BOARD'S FINANCIAL DUTIES

Boards Must Oversee HOA Finances

Boards must exercise reasonable care when overseeing the association's money. Following is a summary of their obligations:

• Bank Accounts. Boards must set up separate operating and reserve accounts. 
• Reserve Funds. Boards must establish and properly fund reserves for the future repair and replacement of major common components.
• Approve Fund Transfers. Depending on the amounts, boards must approve the transfer of funds from operating and reserve accounts. 
• Make Prudent Investments. Boards should obtain a reasonable return on the investments without jeopardizing capital.
• Internal Controls. Boards should establish internal financial controls to prevent embezzlement.
• Insurance. Boards are required by statute and their CC&Rs to purchase certain kinds and levels of insurance to protect the association against loss. 
• Budget and Assessments. Boards must budget for the association's financial needs and then assess whether the membership is sufficient to meet their obligations.
• Collection Policy. Boards must establish and follow strong collection policies.
• Taxes. Boards must file annual tax returns.

Review Financial Records Monthly

Boards must maintain accurate financial records, which can be used to generate annual financial statements for the membership. Beginning January 1, 2019, boards of directors must review their association's financial records every month. (Civ. Code § 5500.) Review can be interpreted by its ordinary meaning, “to go over and examine critically or deliberately.”  (Webster's Dictionary.) Directors should review financial statements critically and ask questions whenever something looks amiss or does not make sense. For example, the board should investigate if the check register shows checks issued to a roofer, but no roof work has been authorized. Embezzlement may be occurring. Some association boards only meet quarterly or miss monthly meetings because of holidays. Even so, finances need to be reviewed. Fortunately, Civil Code § 5501 allows the review requirements to be met when: (1) Every member of the board reviews the monthly documents and statements (described above) independent of a board meeting and then ratifies the review at a subsequent board meeting, or (2) A subcommittee of the board consisting of the treasurer and at least one other board member reviews the records and ratifies the review at a subsequent board meeting. The ratification must be reflected in the minutes of the board's meeting. Review includes:

• a current reconciliation of the operating accounts,
• a current reconciliation of the reserve accounts,
• the current year's actual operating revenues and expenses compared to the current year's budget,
• the latest bank statements for operating and reserve accounts,
• an income and expense statement for the association's operating and reserve accounts, and
• the check register, monthly general ledger, and delinquent assessment receivable reports.

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