Warning Signs to Look For When Reviewing Financials

Jess

March 19, 2024 • 5:46PM

Managing the financial health of your HOA is one of the most critical responsibilities of the board. But even the most dedicated board members or property managers can sometimes overlook subtle red flags that signal deeper financial issues. Here are some key warning signs to watch for when reviewing financials to ensure your community stays on solid footing.

A Steady Decline in Cash on Hand

One of the first indicators of financial trouble is a consistent decrease in the cash balance. While seasonal fluctuations are normal, a steady decline over several months or years may suggest poor financial management, excessive spending, or unforeseen expenses draining reserves.

Unexplained Differences Between Actual and Budgeted Figures

Significant discrepancies between what was budgeted and actual expenditures should raise eyebrows. These variances could indicate mismanagement or a lack of proper oversight. Always ask for clarification and supporting documentation to understand the root cause. The accuracy of the budget directly affects future year budgets and maintenance fees. Under budgeting creates shortfalls which are often covered by reserve funds earmarked for future replacement and repairs. This in turn causes a shortage in reserves. If these shortages are not corrected in the year they happen, a domino effect results year after year until the community finds itself in a precarious financial situation. Learn more about budgeting basics.

Increase in Owners’ Assessments Owed

If the amount of unpaid assessments from homeowners is rising, this could signal financial distress among residents or ineffective collection practices. Delinquent accounts impact the association’s ability to cover operating expenses and contribute to reserves.

Unusually Large Legal Expenses

Legal fees can spike due to disputes, lawsuits, or enforcement actions, but any unusually large legal expenses without a disclosed reason should prompt further inquiry. Transparency is key to maintaining trust and understanding the financial impact.

Absence of a Reserve Study

A reserve study is essential for long-term planning and ensuring the association has enough funds for major repairs and replacements. If your HOA lacks an updated reserve study, it’s a red flag that future financial stability may be at risk.

Failure to Reconcile Bank Statements

Reconciliation differences between bank statements and financial records should never go unresolved. This oversight could point to errors, fraud, or embezzelment—all of which can have severe consequences for your HOA.

Delayed or Missing Financial Statements

Financial statements, and treasurer reports are critical tools for monitoring the health of the association. If they are consistently delayed or missing, this could indicate disorganization, lack of expertise, or even attempts to obscure financial issues.

Financial Statements Not Prepared Using GAAP

The Generally Accepted Accounting Principles (GAAP) provide a standard for consistency and accuracy in financial reporting. If your HOA’s financials aren’t prepared according to GAAP, it may indicate inadequate financial oversight or insufficient expertise in financial management.

What to Do if You Spot These Warning Signs

If you encounter any of these issues, don’t ignore them. Act promptly by:

Consulting with Professionals: Engage a certified accountant or financial expert familiar with HOA management.
Addressing the Board: Bring concerns to the board’s attention and suggest immediate actions to investigate and resolve the issue.
Reviewing Policies: Ensure your HOA’s financial policies and practices are up-to-date and strictly followed.
Communicating Transparently: Keep homeowners informed of any challenges and steps being taken to address them.

By staying vigilant and proactive, you can help protect your HOA from financial pitfalls and maintain the trust of your community. Regularly reviewing and auditing financials is a critical part of good governance that ensures your HOA remains a thriving and stable community.