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Director’s Financial Responsibilities

The new Association director is often thrust into the job with little idea of what his or her duties and responsibilities are, other than the conceptual knowledge that s/he is obligated to serve in the best interest of the Association. Unless s/he has been an active member of CAI (which is not likely if s/he is a first-time director), s/he is not even aware of the educational resources that are available for guidance in learning what a director’s responsibilities are. Further, many directors serve only a one-year term and therefore have little incentive to go through the effort of getting the education necessary for performing their job, since their term will be completed before they can even begin to learn everything they should know.

The purpose of this article is to attempt to provide guidance to the director on his or her financial responsibilities. The most important rule with respect to financial transactions is that they should be well-documented. While the Association may produce monthly financial statements and an annual budget, it is also important to document (preferably in the minutes of the Board of Directors) the following types of financial decisions:

  1. Authorization for new bank accounts
  2. Authorization of changes in signers of bank accounts
  3. Approval of transfers of cash between accounts
  4. Authorization for purchases of major equipment, or major expenditures
  5. Approval of the annual budget
  6. Acceptance of monthly treasurer’s report
  7. Acceptance of monthly interim financial statements from the management company
  8. Approval of the annual audit or review report and tax return
  9. Authorization for an officer of the Association to sign the annual income tax returns
  10. Documentation of board actions and responses with respect to the accountant’s management letter that accompanies the annual audit report
  11. Collection actions (authorization to lien member property, authorization to foreclose on member property)
  12. Documentation of board decisions regarding insurance coverage
  13. Adoption of a conflict of interest policy
  14. Authorization of contract for preparation of a reserve study
  15. Authorization of reserve expenditures
  16. Adoption of reserve policies
  17. Adoption of Revenue Ruling 70-604 Election (This election should be made annually and should preferably be made at the annual membership meeting, then ratified at a Board of Directors meeting.)

Accounting is a complex, technical subject in which very few people have an active interest. However, the impact of financial transactions is something that permeates every aspect of our lives, and certainly that of a community association. While no individual can be given a complete accounting education in a short enough period of time to enable them to gain a complete understanding during their term of office, there are certain things that the director can and should do on a procedural basis that would allow him or her to adequately exercise the oversight of financial responsibilities of the members of the Board of Directors of an Association.

The director needs complete financial information in order to perform an adequate review of transactions. Accordingly, the monthly financial reporting package for a community Association should generally include the following documents:

Monthly financial statements

a. Balance Sheet on an accrual basis

b. Income Statement on an accrual basis with budget-to-actual comparisons ( The income statement should include both current month and year-to-date amounts.<

  • General Ledger
  • Cash Disbursements Journal
  • Aged Assessments Receivable Listing
  • Copies of all bank reconciliations
  • Copies of all bank statements
  • Copies of paid invoices

While the above list may seem like overkill to some, these documents should be distributed to the board members prior to the Board meeting so that they have an adequate opportunity to review them and be ready at the time of the meeting to either approve the reports or ask the necessary questions. It is not reasonable to expect even a CPA to be given a set of financial statements during a Board meeting and on the spot, have to review, understand, and approve the financial statements and, by inference, the underlying transactions.

For the director to competently review this financial package, he must have a basic understanding of each of the documents.

The balance sheet is a statement that reflects the financial status of the Association at a specific point in time (generally month-end or year-end). Common components of a balance sheet are:

Assets

Cash – Petty cash on hand or in checking accounts, savings accounts, or other types of accounts with a financial institution

Assessments Receivable – Amounts owed by members to the Association as of the date of the financial report

Fixed Assets – Property acquired by the Association with a useful life greater than one year and of significant cost

Prepaid Expenses – Payments of expenses in the current period that will benefit more than one period, such as insurance, which is often paid in a single payment for an annual premium

Liabilities

Accounts Payable – Expenses incurred, but not yet paid

Prepaid Assessments – Dues/assessments paid in advance

Income Taxes Payable – Income taxes due for the current year and any prior years

Fund Balances

Operating Fund – Accumulated earnings or losses of the Association from the current and prior years.

Replacement Fund – Amount set aside for future repairs and replacements (this balance should have an equal amount of cash set aside to accumulate for major expenses).

The income statement reflects, for a period of time, the income and expense activities of the Association. A preferred format would reflect both the current month’s and year-to-date budgeted and actual activities. Revenues generally consist of member assessments, fines, vending machine, parking, or other income and interest income. Expenses would include operating maintenance costs, utilities, management company fees, and other administrative and operating fees. Amounts transferred to reserves are generally reflected as an expense of the operating budget, unless financial statements are prepared on a fund basis.

The general ledger is a document which underlies the financial statements and summarizes all activity by account. For instance, if three different checks during the month were written for repairs, they would be grouped into the repairs expense account (even though the checks were not in sequential order). The total of those three checks would represent the current month’s total repair expense, which should agree with the income statement. This document can be used by the director to research questions such as “what is in utility or repair expense this month?”, and “why is it so high compared to prior months or prior years?” The general ledger should provide sufficient detail for you to find the answer to that question.

The cash disbursements journal is simply a listing of checks in numerical order for the current month, listing the date, payee, and amount.

The other reports are self-explanatory.

The procedures that the director might employ in analyzing these documents should consist of:

  1. Examine the balance sheet and compare it against prior periods to see that cash balances and assessments receivable balances appear reasonable. Note if there are any significant fluctuations between restricted reserves in the current period versus prior periods.
  2. Examine the bank reconciliations and see that they agree to the amounts reflected as cash on the balance sheet. Investigate any differences. Also, make sure they agree with the bank statements. The bank reconciliation should begin with cash per bank and reconcile down to cash per financial statements and general ledger. The reconciling items will generally consist of deposits in transit and outstanding checks. Investigate and question any large or old outstanding checks.
  3. Review the bank statements to ascertain that all interest income has been recorded in the financial statements.
  4. Make sure that all bank accounts are recorded in the general ledger of the Association.
  5. Examine the aged assessments receivable listing and compare it to the balance sheet. The total of assessments receivable should agree with the balance sheet.
  6. Review the aged assessments receivable listing and question any assessments receivable that are more than 30 days old. The Association should adopt a strict collection policy that would consist of assessment of late charges, warning letters, filing of a lien, and ultimately foreclosing on member property for non-payment of assessments. There should be no exceptions to these rules, especially for directors of the Associa­tion.
  7. Review the income statement comparison of budgeted to actual activity both for the current month and the year-to-date, and question any significant variations.
  8. For any questioned income or expense items, trace the account to the general ledger and review the detail for that account.
  9. Review the cash disbursements journal for the month and challenge the propriety of all expenses. For instance, if any checks are written to any director of the Association, find out why. If the management company is being paid more than their contractual fee, find out why.

It will take some time for the director to perform all of the above procedures, but it will provide you with insight as to the financial transactions of the Association, and a greater understanding of how your Association operates. While this may seem like too much work to be done on a monthly basis, you as a director have an obligation to the members of the Association to safeguard the assets of the Association. Only through diligence and a step-by-step procedural review of transactions can this be done.

Increase Your Financial IQ

Robert Kiyosaki, author of this text entitled Increase Your Financial IQ is an investor, entrepreneur and educator whose perspectives on money and investing align with conventional wisdom. Kiyosaki has challenged and changed the way many people around the world think about money.

Born and raised in Hawaii, this financial expert is a fourth-generation Japanese-American. After graduating from college in New York, Kiyosaki joined the Marine Corps and served in Vietnam as an officer and helicopter gunship pilot.

On the question of whether money makes one rich, this author says it is not so. He explains that money alone does not make one rich, adding that we all know people who go to work every day, work for money, make more money, but fail to become richer.

This financial expert asserts that ironically, many only grow deeper in debt with the money they earn. Kiyosaki says we have all heard stories of lottery winners, instant millionaires, who are instantly poor again. He adds that again, we have heard stories of real estate going into foreclosure, and instead of making homeowners richer, more financially secure, real estate drives homeowners out of their homes and into the poorhouse.

Kiyosaki says many of us know of individuals who have lost money investing in the stock market. He educates that even investing in gold, the world’s only real money, can cost investors money.

According to him, this text is not a get-rich one or a text about some financial magic formula. Rather, he says it is about increasing your financial intelligence, your financial IQ. It is about getting richer by getting smarter and the five basic forms of financial intelligence required to grow richer, regardless of what the economy, stocks, or real estate markets are doing, reveals this author.

Structurally, this text is segmented into ten chapters. Chapter one is interrogatively entitled What is financial intelligence? In this author’s words here, “Money alone does not solve your money problems. That is why giving poor people money does not solve their money problems. In many cases, it only prolongs the problem and creates more poor people.”

Kiyosaki educates that hardwork also does not solve money problems, stressing that the world is filled with hardworking people who earn money, yet grow deeper in debt, needing to work even harder for more money.

He says education does not solve money problems, adding that the world is filled with highly educated poor people.

According to Kiyosaki, it is only financial intelligence that solves all money problems. In his words, “In simple words, financial intelligence is that part of our total intelligence we use to solve financial problems… Financial intelligence solves these and other money problems. Unfortunately, if our financial intelligence is not developed enough to solve our problems, the problems persist… Many times they get worse, causing even more money problems. For example, there are millions of people who do not have enough money set aside for retirement. If they fail to solve that problem, the problem will get worse, as they grow older and require more money for medical care.”

This author reiterates that whether or not you like it, money does not affect lifestyle and quality of life, adding that the freedom of choice that money offers can mean the difference between hitchhiking or taking bus or travelling by a private jet.

Chapter two is based on the subject matter of the five financial intelligence quotients (IQs). Kiyosaki educates that the five basic financial IQs are: Making more money (Financial IQ No 1); protecting your money (Financial IQ No2); budgeting your money (Financial IQ No3); leveraging your money (Financial IQ No4) and improving your financial information (Financial IQ No5).

As regards difference between financial intelligence and financial IQ, he says, “Most of us know that a person with a mental IQ of 130 is supposedly smarter than a person with an IQ of 95. The same parallels can be drawn with financial IQ. You can be the equivalent of a moron when it comes to financial intelligence… Financial intelligence is that part of our mental intelligence we use to solve our financial problems. Financial IQ is the measurement of that intelligence. It is how we quantify our financial intelligence. For example, if I earn $100,000 and pay 20 per cent in taxes, I have a higher financial IQ than someone who earns $100,000 and pays 50 per cent.”

Kiyosaki explains that in this example, the person who earns a net of $80,000 after taxes has a higher financial IQ than the person who earns a net of $50,000 after taxes. Both have financial intelligence, but the one that keeps more money has a higher financial IQ, educates this expert.

In chapters three to seven, the five financial IQs already discussed in chapter two, are elaborately examined respectively.

Chapter eight is christened The integrity of money. According to Kiyosaki here, “‘Integrity’ is an interesting word. I have heard it used in many different ways and in different contexts. I believe it is one of the more misused, confused, and abused words in the English language. Many times I have heard someone say, ‘He has no integrity’, or ‘If they had any integrity, they would be more successful’. Someone else might say, ‘That house has integrity of design’.”

This author says before discussing the integrity of money, it is necessary to define Integrity. Kiyosaki says “Integrity”, according to Webster, can be defined as “Soundness” (an unimpaired condition); “Incorruptibility” (firm adherence to a code of especially moral or artistic values) and “Completeness” (the quality or state of being complete or undivided).

This expert educates that just as health can break down from a literal lack of integrity, so can wealth be compromised by lack of integrity. “Instead of disease or death, which comes from a breakdown in the body’s integrity, symptoms of a lack of financial integrity are low income, crippling taxes, high expenses, excessive debt, bankruptcy, foreclosure, increased crime, violence, sadness, and despair,” expatiates this author.

He says the integrity of all the five financial IQs is needed to grow rich, stay rich and pass wealth on to generations after you. Kiyosaki asserts that missing one or more of the financial IQs is like someone who does not know how to drive attempting to drive a car that has brakes without pads, and water in the gas line.

In this author’s words, “When a person is struggling financially, one or more of these financial intelligences is out of whack, financial integrity is not sound, and the person is not complete. For example, I have a friend who earns a lot of money as a manager of a small business. Her problem is she has no protection against taxes, plus she does not budget wells, spends impulsively to buy clothes and goes up in price. She gets her financial advice from her husband and his (the husband’s) financial planner.”

In chapters nine and ten, this author beams his intellectual searchlight on the concepts of developing your financial genius and developing your financial IQ.

As regards style, this text is a prototype for stylistic excellence. For instance, most of the illustrations are based on the financial experiences of the author himself, thus lending credibility and conviction to the text. The language is simple and the presentation very didactic. Kiyosaki generously employs graphical embroidery to achieve visual reinforcement of readers’ understanding and make the layout of the text eye-friendly.

However, conceptual repetition is noticed in chapters three to seven where the five financial IQs already discussed in chapter two are further examined. One would have expected him to have harmonised chapters two to seven. Probably, Kiyosaki wants to create emphasis through deliberate repetition.

Also, the word “Intelligence” whose grammatical behaviour in the dictionary shows that it is an uncountable noun as reflected by the symbol “U” against it, is still used in this text in a countable way on pages 150 and 151 where we have “Intelligences”.

In spite of the few errors, this text is fantastic. It is a must-read for those who want to accomplish financial freedom and abundance through concrete financial education.

Using a Financial Advisor to Help You Save for the Future

Financial advisors help people assess their financial situations and give them helpful information on how to best save, invest, and utilize their money. The financial advisor usually has a client make an in person appointment for an initial consultation. The client will often bring in some basic financial information, such as tax returns, pay stubs, bank statements, and any information he may have on his stock and bond market portfolio, if he owns one.

Some clients are more prepared and they even come in with balance sheets describing their assets and liabilities. Many times the advisor will ask the client to bring in information about their current debts, including a budget of income and expenses, as well as credit history information. If the client cannot do this on his own, this is where the financial advisor comes in to help him create and assemble these documents.

All this information is then assessed and used to determine how the client can best prepare for retirement. The qualified advisor will know all about directing the client into the very best retirement plans. He’ll also be able to help formulate an updated budget to help the client start to regularly save for retirement.

He’ll instruct his clients that a minimum amount of money needs to be saved or invested each month for a given set of years in order to amass adequate funding for a quality retirement. The advisor will detail the benefits and risks of different type of investment vehicles that he may suggest his client regularly put money into.

These investment vehicles can include individual stocks, bonds, mutual funds, certificates of deposit, money market funds, and regular savings accounts. In the UK, there are many highly qualified and reputable financial advisors. It can help to get a recommendation from a work colleague, a banker, an accountant, or an attorney, if the client doesn’t know who to use at first.

Some advisors have much more experience and expertise than others. There are also some advisors who specialize only in tax-deferred and tax-free investment vehicles for retirement planing. Certain advisors have much more knowledge of taxes or accounting and banking than others who may know more about the stock market.

But if the advisor is very intelligent, his personal knowledge can go a long way to confidently steering a client into the right direction regarding his overall retirement and pension planing methods. This will result in maximum growth and safety of his retirement nest egg.