise the draft budget after changes are made.
• Mail a summary of the proposed budget to owners prior to approval.
• Mail copies of the completed budget to all owners and have copies on hand for
prospective owners.
Managers should not be expected to perform services outside of their contractual
agreements. Thus, a community association should review their current management
contract to determine the manager’s level of involvement in the budget process. Any
desired changes in the services should be reviewed and negotiated.

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Section two

Accounting Practices &

Financial Statements
Accounting Practices
There are two commonly used bases of accounting, the accrual basis of accounting which
is required by Generally Accepted Accounting Principles (GAAP), and the cash basis
of accounting which is considered to be an Other Comprehensive Basis of Accounting
(OCBOA). OCBOA is not in accordance with GAAP, which is most often used by com-
munity associations.

Accounting Basis Used for Financial Statements

An association’s financial statements will reflect one of the following accounting bases (as
determined by the board with input from both the association’s manager and accountant):
Cash Basis—Cash basis accounting is similar to a checkbook. It records income
when deposited and expenses when paid. The cash basis may not accurately reflect the
association’s true financial condition—it simply shows the result of cash transactions.
Outstanding assessments and unpaid expenses, if any, are missing in this method, which
distorts an association’s financial health.
Modified Cash Basis—The modified cash basis is the cash basis with some aspects of
the accrual basis. Under the modified cash basis some accounts, such as assessment income,
are maintained using the accrual method. There can be degrees of modified cash basis.
Accrual Basis—Accrual basis accounting records income when earned and expenses
when incurred. The statements are more useful for comparing the results of the budget
to the actual activity. There are variances with the cash basis because transactions take
place at different times. For instance, if an association makes a late payment at the end
of a fiscal year, the financials would reflect it with 11 payments in one year and 13 pay-
ments in the next. With the accrual method, all 12 payments would be in the current
year regardless of when the bill was paid. The accrual basis allows the association to
gain the most accurate picture of its financial health.

Generally Accepted Accounting Principles

GAAP accounting provides uniformity among financial statements from different com-
munity associations. GAAP requires the use of accrual accounting for annual reports (see
accrual basis explanation above). GAAP requires the following set of year-end financial
statements for community associations:
Balance Sheet—A summary of a community’s financial position at a specific point
in time. The three major components of a balance sheet are:
• Assets—Items owed to or owned by an association.
• Liabilities—The association’s debts to third parties.
• Members’ equity—The owners’ interest in the association’s remaining assets after pro-
viding for the discharge of its liabilities. It may also be negative and called the members’
deficit if its liabilities exceed its assets. Note: This is called fund balance under the fund
method of reporting.
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Statement of Income and Expense (or Revenue and Expense)—Represents the oper-
ating activities for a given period of time, usually one year, ending on the same date as
the balance sheet.
Statement of Changes in Members’ Equity (or Fund Balances)—Reconciles the
beginning and ending members’ equity with results of operations for the period.
Statement of Cash Flows—Reconciles an association’s operating, investing, and
financing activities from the basis of accounting used (generally the accrual basis) to a
cash basis to reflect what caused the changes in the cash balance during the year.
Notes to Financial Statements—Footnotes that provide additional information to
help the reader understand the association’s financial situation. The notes may describe
the type of association and its characteristics, provide information about the association’s
reserve and investment polices, tax filing status and debts, explain the purpose and time
period of special assessments, describe significant commitments and possible events that
could have a financial impact on the association (e.g., pending lawsuits), and explain
related party transactions.

Financial Statements and Reports

Year-end financial statements help determine and outline a community association’s
fiscal health. Experts suggest that a Certified Public Accountant (CPA) specializing in
community associations prepare these statements.

Audit
An audit is an examination of an organization’s accounting records and procedures by an
independent certified public accountant for the purpose of verifying the fairness of the
presentation of financial statements. An association’s governing documents and/or state
statutes may require an annual audit. However, in the absence of a state mandate, exter-
nal verification of the accuracy and completeness of the association’s financial records is
a sound business practice. The audit should include, but is not limited to, the following:
confirmation of selected transactions and balances with outside parties (such as banks
and contractors); a physical inspection of records; a trace of transactions to supporting
documentation and authorization by someone within the association; and review of the
association’s legal documents and minutes.
After the audit is complete, the CPA will prepare an opinion report that details one
of the following four outcomes:
1. The auditor issues an unqualified or clean opinion that states that the financial state-
ments are presented fairly in all material respects.
2. The auditor issues a qualified opinion that says the statements, with certain reserva-
tions, are fairly presented.
3. The auditor disclaims his/her ability to issue an opinion.
4. The auditor issues an adverse or negative opinion.
Clearly, a community association should strive for a clean opinion or, if necessary,
a qualified opinion. The third scenario—a disclaimer—usually occurs when the client
organization or the circumstances surrounding the audit restrict the CPA’s ability to col-
lect sufficient evidence to form an opinion. An adverse opinion is issued when evidence

9
indicates that the financial statements do not fairly reflect the association’s financial
position or operating results.
Financial experts recommend that a CPA familiar with community associations per-
form an audit annually, minimally every other year. It is important to note that some
state statutes require that community associations be audited on a specific timetable.

Review
A review is less thorough than an audit, thus a less costly analysis of an association’s
financial activities. It provides the board with some assurance that the financial state-
ments are consistent with typical trends without the detailed examination obtained in an
audit. In a review, the CPA interviews management personnel and others involved in the
association’s accounting process in order to assess the association’s financial procedures.
The reviewer compares the actual amounts with the association’s prior year line items
and looks for trends or irregularities.
The review provides a significantly lower level of assurance than an audit does. The
report states that the CPA is not aware of any material or significant changes that should
be made to the financial statements in order for them to conform with GAAP or OCBOA.

Compilation
A compilation is a presentation of financial statements prepared by an accountant, not
necessarily a CPA, but does not provide any level of assurance regarding the financial
statements. Compilations should also be prepared in accordance with GAAP or OCBOA.
Through a compilation, the association asks an accountant to prepare its year-end state-
ments based on the information that the board or manager provides. The accountant
does not make any representation about the accuracy and completeness of the financial
statements. However, if he/she becomes aware that the statements are incorrect, he/she is
obligated to disclose that fact.

Reading Financial Statements

Financial statements are produced for two primary reasons:
• To provide their internal and external users with the economic information needed
to make appropriate decisions on behalf of the community association.
• To enable the community association board and manager to control the association’s
financial operations.

warning signs to look for when reviewing financials

• A steady decline in the amount of cash • Absence of a reserve study.
on hand. • The failure to resolve any differences
• Significant and/or unexplained differ- between bank statements and the finan-
ences between actual and budgeted cial statements in a timely manner.
figures for items. • Untimely generated, or missing, finan-
• An increase in the amount of owners’ cial statements.
assessments owed to the community. • Financial statements not prepared using
• Unusually large legal expenses—unless GAAP.
reason is disclosed.

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Section three

Assessments, Taxes,
and Investments
Assessment Collection
The association declaration and state law give associations the authority to collect assess-
ments. It is not unusual for a board to be responsible for hundreds of thousands of dollars
in assessment fees. Given their fiduciary responsibility, association boards must collect
assessments in a timely, systematic manner. Each association should adopt, by resolution,
the procedures for the collection of payments (dues or assessment fees). The policy should
be distributed to all members and uniformly enforced. Communication of the association’s
budget is critical to assessment collection because those members who understand the asso-
ciation’s financial position are more likely to pay their dues on time.

Characteristics of an Effective Collection Policy

An effective collection policy should:
1. Be established by a formal resolution of the board that:
a. Specifies the problem to be solved (e.g., collection of delinquent fees);
b. Delineates the procedures to be followed;
c. Designates the circumstances under which the procedures are required or permitted.
2. Specify only actions that are within the power of the community association and
its board.
3. Set a firm due date for assessments.
4. Outline the steps to be taken by the person(s) responsible for collecting assessments
when a payment is late with a specific timeline for each step of the process.

take note
• All members of the association must have proper advance notice of the due date for
assessments.
• Be certain to uniformly apply collection policies to all owners.
• Be sure that whatever steps taken to collect assessments are authorized by enabling
statutes, governing documents, and fair debt collection requirements under the
Federal Fair Debt Collection Practices Act. Any steps taken should be automatic and
systematically increase in severity.
• Once an account is turned over to legal counsel, it is critical that all further communica-
tion be between the association’s attorney and the delinquent owner or the owner’s
attorney.
• The right to recover attorney fees and costs from a delinquent party should be guaran-
teed by state statute or the governing documents.

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 5. Allow for discretion in special cases (the burden of requesting special consideration
should be placed upon the owner). The discretionary power should be under the
control of the board of directors.
6. Specify when a delinquent assessment should be referred to legal counsel (this step
should be automatic once a delinquent assessment reaches a specific age or amount).
7. Provide for the collection of any costs associated with collecting delinquent
assessments.

Federal Income Tax Filing Responsibilities

The following are general federal income tax filing responsibilities for community associa-
tions:
1. All associations must file a federal income tax return every year. The lack of taxable
income does not eliminate the need to file, and filing a tax return does not neces-
sarily mean that the association owes the government money.
2. A community association is generally required to file its federal income tax return
as a corporation using Form 1120, but may elect to file as a homeowners association
using Form 1120H, if it meets certain requirements. The association should consult
its tax professional regarding this choice because tax rates are different.
3. A community association’s federal tax return is due the fifteenth day of the third
month after the end of the tax year. It is possible to obtain up to a six-month
extension of time in which to file a return. If an association needs an extension, it
must file an extension request form and pay any expected tax due by the original
filing deadline.
4. If previous boards failed to submit tax returns for previous years, the current board
is not absolved from filing a return for the current year or for any previous year that
was omitted.
5. An association may be required to make quarterly payments of its estimated annual
tax, depending on the tax filing method it uses. When a tax professional prepares
an association’s tax return, he/she will notify the association if it needs to make
estimated tax payments for the upcoming year.
6. State income tax filing requirements vary from state to state. They are not neces-
sarily the same as federal requirements.

Investments
The purpose of this section is to provide basic information on community associations and
investments—not to advise how associations should handle their investments. Investments
involve the purchase of assets with monetary value for the purpose of generating additional
value over time. Examples of investments include savings accounts, certificates of deposit,
US Treasury securities, and stocks, which are not often recommended as an investment
option for community associations.

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Investment Policies and Procedures

A community association should have a written investment policy and a set of pro-
cedures for ensuring that the policy is implemented. In some instances, governing
documents and state statutes establish investment policies for associations. For example,
certain states require that association funds can be invested only in federally insured
lending institutions and government securities.

Essential Investment Objectives

The three essential investment objectives for community associations, in the order of
their importance, are:
• Safety—protecting the principal (amount of original investment) from as much risk
as possible.
• Liquidity—the ease and costs associated with converting an investment into cash or
cash equivalent.
• Yield—the amount of return on an investment. The ultimate earnings from an
investment are not necessarily the stated rate of interest.

Common Investment Policies

(Please note: These are only suggestions. Your association’s CPA and/or financial advi-
sor should recommend investment policies to fit your community’s particular circum-
stances.)
• Investments should be federally insured either through FDIC or the US Government.
Thus, not more than $250,000 will be invested in any one financial institution so that
the funds are fully protected by FDIC.
• Investment income must be optimized without any risk of loss to the principal
(amount of the original investment).
• Investment maturities should meet projected cash flow needs.

Common Investment Procedures

(Please note: These are only suggestions. Your association’s accountant and/or financial
advisor should recommend investment procedures to fit your community’s particular
­circumstances.)
• Management is to deposit all payments received on a daily basis.
• Transfers of budgeted additions to reserves are to be made on a monthly basis.
• Certificates of deposit, passbooks, bonds, etc., are to be under direct board con-
trol—not management control.
• A quarterly special report of earnings on investments is to be prepared by manage-
ment or the treasurer and presented at a board meeting.

Investment Checks and Balances

Every association needs a system of internal checks and balances to protect its invest-
ments. Such checks and balances include:

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 • Association boards should consult a financial advisor prior to investing.
• Association boards should vote to invest funds based on an approved investment
policy.
• Two signatures should be required to withdraw funds from investment accounts.
However, an exception may be made for transfers between accounts of the same
association.
• Association managers, employees, and volunteers should be covered by fidelity
insurance (insurance that protects against employee dishonesty which may lead to
the theft of money, securities, or property) to protect the association from loss due
to employee theft.

Bid Requests/Request for Proposals

Management of a community association’s resources frequently involves the use of
contracts to obtain the products and services required. Given such, one component of
the board’s fiduciary responsibility is to ascertain that the association is not paying too
much for the products and services it receives. The most effective way to ensure com-
petitive prices is through bid requests to potential contractors.
A bid request or request for proposal (RFP) is an announcement that an organization
is interested in receiving proposals for a particular project or service. The bid request
form includes: bid specifications (detailed instructions about the products or services
requested); information about the association that the contractor will need in order to
prepare a bid; and, a request for information about the contractor that will help the asso-
ciation evaluate the contractor’s ability to perform the work and meet the specifications.
Preparing a bid request or RFP involves: gathering preliminary information; identifying
potential contractors; preparing thorough and accurate bid specifications; and preparing
a complete bid request or RFP. To prepare some service specifications, the association
may need to draw on the technical skills and knowledge of such parties as an engineer,
architect or supplier.
Because of the amount of effort the bidding process requires for both the community
association and the bidders, the process should be used only for significant projects or
purchases and for on-going services such as lawn maintenance. The board of directors
should determine the minimum size of a contract that requires competitive bidding.
Simply stated, bid requests and RFPs allow the board to solicit competitive prices for
products and services, thereby ensuring that the community association obtains the
desired services from a quality service provider at a reasonable price.

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Case Studies of Strategic Planning

case study #1
The Oakridge Estates Community Association
Size: 352 Planned Unit Development
Location: Ventura County, California
Board Size: Five (5)

This association is exemplary with regards to its financial operations. The board takes an
active role in the financial matters of the association and seeks professional advice from
their manager, accountant, insurance agent, and reserve study professional as needed.
The association encourages open communication from its members and repeatedly
meets its budget expectations. Below are some specific areas of financial diligence:
Review of financial statements and documents. The management company pre-
pares financial statements monthly, including a balance sheet and an income statement
with comparisons to the budget. Also included in the financial information are a check
register and a listing of delinquent accounts, as well as copies of all bank statements
and reconciliations. The board reviews this financial packet at each board meeting and
discusses the items therein.
Replacement fund/reserves. The association segregates replacement fund activity
and operating fund activity in its financial statements. Reserve cash is also segregated
from operating cash and is kept in a separate bank account. In compliance with California
Civil Code, two signers are required to withdraw any cash from the reserve cash
account. The board of directors approves all reserve expenditures and that approval is
noted in the board meeting minutes. There is an on-site reserve study prepared at least
every three years, and that study is reviewed annually by the board and adjustments are
made as needed. Reserves are funded in accordance with the budget.
Budget. The budget is prepared using data from the prior year with line item adjust-
ments as needed. The budget is distributed to homeowners 45-60 days prior to the end
of the fiscal year. The budget packet includes the information required by the California
Civil Code, i.e., the delinquency policy, reserve study data, insurance information, and
notice of arbitration/mediation rights.
Financial stability. There is approximately five percent of annual assessments in
the operating fund balance (equity). This is within the range of CAI’s recommended con-
tingency amount (of two to five percent minimum) to be kept on hand for unexpected
financial requirements.
Income taxes. For several years, the association has filed form 1120, with the lower
tax rate of 15 percent. Because the association diligently segregates operating and
reserve accounts, funds reserves according to the budget, and denotes capital and non-
capital reserve activity, it has qualified to file IRS Form 1120.
Annual accounting. An annual report, either an audit or a review, is prepared by a
CPA. That report is completed and mailed to the homeowners within 120 days of the
year-end. An additional product supplied by the CPA is a management letter wherein
suggestions for improvements to various financial matters are noted. The board and
manager are always open to suggestions and willing to make changes necessary to
improve financial transactions.

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case study #2
Kiawah Island Community Association
Size: 4115 properties
Location: Kiawah Island, SC
Board Size: Seven (7)

Kiawah Island is a National Community Association of the Year Award (NCAYA)-­winning

community in South Carolina. In addition to the board and management’s dedication to
community spirit and service, they also pay particular attention to financial operations.
Governing Documents. The community’s governing documents provide certain
guidelines related to the association’s financial activities. Financial statements are pre-
pared per the accrual basis of accounting prepared according to the fund reporting meth-
od. Using the accrual method ensures observance of limitations and restrictions on the
use of financial resources that the governing documents require. The association board
and staff also prefer to have an annual audit conducted because it gives the members
a level of confidence that is not possible with a review or compilation. When it’s all said
and done, the board and the staff want their work scrutinized to the fullest extent.
Bank Statements. As per the association’s Financial Controls Manual, the asso-
ciation’s treasurer and controller’s assistant reconcile Kiawah Island’s bank statements
monthly. This allows the association to regularly monitor its assets. The individuals
responsible for reconciling the bank statements do not have check signing authority.
Authorized signatories on all bank accounts are the board treasurer, the general man-
ager, the controller, and the assistant general manager. Regular checking transactions
require two of the aforementioned representatives’ signatures. Access to the associa-
tion’s reserves accounts requires the board president’s and treasurer’s signatures.
Financial Statements. Association financial statements are produced monthly to
keep the board “up to speed” on operations. The financial statements are discussed
every six weeks at a board meeting. Board meeting minutes are posted on the associa-
tion’s Web site for membership review. Financial statements (and annual financial audits)
are always available at the association office for members’ review and the financial audit
is provided once per year as part of the annual meeting packet materials.
Write-offs. Further, the association has a set process by which “write-offs” (delin-
quencies) are approved—the controller approves accounts with a balance of less than
$100, the manager approves accounts with a balance of more than $100 but less than
$500, the treasurer approves accounts with a balance of more than $500 but less than
$1,000, and the board must vote and approve write-offs for accounts with a balance of
more than $1,000.
Budgeting. Kiawah Island’s board and staff also work to develop and follow a
comprehensive budget each fiscal year. Budget items are allocated to the month
during which expenses occur. For example, the pool contractor provides a specific
annual schedule for the coming year listing the services and personnel he is provid-
ing each month and their cost. These monthly allocations are included into the annual
budget because it makes sense to match expenses with income. For example, during
the months that the pool contractor is providing services, the pool is open and income
is being generated.
Unbudgeted expenditures more than $2,000 must have prior board approval. Approval
may be obtained either at regularly scheduled board meetings, or by mail vote, when nec-

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 F i n a n c i a l o p e ra t i o n s

essary. Unanimous approval is needed for a mail vote to pass. Also, the Finance Advisory
Committee is informed of such expenditures and makes their recommendations to the
board prior to the meeting or mail vote.
To facilitate association operations when unbudgeted expenses of a serious nature
arise, the budget may contain a line item for contingencies, not to exceed the limit
approved by the board. The guidelines for the use of these funds are: (1) an unantici-
pated emergency, e.g., hurricane, flood, fire, etc., (2) the replacement or repair of equip-
ment that either fails or is destroyed unexpectedly and is considered by the general
manager to be critical to the efficient operation of the association, or (3) for the protec-
tion of association property from imminent damage.
The reason for this line item is that time required to obtain board approval for
unbudgeted expenditures may, under certain conditions, cause significant unnecessary
expense to the association, or that approval may be unattainable due to the unavailability
of board members, etc. The use of this line item, within the guidelines above, is to be in
the Operating Committee’s discretion only. When expenditures are made, the general
manager is to seek board ratification immediately, of both the expenditure and his/her
justification for the use of the contingency funds versus the regular process for advance
approval of non-budgeted expenditures more than $2,000. Once approved by the board,
the expense will be moved to the correct line item and/or department. The board has the
authority to suspend use of the contingency line item at any time, by written notification
to the general manager.
Competitive bids. The general manager, at the direction of the board, is the con-
tracting agent for the association. The general manager will sign all bilateral contracts.
The general manager may delegate purchasing authority and the ability to sign purchase
orders to various department heads. However, the general manager may not delegate
authority to sign general insurance or employee benefit contracts. Where feasible, all
contracts and purchase orders will be in the association’s standard format appropriate
to the type of purchase. The general manager reserves the right to have the contract
reviewed by legal counsel and/or insurance representatives. Whenever a form of contract
or purchase order other than the association’s standard is used, appropriate review will
be exercised. The general manager reserves the right to require that the standard format
be used.
All contracts valued annually at $25,000 or more require competitive bidding.
Competition for contracts less than $25,000 is not precluded and is recommended
when time and cost for obtaining quotes is reasonable. Staff is expected to perform
due diligence in obtaining bids, when required. Contracts with fewer than three
responses must contain a certification from the requesting manager that all available
responsible bidders were sought and suitable follow up performed to get as many bids
as possible, with explanations of unusual circumstances. The board must approve any
sole source award, in advance. Similarly, any contract to be awarded to other than the
lowest bidder must have prior approval by either the board or, for reserve projects, the
Major Repair & Replacement Committee.
Any contract in excess of $25,000 must either be approved in the annual budget or
have specific prior board approval, except in the case of emergency or contingency pur-
chases. Additional board approval is required in cases where conditions change, before
or after the contract is let, which significantly affect the scope or cost of the contract
(more than 20%). No service contract may be automatically renewed for more than 12
months without additional approval sought from the board. There will be no contracts
between the association and one of the association’s employees, board members, com-
mittee members, or their respective relatives, regardless of dollar value.

17
 Long-range fiscal planning. The board directs the Finance Advisory Committee to
develop a five-year fiscal plan, which includes disaster, insurance, and facilities acquisition
components. The committee receives information about the capital projects proposed
for the future from the Long Range Planning Committee. In their disaster planning, the
committee considers financial disasters (for example, they determine what happens if
revenues become reduced). Draft plans are presented to the full membership at open
forums and via mailings for comments before the board approves them.

case study #3
Riverbend at Leisure World
Size: 231 units
Location: Lansdowne, Virginia
Board Size: 5

Riverbend at Leisure World is a National Community Association of the Year Award

(NCAYA)-winning community in Northern Virginia.
Bank Accounts. The bank accounts are all in the name of the association and are
not co-mingled with any other association managed by the management company.
Expenditures are made only after authorized by a purchase order signed by the on-site
manager and the property manager. This process was instituted for convenience and
prompt payment of bills. The managing agent reconciles the association’s bank state-
ments and investments monthly. In accordance with best practices, this person does not
have check signing authority. Two signatures are required for checks, and the established
limit for non-budgeted, non-recurring expenses that require board approval for checks is
$2,000.
Financial Reporting. The association’s financial statements are prepared using the
modified accrual basis of accounting because the board prefers to see income when
it is earned and expenses when they are incurred. Riverbend’s board commissions an
annual audit, feeling that it is their fiduciary duty to the owners to do so. The monthly
financial statements are first given to the Budget and Finance Committee for detailed
review at their monthly meeting. A written explanation of the statements is also pro-
vided by the community manager in advance of their meeting. The Board also receives
a copy in their monthly Board packet. Owners are welcomed to receive a copy of the
statements upon request.
Long Range Planning. Riverbend establishes a long-range fiscal plan primarily
through the association’s replacement reserve study. The board will continue to update
the reserve study every year themselves and every three years with the assistance and
guidance of a reserve specialist. The association also has a ten year budget which proj-
ects future income and expenses.
Reserves. Board members control replacement reserve accounts. Two signatures
are required to access the reserve accounts. The board funded the reserves this year in
strict compliance with the most recent professional reserve study. They also place all
interest earned back into the reserves account to offset inflation.
Competitive Bids. The association normally requires soliciting three bids for proj-

18
 F i n a n c i a l o p e ra t i o n s

ects. The board will ask 12 firms to bid on a forthcoming concrete sealing project.
Management has a contractual arrangement that the Board should approve all expendi-
tures over $2,000.
Write-offs. The board of directors must approve write-offs of delinquencies more
than $10.

19
Additional Resources
Books available from CAI
Accounting for Managers, by William H. Webster, 2004.
Community Association Finances, Common Sense from Common Ground: A Collection of Articles from
CAI’s Award-Winning Magazine, 2005.
Condos, Townhomes & Homeowners Associations: How to Make Your Investment Safer, by Patrick
Hohman, 2010.
Delinquencies: How Community Associations Collect Assessments, by Loura K. Sanchez, esq.,
and Thomas J. Hindman, esq., 2008.
Member Dues: How Community Associations Collect Assessments, by Debra H. Lewin, 2005.
Property Taxes & Homeowner Associations, by George R. Grasser, 2002.
Reserve Funds: How & Why Community Associations Invest Assets, by Mitchell H. Frumkin,
p.e., cgp, rs and Nico F. March, cfm, rrp, editors, 2009.

Tips for Protecting Association Finances

For more information or a CAI Press catalog, please call (888) 224-4321 (M-F,
9-6:30 ET) or visit www.caionline.org.
Best Practices Reports (available at www.cairf.org):
Community Harmony & Spirit
Community Security
Energy Efficiency
Financial Operations
Governance
Green Communities
Reserve Studies/Management
Strategic Planning
Transition

20
About the Foundation for Community Association Research
The Foundation provides authoritative research and analysis on community association trends,
issues and operations. Our mission is to inspire successful and sustainable communities. We
sponsor needs-driven research that informs and enlightens all community association stakehold-
ers—community association residents, homeowner volunteer leaders,
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tors, regulators and the media. Our work is made possible by your
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Your support is essential to our research. Visit www.cairf.org or
e-mail [email protected].

About Community Associations Institute (CAI)

Community Associations Institute (CAI) is an international membership organization dedicated
to building better communities. With more than 32,000 members, CAI works in partnership with
60 chapters, including a chapter in South Africa, as well as with housing leaders in a number of
other countries, including Australia, Canada, the United Arab Emirates and the United Kingdom.
CAI provides information, education and resources to the homeowner volunteers who govern
communities and the professionals who support them.
CAI members include association board members and other homeowner leaders, community
managers, association management firms and other professionals who provide products and
services to associations. CAI serves community associations and homeowners by:
• Advancing excellence through seminars, workshops, conferences and education programs,
most of which lead to professional designations for community managers and other industry
professionals.
• Publishing the largest collection of resources available on community association manage-
ment and governance, including website content, books, guides, Common Ground™ magazine
and specialized newsletters.
• Advocating on behalf of common-interest communities and industry professionals before
legislatures, regulatory bodies and the courts.
• Conducting research and serving as an international clearinghouse for information, innova-
tions and best practices in community association development, governance and management.
We believe homeowner and condominium associations should strive to exceed the expec-
tations of their residents. We work toward this goal by identifying and meeting the evolving
needs of the professionals and volunteers who serve associa-
tions, by being a trusted forum for the collaborative exchange
of knowledge and information, and by helping our members
learn, achieve and excel. Our mission is to inspire professional-
ism, effective leadership and responsible citizenship—ideals
reflected in associations that are preferred places to call home.
Visit www.caionline.org or call (888) 224-4321.
6402 Arlington Blvd., Suite 500
Falls Church, VA 22042
www.cairf.org
Developing function-specific best practices
in the community association industry has been a goal of Community
Associations Institute and the Foundation for Community Associa-
tion Research for several years. The Foundation has developed best
practices in select topic areas using a variety of sources, including,
but not limited to, recommendations from industry experts and vari-
ous industry-related publications. The outcomes of the Best Practices
project include:
• Documented criteria for function-specific best practices.
• Case studies of community associations that have demonstrated
success in specific areas.
• A showcase on community excellence.

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www.cairf.org