by Bernie Mapili, CPA, MST / Published Aug 2013
Welcome to the Top 10 list of accounting mishaps. This ‘blooper reel’ contains issues encountered over the various audits, reviews, compilations, and even tax returns. Follow along to see these accounting non-best practices.
Homeowner accounts, which are in good standing, should mimic the approved budget. If the dues are $300 per month, then the account of a good homeowner should consist of 12 entries of $300 for a total of $3,600. What we witnessed in 2012 was a homeowner account with 120 entries equaling the same $3,600. Why were there 108 additional entries? Because, the homeowner was charged one amount for the operational portion of the budget followed by 11 entries for each individual reserve line item each and every month. Now multiply the 108 additional entries by each homeowner and you can imagine clogged books with thousands upon thousands of entries. At the end of the day, the homeowner is responsible for a flat $300 a month, not 12 individual line item pieces. Perhaps you’re wondering, then how does the money make it in the reserves? Well, the association transfers one large amount per month as reserves need to be funded regardless if every homeowner pays.
Somewhere along the way, reserves become underfunded. In other words, the reserve account is short on cash that it is due per the approved budget. The main reason this happens is a missed transfer from the operating account. The problem is the reserve account is left underfunded month after month, even stretching over many years. No one goes back to fund the shortfall in cash! However, associations are finally seeing closure from outstanding homeowners’ accounts from 2008 and before. Any portion of that old money received should be used to correct the underfunded reserves.
In 2012, for the sake of illustration, assume there is a bill that will be paid for $120,000 in December for a service provided all year, such as financed insurance premiums. Each month $10,000 of that amount is recognized as an expense. The problem is that each month the individual journal entries increase by $10,000. Instead of simply adding a $10,000 expense each month, the entire growing accrual is reversed out in the beginning of the month. Therefore, in the seventh month of July, there are two journal entries of a $60,000 reversal for June’s entry followed by a $70,000 accrual for July Year to Date at month end. The books are much cleaner simply seeing a $10,000 increase each month, which results in 12 entries. What we saw in 2012 were 24 entries, representing one number that disappears at the beginningof a month then reappears at the end of the month $10,000 higher. This ebb and flow of massive ins and outs are simply unnecessary and clutters the general ledger.
This one is easy. Simply put, the Income Statement should reflect the approved passed budget. There are books out there that consolidate accounts or split out one budget line item. For example, in the budget, there are individual line items for landscape replacements, tree trimming, mulching, irrigation repairs, and regular monthly landscape maintenance. But in the financials, there are various combinations of those line items consolidated into one item called landscaping maintenance. How can anyone in management review if the spending is in line with the actual approved budget?
During the course of our year-end work, a CPA will recommend journal entries. Most of the time, management will agree, but the journal entries never get entered. Please book the entries. Not much else to say. Pretty please?
This is more than likely a perennial problem that will always be somewhere on the list. What exactly is the problem? A bad-debt expense account should only be used as a regular adjustment to the bad-debt allowance. The bad-debt allowance account, contra asset on the balance sheet, is the account that receives the actual, truly bad news as it relates to permanently uncollectible accounts receivable. However, more often than not, associations never use the allowance. The actual activity as it occurs, such as a completed bankruptcy, is coded to bad-debt expense. Please see journal entry below of activity each account is supposed to have:
Congratulations, you have earned interest! The association’s money is put to work, albeit $500 in interest income from a $50,000 CD, but it is additional money nonetheless. But how do we know that? The 1099 that was provided states it, but the books do not have it recorded. At the bare minimum, most December bank statements list the interest earned year to date. Associations sometimes forget to book that interest income. If you are a fiscal year-end association, there is no shortcut. You have to go one month at a time.
There are a host of categories that are clearly taxable. Non-member rental use of the clubhouse for a wedding or birthday party is very common or interest income earned on an account. Then there are other miscellaneous accounts that can be grey or non-taxable, such as pool key cards, fines, and late fees. However, in 2012, all of it is lumped into one account such as Miscellaneous. To bring the books to the “A game” of the best accountants, these accounts should be broken out not only by type but whether they are taxable or not. More than likely, an association is incorrectly paying the IRS as a consequence of not doing it.
The primary 1099s associations should be receiving are related to interest income called 1099-INTs. However, 1099s from foreclosed units via banks, rental companies, or anyone else for non-employee compensation are received called 1099-MISC. Corporations should not receive 1099-MISCs. It generally leads to confusion, possible IRS issues, and poor customer support in finding out why a 1099 was received. Associations should do their best to prevent these unnecessary 1099s from being received.
When in doubt, the fund balance can fix it! Just kidding, it really shouldn’t be so. However, in 2012, quite a few used this account as a response to prior year activity due to a management company change or some random bill that was off the radar. Unfortunately, once a year is closed, it should remain that way. If an accrual was missed or a vendor forgot to invoice for old activity, then that impact should be recorded in the current year. Sure, it may throw the current budget off, but at the end of the day, a budget is a best guess estimate. It is not guaranteed activity. If the board seeks reason to move outside of the budget for the good of the association, then they should take the steps to do so. The fund balance should rarely be touched and more than likely with the agreement of the CPA.
In conclusion, over the course of a year, there are many temptations to create a financial outlier. But more often than not, the issues above should be avoided. By doing so, your books will achieve a higher level of transparency, simplicity, accuracy, and, ultimately, better application of generally accepted accounting principles. The last bit of good news is that you still have time to correct these issues should they find their way in your 2013 financials!
Bernie Mapili, CPA, MST, is Partner of Mapili CPAs, LLC, located in Winter Park, FL. For more information, call (407) 678-1020 or visit www.MapiliCPAs.com.