Modified Accrual Method

I volunteered to be Treasurer on BOD last summer upon moving into a small Bayfront condo community in Virginia Beach with 44 town homes. Per our new Management Company, they use Modified Accrual accounting - which supposedly uses a cash basis for all expenses and accrual basis for income. Our hazard and flood insurance cost are huge given our location directly on the Chesapeake Bay and constitute a huge % of our budget. I have 2 questions as follows:

1. In our Dec 31 2015 balance sheet, the Assets include Prepaid Insurance of about $23K (see pg 2 of the attached 2015 Audit Report). Is this correctly reported pursuant to the Modified Accrual method where all expenses are recorded on the cash basis? It is my understanding that a Prepaid Insurance acct is used only under an Accrual basis accounting system.

2. In our annual budget, we include a contribution to the Replacement Reserve (based on Reserve Study) and to an Operating Reserve of about $50K and $4700, respectively. We are playing catch up with our Replacement Reserve and the annual assessment has increased significantly in the past few years. My question is about our Operating Reserve and how to properly record expenditures paid out of this account. Our Operating Reserve has a balance of about $35K and is segregated into a separate bank account with monthly transfers to that account of the budgeted contribution. The purpose of the Operating Reserve (can also be called a Contingency Reserve) is to have adequate funds in place to meet unanticipated large expenses. These funds will come in handy to help cover the $25K storm damage cost caused by Hurricane Matthew this fall. My question is should the storm damage cost paid from the Operating Reserve checking account ( versus our standard Operating checking account) be reported as an expense in our Operating Cost for 2016? (please note the Operating Reserve balance is included in the Cash assets reported under "Undesignated Operating Fund" of the attached Balance Sheet ).

Thanks for any assistance.

RogerB - thank you for your comment.

Just received an email reply from the owner of our Mgt Co stating that the Balance Sheet provided to the CPA for audit did NOT include a Prepaid Insurance balance. He stated that "The auditor is required to convert back to full accrual for the Audit per GAAP which I guess is why her statements reflect the accrual amount. We are NOT required to change our books to match, she is reflecting this in the audit only."

Do the CPAs performing audits for your HOAs restate their financial statements from Cash to Accrual basis for the Audit report? This is crazy, they are not longer our Association's financial statements if they have been totally restated by the CPA.

Unfortunately, I think both our Mgt Co and CPA lack the expertise and knowledge in proper HOA financial management. Where to go from here? Sure the CPA is going to love all my questions about the audit report.