Accounting/Banking Questions

We recently changed management companies. With the new company we had to change banks and open new bank accounts. Our treasurer is very hands on (some say obsessive) about knowing how much money is in each account. He had a system, before the transition, where he kept money in an operating account and a "reserve" account (not like for just reserve expenditures, it was like a savings account) and then he would move money moved back and forth as necessary, plus make transfers in and out of our investment account that holds the CDs for our reserve study accounts.

The new company has a different set up. They have an operating account but then sweep any money in the operating account into another account each day, so the operating account is always at zero. If a check or auto-payment needs to be paid, they move money from the sweep account into operating. Our treasurer is extremely unhappy with this process and the fact that he has access to the operating account, but not to the sweep account yet. Today he just flipped out. The transition has been hard for him because he has HIS way and HIS processes and they are not following his procedures. He called me this morning and told me they are stealing from our accounts and they are purposely hiding money from him. This is a large, reputable management company and they are not stealing our money.

I'm trying to get the new management company to explain to him the WHY of the setup, since he just cannot figure out why it's set up this way. In my experience in business, it's common to use sweep accounts but he said he had never heard of such a thing.

For those of you who use (or work at) management companies, have you ever had a set up where they used a sweep account? Can you help me explain why we would have our finances set up this way? I'm working with the management company to explain why and then figure out if there's a way we can make him more comfortable. But in reality 99% of treasurers would not be as detailed as he is and I have to think of the next treasurer who might not care as much. Thanks.

The new MC I like that method. It makes sense for an HOA. My feeling is your other person thinks operates as their own personal account. They do not understand it is a non profit where "0" is the goal.

May need to explain that a non profit not a charitable one works. That a zero balance saves on risk of taxation. Plus keeps a savings account as more of a guide of if HOA is funded well.

It is a hard concept for many to understand. It is not easy.

HOLY CRAP

My first blush is why is a sweep account even needed? Secondly if the sweep account has money from more then one HOA in it, I would be opposed to it.

We have an operating account that we carry a balance of around $50,000; with a sweep account for when the balance goes above $50,000 -- with the excess going to the sweep. The sweep account gets a higher interest rate, and we've decided anything above $50,000 is unnecessary for handling our monthly bills.

I agree - I would be very uneasy if one HOA's money were comingled with another.

For those that are not familiar with sweep accounts, take a look at the following:

Sweep Accounts Definition: Types and How They Work from Investopia

What Is a Sweep Account, and How Does It Help My Small Business? from a bank

The main just of the articles are that the funds should be earning a higher interest in a sweep account.
My questions to an MC using sweep accounts would be:

Who benefits from the higher interest (The MC, the HOA or both)?

Is it one sweep account for all managed properties (commingling of funds - as Max warned about) or separate accounts for all?

-- Like others, the first question that came into my mind was: Is the PM commingling funds from other HOAs?

-- Was this not discussed prior to hiring this PM?

-- The Treasurer should be given at least read-only access to the sweep account immediately. If the PM refuses, and I lived at this HOA, then I would be troubled.

Lori,
This should have been discussed when interviewing this PMC. Don't expect them to change any accounting practices for your HOA. You mention that this is a larger management company, so I am sure they are doing best practices.

I'm sorry, but that is not how a sweep account works... The money is still present and it doesn't save you anything on taxation to have a sweep account. Typically they are simply used to provide a higher interest rate on overnight funds instead of having them sitting in a zero interest or low interest account. HOAs, even though many are not-for-profit still should act like a business. And the fact that the dues would make accounts higher in deposits, you want to get the highest rate of return while still remaining in cash. That's the main purpose.

-Current Board of Directors Treasurer and Financial Services/Operations Director

Just want to follow up. First, our treasurer never moved money to a personal account. The investment account where he likes to keep money is in the association's name. We just don't like that he moves money around so much, although he got the message and this is happening less.

Second, he figured out how the sweep account works and that the money is still available for paying bills and moving to the investment accounts. He has view access to all the bank accounts, and other than the fact that it takes a few days for the PM company to make the transactions, he's happy.

There is NO WAY money is being embezzled. Not only is he an honest guy, but we have a full audit of the books done every year.