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“Fiscal Fitness” for Board

TreasurersA Presentation of CWD Group University © 2015

Thursday, September 17, 20156:00 – 9:00 pm

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Our Agenda for this evening: 6-6:05: Welcome and Introductions – Paul Grucza PCAM®

6:05-6:25: The CWD Group Fiscal Process – Jacque Haynes, CPA, MBA

6:25-6:55: Audits – Cathy Kuhn, CPA

6:55-7:25: Investments – Kris Gjylameti, Mutual of Omaha Bank

7:25-7:40: Treasurer’s Role – Paul Grucza, PCAM®

7:40-7:50: Break

7:50-8:30: The Budget Process – Marshall Johnson, PCAM®

8:30-8:50: Q&A

8:50-9:00: Wrap up – Paul Grucza, PCAM®

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The CWD Group Financial Process The financial process is made up of

many components and people that contribute to the preparation of your monthly financial statements.

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The Association’s Approved Budget It all begins and ends with the annual

budget! The budget determines the chart of

accounts (COA). Communicates expected income and

planned expenditures. Assist with monthly accruals. Provides a picture of where the

association’s money is going and a tool in preparing next year’s budget.

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The Accounting Support Team Accounts Receivable (AR) post charges

and payments to owners accounts. Sends out delinquency letters.

Accounts Payable (AP) watches cash flow and pays vendors weekly. Resolves vendor issues.

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The Community Manager Role Assist board of directors with the creation

of the budget using historic data. Approves and codes invoices according to

the budget’s COA. Submits to AP for processing. Signs checks as final approval.

Reviews monthly delinquency report. Tracks progress of legal collections.

Reviews monthly financial and prepares summary.

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Staff Accountant (GL) -Monthly Review and Reconciliations Each month the financial entries are

reviewed for obvious posting errors and needed adjustments.

Accruals are determine based on usage dates and contracts.

Bank statements are reconciled. Actuals are compared to budget. Supporting documents are compared to

Balance Sheet line items.

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Staff Accountant (GL) – Other duties Works with auditor providing necessary

information Reconciles Prepaid Insurance Reconciles Special Assessments. Reconciles Insurance Claims. Provides additional information as

requested by the manager and/or board.

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Accruals-It is a timing issue Not everything can be accrued if it is

unknown and the invoice has not been received.

It is the best presentation on the closing day of the association’s books.

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Accruals-It is a timing issue CWD Group’s accrual policy

Accrue utilities and known monthly contracts.

Accrue actual invoices received after month end close and before closing the financials for the month.

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Year End Close Obtain Bad Debt estimates from Board. Inquire amount contracts completed but not

invoiced. Hold open books a few extra days to

capture as much year end activity as possible.

Variances from year end financial and annual audit are common due to the timing of when the association books are closed.

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The Accrued Financial Balance Sheet Focus-provides information

regarding the health of the association. AR/PPD Assessments-high AR affects cash

flow and may affect ability to pay vendors. High PPDs means an association is borrowing from future income.

AP/Accruals-high AP/Accruals may indicate a ongoing cash flow issue.

Interfund Payable-may indicate the association is borrowing from reserves to pay operating expenses.

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The Accrued Financial-Cont. Balance Sheet Focus-provide

information regarding the health of the association. YTD Operating Fund Equity-current years

profit or loss. Retained Earnings-is all prior years profit

or loss combined. A negative/loss should be a red flag and should be address in the following years budgets.

The monthly financial summary-provides the association cash flow position.

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AUDITS- 20 Questions! AKA Stump the Auditor!

Cagianut & Company, CPAs//Catherine Kuhn, CPA

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Let’s Play 20 Questions 20 most commonly asked questions

about the audit and tax process 20 minutes – 1 minute per question –

FLYOVER! 10 minutes - YOUR questions~ I will be available afterward~ Hoacpa.com 100 “FAQs”

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#1 – WHAT is an Audit? Independence (CPA) MATERIALLY correct financial statements

(We don’t look at EVERYTHING) GAAP - Generally Accepted Accounting

Principles – “In accordance with” Adequate Disclosures in the Footnotes

(Readers are current and FUTURE members)

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#2 – WHY have an Audit? State Requirement (in some cases) -

See next slide BOD Duty – Accountable to Membership,

Oversight Run it like a business – Internal Controls,

Accounting practices Error and Fraud prevention/awareness Materially correct financial statements

and impact on owners/potential owners

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# 3 When is an Audit REQUIRED? New Act (1990) Condo – WA RCW 64.34.372

50 or more units (Under 50 waiver/60%) Old Act (pre-1990) Condo - Defaults to New

Act, EXCEPT, Governing Docs over-ride if an audit is required

HOAs – 64.38.045 - ASSESSMENTS $50K Over or under $50K can be waived/67%

Developer Transition -64.34.308 Required @ “transfer of control” – (waived 2/3 other than Declarant units)

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# 4 -When is an Audit RECOMMENDED? Large Settlement (Defect, Insurance, or

otherwise) Large Reserve Fund projects Mgmt Company Change Suspected Fraud (FORENSIC, NOT GAAP

Audit) Board politics, changes Little or no Internal Controls

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# 5 – WHAT does an Auditor DO?“Walk through the Balance Sheet” Cash- Accuracy of Bank Recs -

ALL ACCOUNTS including CDs- Assessments Receivable/Assmt Income-

AR Aging, Bad Debts Assmt Income – Compare to Bgt Special Assmt Income/testing

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#6 What does an Auditor DO? Prepaid Insurance – Verify & test

Expense

Accounts Payable- Are accruals complete?

Federal Tax Payable – Calculate Liability

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#7 What does an Auditor DO? Reserves – Largest risk area:

Allocation – Compare to Bgt and RS Trace the cash in and out for the year Compare BOD minutes to reserve

expenses Compare reserve expenses to RS Examine reserve expense invoices Check exp coding between res/ops/SA Adjust Due to/Due From Res if necessary

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#8 What does an Auditor DO? Income:

Compare to prior year and budget Test unusual items e.g. Insurance settlement Completeness: Is it all there?

Expenses: Compare to prior year and budget 12 months? Examine selected invoices NOT “value auditing”

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#9 What does an Auditor Do? Yes, more….. OTHER ITEMS:

Read governing docs (financial impact) Evaluate Internal Controls (for the audit) Read BOD Minutes including Exec

Learn the “story” of the Assn Approval of financial transactions Information for Footnotes (e.g. Litigation)

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#10 Why does Auditor look at the months AFTER Year End? Responsible for events up to DATE of the

Audit Report (e.g. 3/31/15 for 12/31/14 year end)

Called “Subsequent Events” Similar to what may be disclosed in re-

sale certificate- these items are in the Footnotes

Litigation, loans, SAs, Settlements, Uninsured damage/claims

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#11 What does an Auditor look at for Subsequent Events? Minutes up to report date Financial statements General Ledger Representations from Mgmt/BOD

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#12- What does Auditor’s Report SAY? “Opinion” - Only thing we “own”

Rest are the Financial Statements- Assn’s

“Clean Opinion” Materially Correct Financial Statements In accordance with GAAP Adequate Footnote Disclosures

“Qualified Opinion” – Clearly Stated – Lack of evidence to support balance(s)

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#13 Is the Reserve Study a Required Disclosure? YES

“Required Supplementary Information”

If NOT: Statement in the Auditor’s Report that the

information has been OMITTED

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#14 Do we AUDIT the RS information? NO!

We are not reserve professionals

We DO compare components and assumptions for material changes from year to year and disclose if necessary

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#15 What else is disclosed from a Reserve Study? % Funded Components Estimated Lives Replacement cost (current or future) Minimum required annual allocation if

materially higher than budget Recommended large Special

Assessments

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#16 Why does the BOD sign a “Letter of Representation”? Financial Statements are the

responsibility of “Management” “Management” is those “charged with

governance” (BOD and Mgmt Co) Current BOD asked to sign “to the best

of their knowledge” Dated the same as the Auditor’s Report Signifies the BOD is ready to Issue the

Report “Final”

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#17 What are SOME Financial Matters that should be documented in the Minutes?

Opening/Closing Bank Accounts Major Contracts- Approval Reserve Expense approval (amt/desc) Collections/AR write offs Financial Statement review-

Budget/Actual Approval of Budget, Assessments, SA,

Large Projects

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#18 Do Auditors LOOK for Fraud? Not specifically Need to evaluate risk, modify

procedures as appropriate If find fraud, notify next level up of

Mgmt This is a financial statement

(GAAP/GAAS) audit, not a “forensic audit”

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#19 How do we PREVENT fraud? Corporate culture – Ethical, policies

Tone at the Top Segregate duties

Bank reconciliations different from issuing checks

Bank deposit separate from AR posting Rotate duties, random checks

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#20 Do HOAs file tax returns and pay taxes? YES!

What else do I need to know about taxes? That’s a whole different class! See FAQs hoacpa.com

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Questions??????????????

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Investments

Kris Gjylameti - - Mutual of Omaha Bank

Session to be presented separately by Mr. Gjylameti

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Break Time!

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Treasurer’s Role Financial voice of the board and

community. Board’s liaison to the association’s

auditor. Treasurer should implement the reserve

program. Treasurer works with manager to

monitor expenses month over month.

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Treasurer’s Role Responsible for ensuring that the draft

annual budget is prepared and approved.

Typically will delegate initial preparation to the community manager.

Treasurer will review and work with a Finance Committee on it.

Typically the treasurer will present the proposed budget being considered.

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The Budget Process

43 What is (and is not) Budgeting?

IS NOT something you do once a year.

Budgeting:

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What is (and is not) Budgeting?

IS an annual, monthly, and daily process IS a system of financial controls IS a philosophy of financial management IS simple in concept, complicated in execution IS worthy of work and attention.

Budgeting:

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Definitions & Concepts:Historically-Based Budgets

Uses the prior expenses of the Association to justify the expenses for the future

Older Associations have more history, resulting in increasingly accurate budgets

Takes into account seasonal, annual, and multi-annual variations in expenses

Adjusts for inflation, published increases, or contract amounts.

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Definitions & Concepts:Zero-Based Budgets

Assumes $0.00 as a starting point for all line items Justifies each line item as important to the operation

of the Association Obtains information from other associations,

municipalities, or others in absence of historical data

Adjusts for inflation, published increases, or contract amounts.

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Definitions & Concepts:Accruals, Assets, & Cash

The annual budget must work closely with the monthly financial statements

Accurate, detailed budgets assist in the preparation of accurate accrual financial statements: Monthly budgeted utility numbers come from budget

Fund balances and activity should be reflected in the budget for the full financial picture.

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What is the Manager’s Responsibility?

Support the development of the budget and keep the Association in compliance

Provide a draft for discussion purposes Provide historical data that supports the budget Provide future projections Provide industry perspective of relative costs Act as the ‘scribe’ for the final budget.

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What is the Board’s responsibility? Responsible to ensure the budget development Must stay in compliance with the documents Review the draft budget and consider the information

contained within the draft budget Get folks involved and utilize the broad base of

experience – the more eyes the better Inform owners of the realistic costs of operation To not not pick the percentage of increase first.

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What Is Our Mutual Responsibility?

To present a budget done completely, and correctly To present the budget to the membership To develop useful and meaningful reports to

educate the owners To help the owners understand that a budget is part

art, and part science.

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What Is NOT Our Responsibility?

To apologize for the costs of operation To try to artificially limit increases To take it personally

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Why Do We Budget?

Short term planning (12 months) Mid-range planning (5 years) Long-range planning (20 years) Future fiscal prudence Audit and review financial controls Look for errors & audit transactions

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When Should We Start?

Be mindful of your declaration requirements Various fiscal years New act condominiums call for the ratification of the

budget, with specific timelines Count backwards from the date the budget needs to

be approved according to declaration requirements (2 - 3 months)

Provide owners with sufficient time to adjust their payments.

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The budget may be reviewed and revised by

the membership at any annual meeting or special meeting called for that purpose, but if the membership does not review the budget or if no change is made

it shall be deemed approved.(Generic Language, old Act)

Board Approval

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RCW 64.34.308(3) Within 30 days after adoption of the proposed budget the board shall provide a summary budget to all owners and set a date for the unit owners to consider ratification of the budget not less than 14 nor more than 60 days after mailing. Unless at that meeting the owners of units to which a majority of the votes are allocated or any larger percentage specified reject the budget the budget is ratified whether or not a quorum is present.(Generic Language, New Act)

Ratification Requirement

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What Are The Primary Drivers Of Budget Development?

Current cash position Last year’s budget performance Next year’s increases Trends from prior year’s budget performance

(5 years or more) Remember: Mistakes, over-budget expenses, and

un-budgeted spending compound next year.

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The Process: Develop A Plan And Philosophy

The four basic budget goals: To protect, maintain and enhance the value of the

Association To determine and maintain a particular standard of

living and/or lifestyle To encourage a sense of community To use the least amount of resources to obtain

maximum benefits.

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Administration: Telephone, permits, fees. Maintenance: general maintenance, contract vs.

non-contract, major components only Professional Services: legal, audit/tax return,

management costs, building inspections, designers for upgrades

Reserve Transfers: Common and limited common replacement, insurance, contingent reserves, uninsured loss reserve for deductibles.

The Process: Review The Categories

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Track enough line items to be meaningful, but not so many that it is confusing

Combine similar and small dollar line items Separate contracts from additional contract costs Separate major expense categories to track useful life

costs for reserve purposes Less is More.

The Process: Finalize The Categories

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Operating Cash Position Determine the Association’s cash position as of

the end of the fiscal year Operating cash position = short term operating

fund assets (cash + receivables) minus short term operating fund liabilities (prepaid assessments + unpaid bills)

Short term = 90 days or less. Reserve cash is not included in cash position

calculations

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The Process: Learn From History Be sure to review the current financial statements

with YTD actuals, cash balances, cash position, paid invoices, projected year end projects, bids & proposals, etc.

Read the declaration – you may be building in an error from prior years – errors may come back to haunt you or future Boards & managers.

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The Process: Supplement With Current Info Understand contractual increases in existing service

contracts Where not specified, request increase information

from vendors Learn about requested utility increases Investigate insurance policy, coverage, limits, and

value Update reserve study.

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The Process: Supplement With Current Info Current 2015 projected utility increases: City of Seattle: Electricity 3.5%, Water .3%,

Sewer .8%, Garbage 4.3% Significant water & sewer increases in 2016 and

beyond – up to 300% over 10 years Puget Sound Energy: all costs TBD - Natural Gas

TBD, Electricity TBD% General contract costs: 3% General contractor (construction) costs: 10% -

15%+

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The Process: Zero-Basis To Reduce Costs Budget “real” dollars – don’t count on

volunteer or “free” services. Solicit and evaluate Owner expectations Zero-Basis the largest expenses

Utility auditsInsurance coveragesVendor Contracts /staffing

Communicate, Communicate, Communicate when making changes to service, staffing, or ‘security’.

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Decreases Deduct meters Lighting retro-fits Service options “Service” line items make up between 10% and

15% of the annual budget, with 85% to 90% going to utilities, insurance, and other non-negotiable “consumables”. Decreasing “service” in the name of low assessments results in low quality of community life.

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Increases

Contract increases Cost of Living & CPI increases Projected utility increases Don’t pick the increase first Is an annual increase wise? Develop a budget “philosophy”….

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Wrap-Up The Board is in charge Protecting the association and planning for the

future is the goal Use facts and a process Understand and believe in the numbers Sell the final product Live within your budget.

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Questions/Answers

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Session Wrap Up On behalf of all our presenters this

evening, our thanks to YOU for taking time to be part of our “Fiscal Fitness” session.

We recognize the value you bring to your community and appreciate your willingness to serve, learn, inspire and lead!