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Tips To Proactively Avoid Fraud and Embezzlement in a HOA

Fraud and embezzlement are words that can really cause an Association a lot of wasted time, money and energy.  So how can the Board of Directors get out in front of any potential fraud or embezzlement?  This is really simple and easy, but is almost always overlooked.  The Board needs to understand their role in fraud prevention and the top two components to fraud: motivation and opportunity.  In almost all cases, it will take both of these factors for fraud to occur.  Motivation is a factor completely outside of the Board’s control, but that cannot be said about the opportunity factor.

To reduce or eliminate the opportunity factor, establishing simple monitoring tasks by the Board are critical, extremely simple and highly effective.  First, review and control those key individuals that have banking authority.  When there are transitions on the board or with a management company then the individuals with banking authority need to be reviewed immediately and updated. Ensure this is reviewed and monitored by the Board Treasurer and then approved by the entire board. Next, establish an approved vendor list.  Payments made to vendors that don’t exist or consultants with no credentials are very common with Associations.  The Board should periodically review the disbursements ledger (check register) and look for payments to vendors that are not on the approved vendor list.

In addition, there are a number of control measures the board should do on a regular basis to reduce the risk of fraud or embezzlement.  These can include the following:

  • Review and approve the bank statements and bank reconciliations. Establish a due date to ensure the bank reconciliations are completed timely and reviewed timely.  Typically 15 days from the close of the previous month is a best practice.
  • Review actual results versus budgeted amounts and inquire of all variances.  Avoid only focusing on variances where the actual amounts exceed the approved budgeted amounts.  Variances significantly below approved budgeted amounts can be a myriad of issues.  Remember, the devil is the details. 
  • Discuss with your management company the safeguards they have over cash receipts.  The board should have a very good understanding of how much cash is received and what activities are leading to the generation of members paying in cash. 
  • Make sure your management company is utilizing a lockbox system for assessment collections.  Encourage all of your members to pay directly to the lockbox.  This will cut down on cash receipts. 
  • Review, review, review and review the monthly financial package.  This information is key and the boards timely review is critical to the identification of any potential issues that could be caused by fraud or embezzlement.  Make sure the financial package is completed timely as well.  Establish a due date with your management company.  This should be a date that is reasonable and agreed upon.

These steps, or suggestions, tailored to fit your association can help reduce or even possibly eliminate the opportunity for fraud and/embezzlement.  Fraud will happen at the most unexpected time, make sure your Board is taking the necessary precautions to protect the financial health and stability of your Association.  To learn more click the button below to speak with a Certified Public Accountant at LBA Haynes Strand.

5 Tips For Preparing Your Annual HOA Budget

Preparing a budget for an HOA may seem daunting.  However there are 5 simple tips that can go a long way in making sure your HOA is budgeting correctly:

1.  Start by preparing a “business plan.” 

Set financial goals or objectives for the HOA to achieve.  Establishing short term and long term financial goals that are attainable and span from board-to-board, are essential to the Association when boards turnover.   This can be a simple list of goals and/or objectives for the upcoming year and future years ahead.  Use this list to plan for potential mid-year problems or anticipated major repairs.   This would be a good time to review the reserve study and anticipate those common areas that need to be replaced or repaired. 

2.  Always factor in uncollectible assessments.

Every association is going to have owners that just don’t pay their Association’s assessments.  Budgeting for uncollectible assessments is not only essential but critical to understanding the Association’s potential cash flows. Avoid the simple use of prior bad debt expense as the same amount for the current budget.  Put some ‘weight’ behind this line item in the budget.  A simple method would be to look at historical collection amounts over a five year period, as well as, factoring in any potential external impacts to homeowners.   Remember to include an evaluation of legal and collection costs when you develop an uncollectible amount.  These costs can increase significantly when collections become a significant issue.  

3.  Obtain updated contract costs on all major contracts; don’t just rely on annual renewals.

Landscaping, pool service and maintenance, and association management are typically the largest expenses to an association.  Review these contracts annually and make sure to understand the increases and possible changes.  Many of these contracts will have an automatic renewal clause.  Avoid the ‘autopilot’ approach and negotiate new rates and charges.  Remember, the Association’s income is fixed and a good approach would be to align the major expenses on a fixed basis.  Renegotiating with your major vendors doesn’t mean a full ‘request for proposal’ process.   If the Association is happy with the major vendors, then there is no need to go through the hassle of changing but locking in fees is a prudent approach for both parties.

4.  General recurring maintenance costs and utility costs are expense areas that seem to be ignored.

Utility costs are a given and increases annually should be expected, but simply relying on the prior year amounts for the current year budget can be misleading.  Research the anticipated annual increases and compare to historical trends within the Association.  General maintenance is unavoidable but these occurrences are not consistent from year-to-year.    Use the ‘business plan’ that was developed and budget for maintenance costs with a idea of the areas that need the most attention. 

5.  Review the reserve study and the Association’s current balances in reserve.

Then set the reserve contributions to ensure that you are meeting the needed reserve balances for future major repairs and replacements.   The more long term liabilities and obligations you have, the more you should be putting away.  For example, many condo associations have much larger obligations regarding upkeep, maintenance and replacement.   Failing to follow the reserve study or not budgeting for reserves at all can lead to significant financial problems.  Budgeting appropriately and consistently with the reserve study is critical to avoiding that dreaded need for a special assessment. 

To learn more and to speak with a member of the LBA Haynes Strand team. Click here for your no-cost consultation!

3 Keys To Staying Relevant With Your Clients

Staying relevant with your clients is the key to success. This applies to not only retaining your clients, but to also getting referrals from your clients. So, how exactly do you do that? What does staying relevant or becoming more relevant mean?

You talk to your client, you master the industry the client is in, and you provide timely advice and tips that lead to productive results for your client. Ultimately you are building a relationship with your client. One that is built on mutual trust and knowledge share. In North Carolina, especially in the Charlotte and Triad regions, there are dozens of CPA firms that can handle a client’s tax or accounting needs, however client service is where LBA Haynes Strand stands out from the rest. We create strong mutually beneficial relationships with clients. We stay relevant with our clients, and we do that by focusing on three main client service aspects:

1. Industry Acumen

Staying up to date on a client’s industry, including threats and opportunities is key. This includes making your client aware of any changes or updates that they need to be aware of relating to their industry. We pride ourselves in having a diverse team that is able to handle client needs in a number of industries. Most specifically: Charter Schools, Construction, Manufacturing, HOA, Non-Profit, and Entrepreneurs. Our team attends regular seminars, conferences, and other events in all of these fields to stay up to date.

2. Client Collaboration

We cannot stress this enough… work with your client! Your client should feel comfortable to come to you regarding any problem or issue they have and before important decisions are made! Something we have found helpful with our clients is to hold regular planning sessions. These can be monthly, quarterly, semi-annually or just annually – whatever the client feels is necessary. When you sit at the table on the same team with your client, then you are much more likely to provide real value to your client.

3. Client Insight

Focus on the client! Focus on the client’s vision, short-term and long-term goals, and strategic initiatives to meet those goals. You must understand your client in order to provide great service! This can greatly help you, especially when it comes time to offer useful advice to the client. You cannot fully help your client if you don’t understand them.  We highly recommend to take this last step seriously and really get to know your client.

These three steps can greatly increase your relevance with your clients. Thus, creating an excellent client experience and one that will be mutually beneficial for years to come. We know because this is how we handle our clients. If you would like to discuss your tax or accounting needs with a member of the LBA Haynes Strand team, contact us for your no-cost consultation!

Does My HOA Have To File Tax Returns?

Does my association need to file the 1120-H or the 1120 federal income tax forms? What is the difference? Isn’t my association exempt from taxes? Is my association subject to franchise and income tax in North Carolina? These are questions that come up for community association board of directors.

Under North Carolina law, a homeowners or property owners association is exempt from state franchise and income tax as long as the association is comprised solely of residential property Associations organized for commercial property (such as office condominiums). However, they are not exempt under the law. This is a common misconception for board members. We sometimes see commercial property associations having to amend prior years’ tax returns and pay the franchise and income taxes for past years, plus penalties and interest.

If your association is comprised solely of residential property, income from member assessments is exempt from income taxes for both federal and state filings. What is defined as membership income? Essentially, it is income derived from members for the preservation, maintenance and management of the association. Some examples are the dues or assessments paid by members, late fees, interest charges on delinquent dues, and special assessments. Income generated from the clubhouse rentals, amenity rentals, as well as interest income generated from CDs and interest-bearing bank accounts is considered to be outside the purpose of the association.

Which tax form needs to be filed?

The standard form for a homeowners association is the federal form 1120-H. The “H” stands for homeowners association. This is a straightforward one-page form on which both exempt and non-exempt income is listed. The tax rate associated with this form is a flat 30 percent applied to the taxable net income only. Remember, this form is for homeowners associations specifically.

An association has the option to use form 1120, but this will subject the association to being treated as a for-profit corporation for tax purposes. This could expose the association to closer scrutiny by the IRS. The tax rate on the federal form 1120 is only 15 percent on the first $50,000 in taxable income. Many board members view this as a big savings on the association’s tax liability, but the board must weigh the increased risk for an IRS audit before choosing to use form 1120.

The fact that your association’s income may all be tax exempt does not eliminate the requirement to file tax returns. Failing to file can subject the association to additional or higher preparation fees for these unfiled returns, plus penalties and interest. In addition, the North Carolina Secretary of State will often suspend the corporation’s charter until all returns have been filed.

Let us know if you have questions about your association’s tax or audit needs. Reach out to the LBA Haynes Strand team for your no-cost consultation.

Property Management Companies Are Growing Through M&A

Mergers and Acquisitions have become an increasingly popular growth strategy among property management companies. In an earlier blog titled, “What Industries Are Growing Through M&A,” we mentioned property management companies as a top industry for mergers and acquisitions. So let’s dig a little deeper and learn what is being gained by M&A and what trends are driving M&A in the property management marketplace.

What Property Management Companies Are Trying To Gain Through M&A:
  • Size/Proximity to New Locations: In some cases, especially in the Charlotte area, management companies are looking to grow across State lines.  Rather than a Charlotte based management company opening a new location in South Carolina, they will often acquire other established management companies already based in South Carolina.  This is also true within the State as well (Charlotte -> Greensboro, Wilmington, Raleigh, etc.)
  • Economies of Scale: Management companies deal with many different service providers from landscapers and painters, to accountants and attorneys.  As management companies grow and manage additional communities through M&A, they are better able to pass cost savings (via economies of scale) onto their clients.  Doing so, theoretically, makes the management company more attractive in the market place as they are better able to offer attractive rates.
  • Additional Management Offerings: There are many local management companies who specialize in residential communities while others mainly do commercial associations.  Through M&A, management companies may be able to acquire residential work if they didn;t already have it, or vice versa.
What Trends Are Driving M&A In The Industry:
  • Real Estate Brokers Wanting Out: Community management is NOT a glamorous field. In lean times (2008 – 2012) many small/local real estate sales offices turned to property management when they were struggling to sell homes. With real estate “Hot” again, some real estate agents are looking to shed their portfolio of community associations to better focus their efforts on more lucrative selling activities.
  • Lack of Succession Planning: Similar to the CPA industry, some “mom and pop” community management companies simply have no succession plan, while other “younger” management companies are seeing this as a great opportunity for M&A.
  • National Players Coming To Charlotte: Up until 2008, community management in Charlotte was pretty much locally run (i.e. 20 or so management companies throughout the State and SC, perhaps). However, in the past 5 to 7 years, Charlotte has experienced an increase in nationally known management companies who often launch their local office by purchasing a locally-owned community management company.

This may be un-chartered territory for some management companies, and LBA Haynes Strand is here to help. We have a team that understands the needs and the financial issues associated with HOAs and property management companies. If your property management company is looking to grow through M&A, schedule a no-cost consultation with us and we will walk you through the steps for a successful merger or acquisition.