Do you have problems with homeowners association financial reporting? Even with a financially literate board, mistakes can still happen. What’s important is that you’re able to identify these HOA financial reporting mistakes early on and make changes so that they never happen again. If you want to protect the financial position of your HOA, here’s what you should look out for.
HOA Financial Reporting Mistakes You Must Avoid
Accurate financial reporting is essential to the successful operations of an HOA. Financial statements reflect the financial health of your community. These documents let homeowners know that the HOA board is putting their money to good use. With accurate financial reports, you can also attract potential homebuyers to join your community.
But what happens when there are problems with homeowners association financial reporting? The board loses the confidence of the homeowners and the community fails to attract new members. Not only that, but financial reporting issues can also lead to higher insurance premiums and difficulty getting loans — should the need for one arise.
If you don’t want to experience these pitfalls, here are four HOA financial reporting mistakes to avoid.
1. Underreporting Budget
The HOA budget should be realistic and cover all the anticipated expenses for the coming year. The board should also cushion the budget for inflation, overspending, bad debts, vendor rate adjustments, and emergency expenses. If the anticipated income is not enough to cover all these expenditures, HOA fees must be increased. However, since these fee increases do not go over well with homeowners, some board members might decide to underreport their annual budget.
Underreporting the budget is a major financial reporting mistake that HOAs should avoid. As a board member, it is your fiduciary duty to act in the best interests of the association. That means ensuring that financial reports, including budgets, are accurate. Remember, is not your responsibility to appease homeowners with low assessment fees.
2. Overreporting Expenses
Overreporting expenses is one of the HOA financial reporting problems to look out for. Mistakes in your HOA financial statements might simply due to human error but it can also be a sign of fraud or embezzlement. Board members must carefully inspect their financial statements. For instance, is the HOA suddenly issuing payments to vendors that don’t exist or paying for excessive repairs and amenity upgrades? You can also check checks are being issued to individuals.
Many HOAs only discover cases of fraud or embezzlement when it’s already too late. Thus, to protect HOA funds, board members must know how to read HOA financial statements so that they can identify discrepancies or mistakes — no matter how minute they may be.
3. Failure to Itemize
The HOA budget must be as detailed as possible to have an accurate picture of the upcoming year’s financial obligations. Accordingly, creating an annual budget requires a lot of time and effort. If your board is untrained or lacks attention to detail, you might end up with a budget that is not properly itemized. For instance, instead of listing down roof maintenance, plumbing, electrical, and landscaping as separate expenses, the budget just has a maintenance category. This financial reporting mistake can result in overspending. Without establishing specific budgets, the HOA may spend more for roof maintenance and leave less for the other maintenance projects. Thus, there is a chance that essential maintenance tasks cannot be accomplished. The board may also end up depleting funds, which can put HOA financials in a precarious situation.
4. Not Filing Tax Returns
Apart from the homeowners, HOAs must also report to the Internal Revenue Service (IRS). Some HOAs fail to file their Form 1120-H on time while others may not even know that they have to file taxes. Failure to file tax returns is a financial reporting mistake you should avoid. Otherwise, you might end up in trouble with the IRS. Failure to file and pay taxes comes with penalties with interest. The IRS may also strip your HOA of its tax-exempt status. To avoid these costly consequences, make sure to file your HOA tax returns on the due date.
3 Solutions to Avoid HOA Financial Reporting Mistakes
Regardless if they were intentional or not, HOA financial reporting mistakes can have major consequences. Here are three solutions that can protect your association from the abovementioned financial missteps.
1. Pursue Board Member Education
Financial literacy is not a requirement for board members. However, once elected to the board, you must show initiative by pursuing HOA board member education. Newly elected members will have the opportunity to learn the basics of financial management. They do not need to be financial experts but at the very least, they should know how to read and interpret financial reports.
2. Seek the Expertise of Professionals
If financial management is not the forte of the board, considering consulting or hiring professionals. HOA management companies and accountants have experience with financial management tasks so they can provide the guidance that your board needs. These professionals can also serve as checks and balances to prevent fraudulent activities within the HOA.
3. Utilize HOA Resources
Board members should not use the lack of financial background as an excuse for financial reporting mistakes. In this day and age, there are so many resources you can use to manage HOA finances. For instance, HOA software can automate day-to-day financial tasks so that there are fewer accounting mistakes and errors. These programs can also analyze your data and produce financial reports. As long as the numbers are inputted correctly, HOAs can be confident that the generated financial reports are accurate and detailed.
Overcoming HOA Financial Reporting Mistakes for a Better Future
By now, board members have a better understanding of HOA financial reporting mistakes and solutions that can help them avoid these pitfalls. Through proper financial management, you can ensure that your community operates smoothly and that homeowners can see the results of investing their hard-earned money.
Looking for software that can help you avoid HOA financial reporting pitfalls? Feel free to contact the Condo Manager team today! Call us at (800) 626-1267, email us at firstname.lastname@example.org, or contact us online to request a demo or to learn more about our HOA software solutions.
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- What You Need to Know About Form 1120-H