by Bernie Mapili, CPA, MST / Published Mar 2014
After so many clients, the question eventually comes up… what is the best accounting setup? I cannot help but answer, “it depends” (no, I am not a lawyer). Associations have different budgets, resource limitations, and overall experience to deliver to the members. However, what I will share is that accounting is more than just the books. Accounting is a clear and ever present symbiosis with the operations of an association. They must work together or failure is sure to follow. As such, please find good ways, great ways, and, with all due respect, some ugly ways associations do business. One caveat, this is not an article to point fingers or drum up the past. Nearly everyone involved has the same intention of creating a great place for people to live. Let’s dig in!
This is quite possibly one of the most popular, technical questions in association management. More often than not, folks love to push cash basis as the default accounting choice. But when I ask why, the usual answer is that it is the easiest. But if I press further, the answer becomes it is the only way they know how to do the accounting. The somewhat positive news is that cash basis of accounting is not terrible, but it is truly barely good accounting. Cash basis simply only recognizes activity based on the movement of cash. If cash was not received or spent, then no activity is recorded.
However, consider this simplified example. If the average person earns $50,000 per year, then cash basis can track the activity as $50,000 in cash. It is not hard to follow how the $50,000 is earned and spent. But what happens if you make $250,000 per year? Do you really think simply following the cash is good enough? If a person earns $250,000 per year, they more than likely own a nice house, nice car, take multiple vacations, and have multiple obligations. How do you think financials are tracked in order to satisfy the IRS, mortgage, etc.? More than likely, that person plans out a rough budget on making it month to month.
Good associations will have excellent teamwork between the assigned CAM and the accountant of the association.
The same goes for an association. Most associations have budgets that exceed $250,000 if not in the low millions. So if a person cannot track their personal life of $250,000 per year on a cash basis, then why is it reasonable for an associa- tion with a fiduciary duty to its members deemed okay to do so? This is why the best answer is accrual accounting. The irony is that accruals are not hard to do. You document why you have the future obligation or future right to collect and book an entry to represent that information. Great asso- ciations perform accrual accounting.
The ugly are those associations that use arcane processes or are simply inconsistent with the accounting month after month. They simply treat the association’s bank account like a checking account, hoping the balance stays positive as checks are written. There are associations out there using outdated software or no software at all. At the end of the day, it is not accounting but a large checkbook.
Good associations will have excellent teamwork between the assigned CAM and the accountant of the association. For many asso-ciations, a two-man team is all that is needed. A great CAM who can code invoices to the right budgeted line items and a good account- ant who makes it happen.
Great associations will have an expanded team that can operationally manage detailed budgets and annual or longer spending timelines within specific categories. An easy example is reserves. A great team would have a preventive maintenance plan in place that works in tandem with the large reserve expenditures. This dance of operation and reserve budgets can really stretch an association’s game plan, leading to millions saved in a decade’s time. Large condominiums should strive for this to be a must.
Ugly associations scratch the surface of the above. Everything rides on the shoulders of an overburdened CAM who simply does not have the time between operations and administration to properly handle the accounting. Checks are cut, wrong budget line items are hit, and there truly is no oversight from a high enough management level. Everything is essentially run from within the trenches. If you consider trench warfare, someone has to be calling the shots from the high ground. You can only lob so many grenades over the trench walls before you start wondering which direction is best to throw…the enemy whether it be past due assessments, reserves, violations, lost pets, broken toilets, or other budget blows are surrounding you while you spend all your time fighting with the land- scaler over the latest sprinkler head breaks or slightly overpriced annuals.
Good associations will receive checks at the main office and on a regular basis—weekly—update homeowner accounts. Late notices or related items should be sent out no later than one month from the due date.
Great associations have automated processes in place where the check is not handled by an actual human. There are lockbox services or electronic payment processing that puts the pressure on the computer systems in place to streamline the operation. This is ideal as human error will always be higher than a thoroughly built computer system. All it takes is one human keystroke to send a payment off to never-to-be-found-land.
Ugly associations have detached boards that sleep at the wheel and basically defer nearly every responsibility to the management company.
Ugly associations have volunteers in the mix or have various people pitching in to help count the money on a first come, first served basis. There is no direct and regular oversight, no documentation, and no recalculation possible of deposits without extensive bank record requests. Manual ledgers are kept as excel tabs with each individual owner. The overall point is an association with 300 condominium units, collecting on a monthly basis, would have 3,600 regular dues collection transactions. Add in late fees, interest, clubhouse rentals, fines, and legal action fees and that number of transactions can easily increase to more than 5,000 transactions. Without automation, assuming there are 240 work days over an entire year that would be 21 transactions (5,000/240 work days) that would have to be performed perfectly and manually without error every workday of the year. Or for portfolio management, to a certain extent this burden is spread across 10 or more communities.
Good associations have regular, monthly board meetings where the board reviews the checks written since the last month. They ensure they understand budget line spending whether over or under. The board makes decisions that have a cost over a predetermined dollar value such as $1,000, which may or may not include competitive bidding relative to the size of the association.
Great associations have sub-committees running the larger parts of the budget such as landscaping, events, clubhouse operations, and even utility efficiencies. Each committee meets on a monthly basis and monitors how the budget for the specialized area is doing. They report to the board liaison that ensures the board can make association-wide decisions based on the input.
A great operator is not one that solely hits his budget, but one that focuses on maximizing revenue, minimizing expenses, and overall delivers on the best community experience suited for any specific association.
Ugly associations have detached boards that sleep at the wheel and basically defer nearly every responsibility to the management company. Now, if you can afford on-site management, then increased deferral to the on-site CAM can make sense. But many portfolio associations simply want to be contacted only when a major disaster strikes. Despite the association being in control of a $1 million budget, it is set on autopilot in the hands of a CAM and staff with little-to-no board level accountability. This is a classic formula for the Fraud Triangle. Fraud nearly always occurs when control of cash, need for cash, and the justification to take the cash are fully aligned. This includes kickbacks by unscrupulous vendors desperate for work in this tough, recovering economy. When the dust settles, the fiduciary duty falls on the unpaid volunteer board members.
We also know that at the end of the day, insurance companies will do what is in their best interest, especially if there is obvious gross negligence. If the board is not going to operate on some level of management and make sure the management company understands they work at the pleasure of the board, then it is only time that prevents an unfortunate circumstance. Please note, an unfortunate circumstance could simply be wasteful spending but still being under budget. A great operator is not one that solely hits his budget, but one that focuses on maximizing revenue, minimizing expenses, and overall delivers on the best community experience suited for any specific association.
As we continue into 2014, this is a call to action to tighten the overall operations especially accounting. For the majority, this is the most optimistic operational year in quite some time. Banks are finally doing their part, folks are buying the arrear units, and people are improving their homes once again. In turn, associations are finally recovering and reaching the point where associations can deliver at optimal speed. Now is the time to operate the association with adequate resources and make Florida real estate simply beautiful and a great place to live.