Spring 2015 CPA Newsletter
Volume 31 Issue 2
By Jessica Chelkowski, CPA
Associations commonly have their Property Manager as well as their Attorney present at virtually all of their Board meetings. As part of the normal course of business, the Association does retain the services of other professionals and we would like to suggest that for Board members to best fulfill their fiduciary responsibilities, Associations meet periodically with these other professionals. Specifically, we recommend that the Association meet with their:
- Certified Public Accountant
- Investment Advisor
Why? We believe that educated Board members make the best decisions for their Associations and best fulfill their fiduciary responsibilities which will result in a well maintained Association. The remainder of this article details our rationale for this assertion.
Certified Public Accountant
Although Boards typically retain the services of a Management Company or in-house bookkeeper to maintain the Association’s books and records, the ultimate financial responsibility is still the Board’s, not the Management Company or the bookkeepers’. (NOTE: This is why prior to the CPA issuing the final audited financial statements, it is a Board member who must sign the Representation Letter.)
Once we are engaged to perform an audit, we conduct our fieldwork in accordance with generally accepted auditing standards, issue the draft financial statements, and then meet with the Board to review these draft financial statements prior to their approval. This allows us to:
- Maintain or create our relationship with the Board as their trusted advisor
- Explain to the Board the significance of the audit, the responsibilities of the various parties and the varied audit procedures performed during the audit
- Help Board members understand the financial statements by explaining commonly used language within the financial statements, discussing the status of each of the Association’s funds, required disclosures, and any significant footnotes
- Define the purpose of the representation letter and the Board’s responsibility with respect to this letter
- Engage in a discussion of the Association’s financial position by highlighting any potential exposure that may require current action, and to better position the Board for more effective long-range planning (See our Fall 2010 issue of the CPA, Financial Pitfalls All Boards Should Avoid, for more details.)
- Provide an understanding of any of our recommendations to the Board by discussing significant issues requiring additional attention, such as when to consider having a Replacement (reserve) study updated or an improvement in internal controls based on our industry experience
- Create a forum for discussion of other potentially relevant topics by discussing issues such as the need for a special assessment, the tax implications of financial decisions/strategies made by the Board or future budgeting concerns
- Provide information gained through our years of expertise by addressing issues such as industry trends, best practices, “hot topics” or other general questions Board members may have.
The single largest asset on an Association’s balance sheet is typically the money set aside for replacement funding. Just as a Board should meet annually with its CPA to discuss relevant financial issues, we would recommend that the Association meet with its Investment Advisor to ensure its financial assets are being properly and pragmatically managed. Topics for discussion should include:
- Liquidity position, maturing investments and future funding needs for major replacement or capital projects
- Signature/transaction authorizations that reflect current Board membership
- Formal investment policy, which is drafted and reviewed by the Board
- Types of suitable investments
- Clarification of responsibilities for investment management; i.e. who is monitoring maturing investments and developing appropriate reinvestment strategies consistent with the investment policy
- Investment approach to be used for deferred maintenance, working capital or other excess operating funds (if available)
- Trends and appropriate application of strategies and practices used by other Associations
- Understanding the monthly investment statements provided by their Investment Advisor
Associations have the responsibility to set aside funds for future major repairs and replacements. In New Jersey, most Associations hire an Engineer to determine these funding requirements. Regular updates are critical to ensure that the Association is accumulating the appropriate funds for future repairs and replacements. An update to an Association’s Replacement (reserve) study can dramatically impact the Association’s finances based on the revised calculations of required reserves indicated by the analysis. An updated study will take into account current replacement costs as well as the current condition of the common property. Additionally, an updated study may bring into consideration certain common elements that previously had a longer useful life and therefore, had not been included in the prior study.
Given the potential substantial impact this analysis can have on an Association, the Board should meet with its Engineer prior to finalizing a reserve study to:
- Review that all items indicated for reserve funding are appropriate, excluding those which should be funded out of the operating or the deferred maintenance funds
- Verify the accuracy of the engineering report to ensure that all appropriate components are included in the study at the proper cost
- Confirm the ongoing maintenance requirements to achieve the projected lives of the components listed in the study and discuss any reserve items included in the study which may not meet the projected lives originally stated in the study. This may impact the future funding requirements.
- Discuss the alternative proposed funding methodologies utilized for the calculations full baseline or threshold, as well as to ensure the Board’s understanding of the risks/benefits of the available choices and recommended approach. Additionally, there should be a review of the engineer’s assumptions about inflation and interest rates. This will allow the Board to determine the appropriate funding methodology for their Association which will ensure that the reserves are appropriately funded in the future, taking their current financial position into consideration.
- Understand any variances (and the supporting reasons) from the prior study (as applicable)
- Ensure that the Board and Engineer can reach agreement on the approach to be taken
The Association’s Auditor is required to disclose in the audited financial statements situations in which the Board’s funding decision varies significantly from the Engineer’s recommendation. Accordingly, we believe it is incumbent upon the Board to meet with its Engineer to understand their choices as well as to become comfortable with the most suitable approach for the particular circumstances.
For most of the Association’s members, their home is their single most important and largest asset. A Board must conduct the Association’s business in a manner that protects the market values of these assets. This process should include regular communication not only with their Property Manager and an Attorney, but should be extended to include other professionals such as a Certified Public Accountant, Investment Advisor and Engineer. As we have said many times, we believe a key aspect of our role as industry leaders is to be proactive in providing value-added education and information. This perspective is an important aspect of our advisory relationship.
A well coordinated system of communication with a Board’s expert professionals is a key ingredient in helping to ensure that a Board is fulfilling its fiduciary responsibilities while facilitating the preservation of the market value of their member’s homes.
Please feel free to contact your Wilkin and Guttenplan advisor with any specific issues, questions, or concerns.