Accountants are a norm for most people around tax time. And then, post-tax season, we rarely think about them. But for co-op and condo owners, this shouldn’t be the case. It’s crucial that large associations hire an accountant to help with multiple items within the property.
After all, for most co-op and condo owners, their homes represent one of their largest assets, if not their largest asset by far. Their unit can be viewed as an investment—and while each individual unit owner or shareholder is responsible for managing their own personal finances and doing their part in maintaining and increasing the value of that investment; the building community also has a duty as well.
Balancing the Books
Boards work with outside accountants and financial advisers to balance the books, to manage reserve funds and to deal with other money matters, and it's crucial that the individual or firm in that position is capable, competent, and trustworthy—as well as being someone who can communicate complex financial information clearly and coherently to association board members and residents who are not all professional money managers.
The relationship between the board and an accountant needs to be taken seriously. This can be done via specific rulings and documents outlining everyone’s roles. And there are ways to optimize that relationship as long as everyone knows what to expect and what to demand.
The relationship between an accountant and a board usually begins when the accountant is recommended to them by other clients or professionals who have had favorable relationships with the accountant, says Karen Sackstein, CPA and owner of The Condo Queens in Fairlawn. “We're usually referred by a property management company, or they see us advertised or in a directory.” Jules Frankel, CPA for certified public accounting firm and consultant Wilkin & Guttenplan in East Brunswick, says, “If they were to go on the Community Associations Institute (CAI) website for New Jersey, they would find names of accountants that service the industry, or if they look through The Cooperator magazine.”
Boards should also inquire about how many co-ops and condos a firm represents, in addition to asking for a typical monthly report and an annual report so the board can see what they will be getting.
“The best way for them to vet an accounting firm is to interview them before hiring them. They ought to sit with that accountant, and understand their background in the industry, and that accountant's communication skills are such that they're comfortable being able to understand the finances,” says Frankel. Frankel adds that some firms offer survey data of how other associations are managing their books. “They should look at the type of resources a particular firm could offer them in terms of industry knowledge,” says Frankel.
Once the board has done its homework and thoroughly reviewed the potential accounting firm, the board will make an official determination via a vote.
Getting to Know You
The American Institute of CPAs (AICPA) requires the board and the financial advisers to enter into a formal agreement for their services. They sign an agreement outlining the services to be provided, along with the charges. For many buildings, the accountant will be asked to audit the financial statements, prepare its tax returns, prepare or assist in the shareholder deductibility letters for the mortgage interest and real estate tax deductions on their personal tax returns. The accountant may also be asked to assist in a refinance of the building’s underlying mortgage or the budget process. “We find out the major issues with the client. We look at their cash flow. We look at upcoming projects to see how they're going to be financed. We get a familiarity of their sources of revenue and expenditures. We need to know the history of what's gone on in the association so we can analyze and give them recommendations. It's like going to the doctor and giving a medical history. That will help us to give them advice,” says Sackstein.
During an audit process, the accountant evaluates the internal financial controls—the checks and balances—in place inside the co-op. If any weaknesses are identified, the accountant has a professional obligation to report those to the board, along with the suggested remedies. “One of the most important things a board can do is to meet with their auditor once a year, in order to make sure they're educated on what these financial statements mean, because an accountant cannot issue a set of financials until the board approves the financial statements and signs something called a representation letter,” says Frankel.
It’s important to understand that there is a difference between an accountant and a financial adviser. Accountants may provide financial advice and guidance, while a financial advisor is normally used for investment advice for reserve funds. These are two separate duties, so the building should figure out if they need to hire an accountant plus a financial adviser—or just the accountant. Most buildings have their property manager’s act as a financial adviser of sorts. “Most boards will hire a management company to keep the books and records and to do the financial reporting of the board based on the financial activity that was incurred during the month,” says Michael Jablonsky, a CPA based in Hillsborough. “If they're self-managed they still have the problem of assigning to an individual to keep the books and records. They could hire another CPA, because a CPA can't do the books and audit at the same time. I've encountered both. The better way is to go with a management company. You get a different point of view as to how to run the organization,” says Jablonsky.
Typically, the property manager is the center of it all. The manager should regularly provide management reports, invoices, bank records and other documents to the accountant for review and comment. Good communication between the manager, accountant and designated board members is also key to efficient and timely financial reporting, as well as having a good understanding of financial transactions, budgets, capital expenditures, cash flow and seasonal fluctuations on expenses and income.
The treasurer also has a major role in the building’s economic state of affairs, depending on his or her experience. “I have treasurers that do some financial work for their regular job, they're going to be talking to me about higher level questions,” says Frankel. “Whereas someone that doesn't have that background that's a treasurer—our job with them might be a little more hand-holding. It's more making sure they have the knowledge to look at transactions during the year and on an interim basis.”
For associations without a lot of financial expertise, the relationship the board has with the accountant becomes even more important. “The first thing we do is we sit down with them, we teach them how to read their financial statements, what questions to ask, what those numbers actually mean,” says Sackstein. “The comment we get all the time is, 'Wow, nobody explained that to us before.' We want to explain it to them in a language they can understand. We really just want to teach them the basics, and how to use that information to make decisions for the association,” says Sackstein.
It may seem like a lot of people involved in similar roles but the separation of tasks is crucial to prevent things from getting out of hand. “You want segregation of duties, you want transparency. You don't want the same person approving the invoices and paying the checks, and then doing the bank reconciliation unless there's oversight. You don't want too much control with one person, because if that one person is not honest, then it becomes a situation where fraud can occur,” says Sackstein.
But, accountants aren't magicians. Even if you have the basics covered—balancing the books, making sure the records are correct—boards are susceptible to mismanagement, and they make common mistakes which almost always deals with avoiding payments for future projects. “They don't budget properly for reserves,” says Jablonsky. “They probably don't have a reserve study done. So anything they budget for reserves wouldn't be correct, because they don't have a study. A reserve study covers the replacements and repairs of common area elements that the association is responsible to maintain. The value is that you're funding currently for the wear and tear of your common area assets. You won't have to do a special assessment on your membership.”
“The biggest problem is not setting budgets at a realistic level,” says Frankel. “They want to be popular; they want to keep the fees the same. But if you think about it, gas prices go up, food prices go up. It's not reasonable to think that the cost of living in a condo is not going to go up in 20 years.”
But avoiding the realities of reserve budgets can create disasters, and situations that pile lots of expenses on people that do not deserve it. Reserve budgets essentially guarantee that everyone is paying their fair share. If a roof is expected to last 30 years, a unit owner who pays fees for 15 of those years and subsequently moves, invested in the maintenance of the roof while he or she lived there. Without the reserve budget, the new unit owner who moves in only five years before a roof replacement is needed will end up paying tooth- and-nail for a special assessment, when the financial burden should have been shared by past unit owners as well. “That's when association finances can get ugly,” says Frankel. “The understanding of the implication of today's decisions on long-term planning for the association is one of the major problem areas that boards run into.”
The main lessons to take away from accountants are twofold: don't pretend to understand things you don't. Property managers and accountants should be your experts, and it is their job to inform you and make sure you understand the association's finances, not the other way around. Particularly with a property manager, their accountant, and their attorney—you know, that's your team,” says Sackstein. “They're your strongest advisers.” If boards take the advice of the experts, they'll be much better off.
Above all, as with most professional relationships, a board and its accountant must strive to establish good communication so they can accomplish their objectives and maintain their building community's financial well-being.
Danielle Braff is a freelance writer and a frequent contributor to The New Jersey Cooperator. Editorial Assistant Tom Lisi contributed to this article.