Director Compliance with Financial Responsibilities

It is common knowledge that homeowners associations are vulnerable to fraudulent financial (i.e. embezzlement and theft) activities by those who are entrusted with the management of the associations finances. To protect against losses from such fraudulent activities association directors must be conducting financial reviews on a regular basis.

A financial review generally consists of: (i) reviewing bank statements and preparing reconciliations; (ii) reviewing actual current operating revenues and expenses and comparing them to the current budget; (iii) reviewing current income and expense statements; and (iv) reviewing the check register, monthly general ledger, and delinquent assessment receivable reports.

State laws and/or an association’s governing documents may contain specific provisions relative to the frequency, nature, and extent of financial reviews that the association’s directors are responsible for performing. Thus, it is critical that an association’s managing personnel be familiar with both, their state’s requirements, and their association’s internal requirements, relative to financial reviews. While some jurisdictions and association governing documents may lack provisions, or have less stringent requirements relative to financial reviews by association directors, the better practice is to have a requirement for a monthly review, such as those that became law in California last year. California Civil Code §5500, which took effect on January 1, 2019, mandates that association directors review their association’s financial records on a monthly basis. The review must include: