Questionable accounting

Started by SB5 • 17 replies • 2412 views

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SB5 (Indiana)
Posts: 5

Posted:

Hi all,

Looking for advice here.

I'm in incoming treasurer for our HOA and when I sat with the out-going treasurer, it had been the practice to use excess budget at the end of our Aug 31 fiscal year to "pay" for misc. landscaping projects. This seemed fine with me - except in the past, they wouldn't actually get the work done and paid until well into the next fiscal year - even though they would go head and book the cash payment (expense) into the past fiscal year.

My gut feel is that this is wrong - even though it has no impact to our tax filing (because the expense still goes into the right calendar year). I honestly don't see a problem with saying to neighbors that we overbudgeted expense and now have a larger savings surplus for future needs. It's not the expectation that we finish every year exactly on budget.

The extra landscaping amounts are not immaterial - something like 10-15% of the annual budget.

Any advice?

MelissaP1 (Alabama)
Posts: 13,836

Posted:

A HOA is to spend as much as it collects on it's expenses. It can have a reserves fund. So for you all to have "extra" money may mean deeper issues. Are you putting away any money towards a capital improvement funds? The extra money concerns me because it needs explained why your dues are set to a point this happens. A HOA is ONLY funded by it's members for it's members. Everyone to put in their fair and equal share. So to have any leftovers means to me that watching the books and expenses are a little willy nilly and based on someone's home budgeting skills. In a HOA the money is EVERYONE's money and the board is in charge of budgeting it.

As for putting it toward landscaping, I don't see a problem with that. It does make the property more attractive to potential buyers. However, the budget carryover seems like a bit of tax evasion...

Former HOA President

SheliaH (Indiana)
Posts: 6,964

Posted:

What did the outgoing treasurer say when you asked him/her about this? If your association has an accountant, you may also want to run this past him/her as well.

This wasn't an issue when I was treasurer of my HOA - probably because we usually didn't have a lot of wiggle room (there was always something weird coming up). We're also on a calendar year for our fiscal - seems to make the math easier. If we had any money left over on a line item, it was either put towards next year's budget or we would take the money and use it for another line item, if necessary

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

SB5 (Indiana)
Posts: 5

Posted:

The outgoing treasurer indicated they were uncomfortable with the idea but the president insisted on it (meaning the treasurer got talked into doing it).

One thing that concerns me is that we end up buying landscape work that is unnecessary - or we don't shop around for better pricing because the focus is just to get the "extra" dollars spent.

I'm just unsure how big of a stink to make about this - like I said, the IRS report is correct...but the fiscal report is misstated because of the cash payment timing issue.

SheliaH (Indiana)
Posts: 6,964

Posted:

Then you need to talk to the entire board about this - ask the president why he wants it done this way.

Your concern about unnecessary work and shopping around for the best price may be well founded, so you may want to do a little digging on how the decisions on landscaping were made and why (start by reading the minutes if you're a newcomer to the Board and talk to some of the other Board members). Once this issue is resolved, it may be a good idea to review the budget over the last few years and note if other line items have increased faster than others and find out why. It may be a matter of doing more planning and cost comparison to make the spending more reasonable and transparent.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

BobD4 (up north)
Posts: 1,002

Posted:

SB5 (Indiana) Do any of the "overlaps"/ un-matchings misleadingly target the financial year end of year statements ? Are owners unable to get a meaningful financial grip ? Is there less than careful use of owners' bucks ?

Your jurisdiction may have formal accounting & auditing procedures recommended for condo/HOA/co-ops by the auditing profession that sort out cashflow v accruals, reporting the matching of expenses with revenues ( regardless of what has gone on for years ).

SB5 (Indiana)
Posts: 5

Posted:

Thanks - I believe the intent itself is to give a false appearance on fiscal year-end books (the HOA president has wanted it to appear most or all of non-reserve revenue has been spent).

I don't feel I can accrue the work that has yet to be done. We report on cash basis so it doesn't matter anyway. Certainly there's a period matching issue going on.

I'm thinking about letting the new president know about our current cash surplus - and let them know it needs to be spent by August 31 in order to avoid a large surplus. Personally, I am fine with paying (pre-paying) today for legitimate work that is done in 2 months from now - but I have a hard time recording cash payments that have not been made.

MarkM31 (Washington)
Posts: 556

Posted:

Quote:

Posted By SB5 on 08/14/2015 9:15 AM
Thanks - I believe the intent itself is to give a false appearance on fiscal year-end books (the HOA president has wanted it to appear most or all of non-reserve revenue has been spent).

A common occurrence in large companies and government.

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By MelissaP1 on 08/14/2015 7:43 AM
A HOA is to spend as much as it collects on it's expenses. It can have a reserves fund. So for you all to have "extra" money may mean deeper issues. Are you putting away any money towards a capital improvement funds? The extra money concerns me because it needs explained why your dues are set to a point this happens. A HOA is ONLY funded by it's members for it's members. Everyone to put in their fair and equal share. So to have any leftovers means to me that watching the books and expenses are a little willy nilly and based on someone's home budgeting skills. In a HOA the money is EVERYONE's money and the board is in charge of budgeting it.

As for putting it toward landscaping, I don't see a problem with that. It does make the property more attractive to potential buyers. However, the budget carryover seems like a bit of tax evasion...

I am frankly tired of seeing these two quotes, one about the funding and the other about the suing.

An HOA doesn't have to spend what it takes in. That is just plain stupid. An healthy HOA should have 2-3 times their monthly dues as backup, for emergency purposes. If the excess funds are used for landscaping, it would now be best to add that to the budget. There is also an IRS ruling (70-604) that owners should be voting on and possibly deciding where their excess funds go, either back to them or carried over into the next fiscal year.

To be transparent, if the Board wants to spend the excess funds for their pet projects, first get a consensus of the community. I also disagree with the idea this may be tax evasion.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By SB5 on 08/14/2015 7:11 AM
Hi all,

Looking for advice here.

I'm in incoming treasurer for our HOA and when I sat with the out-going treasurer, it had been the practice to use excess budget at the end of our Aug 31 fiscal year to "pay" for misc. landscaping projects. This seemed fine with me - except in the past, they wouldn't actually get the work done and paid until well into the next fiscal year - even though they would go head and book the cash payment (expense) into the past fiscal year.

My gut feel is that this is wrong - even though it has no impact to our tax filing (because the expense still goes into the right calendar year). I honestly don't see a problem with saying to neighbors that we overbudgeted expense and now have a larger savings surplus for future needs. It's not the expectation that we finish every year exactly on budget.

The extra landscaping amounts are not immaterial - something like 10-15% of the annual budget.

Any advice?

Sikubali jukumu. Read all posts at your own risk.

TimB4 (Tennessee)
Posts: 21,059

Posted:

SB

We take any under budgeted amount and apply it to our Reserves Contingency line item.
This keeps the IRS happy and the books are easily completed at the end of the year.

My suggestion would be to create a landscape line item within your Reserves and adopt a resolution that year end under budgeted funds would be placed into that line item.

This will allow the Association to utilize the funds whenever and keep the books clean.

SB5 (Indiana)
Posts: 5

Posted:

Thanks so much - I appreciate all the comments/suggestions.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By RichardP13 on 08/14/2015 10:21 AM

An HOA doesn't have to spend what it takes in.

However, it does have to account for everything that it takes in and anything taken in that is over the expenses incurred may result in additional taxes.

As for having an fund to cover shortages between bills and collection of assessments, that makes perfect sense. Our Association utilizes this in our budget by having a minimum balance in the operating fund (i.e. the checkbook) equal to 1 months normal expenses. For us, these equates to $3,000.

DavidW5 (North Carolina)
Posts: 565

Posted:

A surplus at year end should show up on the balance sheet as a liability with a description something like "Unappropriated Members Equity". In every audit report I have seen the auditor includes the recommendation that the association develop through the budget process an "operating contingency" of between 10 to 20 percent of annual assessments. The only way for that to happen is for yearly operating expenses to be less than yearly operating income.

In the situation described by the original poster, in the subsequent year any needed landscape work that cannot be accommodated within that year's operating budget can be funded out of the operating contingency. This will have the effect of reducing the unappropriated members equity on the balance sheet.

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By TimB4 on 08/14/2015 5:22 PM

Posted By RichardP13 on 08/14/2015 10:21 AM

An HOA doesn't have to spend what it takes in.

However, it does have to account for everything that it takes in and anything taken in that is over the expenses incurred may result in additional taxes.
My point was that just because you took the income in, doesn't mean you have to foolishly spend it. More than anyone, I do realize that funds have to be properly accounted for.

BonnieG1 (Nebraska)
Posts: 1,186

Posted:

If you're on a cash basis, it's wrong period. If you decide to shift to an accrual or modified accrual basis, then there's wiggle room. You could change your accounting method at any time.

From a transparency standpoint, not good to make believe that money in = money out.

In your shoes, I would first look at how well funded reserves are - excess dollars could improve the financial health of the community.

I agree with this. I had a difficult time understanding the difference between accrual financial basis. I think the members (including most Board Members) can understand cash basis accounting better than they can understand accrual accounting basis.

TimB4 (Tennessee)
Posts: 21,059

Posted:

For those who may want to review the difference between cash basis and accrual basis:

What is the difference between the cash basis and the accrual basis of accounting? from the accounting coach

Cash vs. Accrual Accounting Learn which accounting method is better for your business.
From NOLO

BASIS OF ACCOUNTING–WHICH ONE SHOULD YOU USE? Article by a California CPA firm

Understanding Accounting Methods from the "for dummies" line of books.

Subject: Financial Statements in Accordance with GAAP a 2012 thread on this forum (please do not reactivate the thread).

CyrstalB (Maryland)
Posts: 457

Posted:

First, if your HOA is a non profit, and you are not an accountant or bookkeeper by trade, you should get some education on the bookkeeping for a non profit. From what you describe here, it doesn't seem out of the ordinary, but it is easy to see why someone without that education can assume something is wrong.

Second, unless you want the current board or past treasurer to think you feel they are or have been shady with said money, be very careful of just what your saying, here or in the board meeting.

Third, good of you to step up for this position, are you a board member too or just an officer? Are you on the account as well, with permission to sign checks etc? YOur CCR's will spell it all out for you. Good luck.

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