2013-2014 HLA Financials Review
2013-2014 Hidden Lake Association Internal Financials ReviewAs Requested by HLA Board of Directors
Mark Jensen
3/31/2014
An internal review of the financial statements, transactions, policies, practices, and supporting documentation.
To: Hidden Lake Association Board of Directors and Members
As a continuation of assuring proper fiscal management of Hidden Lake Association (HLA), and at the request of the HLA Board of Directors (BOD), I have reviewed the financial records of HLA including Balance Sheet, Reconciliation Summaries, Reconciliation Details, Check Request forms and Paid Invoices. I also reviewed HLAs current By-Laws and Articles of Incorporation pertaining to the handling of HLA financials as well as any HLA operating procedures which influence HLA’s financial processes.
As pointed out in the review performed in 2009 the most important reason to maintain an accurate financial record is so the association will be able to fulfill its budgetary obligations to its members. In addition the BOD has a legal, fiduciary responsibility to maintain accurate records. Failure to do so could expose the BOD and the association to costly litigation, erode confidence in BOD actions, and subject HLA to possible financial oversight by outside institutions.
As in the review of 2009 my responsibility was to express an opinion on these financials and record keeping activities based upon the review results. As an internal review, the findings reached are not the opinion of an external reviewer such as a Certified Public Account, but reflect the understanding by a member of HLA on how HLA financials are handled.
It should be of special note that as a Non Profit Cabin Owners Association, HLA finances are not monitored by the state of Utah. Recent changes to housing laws in many of Utah’s surrounding states now require having a Home Owner Association Administration division, managed under the individual State Attorney General’s Office, for the purpose of monitoring the budgets and actions of all Home Owner Associations within that state. In Utah, no such supervision exists as of the time that this audit was performed. The actions of managing the monies received and used by HLA is only accountable to the Cabin Owners themselves. HLA members approve HLA monetary activities by a single yearly indemnification vote. The vote also serves to indemnify BOD member for their actions as representatives, and on behalf of, the association membership.
Scope of Review:
For consistency, the review was based on the same guidelines as utilized in the 2009 audit with the notable exceptions of:
· Updated reference of Financial and Accounting Guide for Not-For-Profit Organizations (Eighth Edition – 2012, John H. McCarthy, Nancy E. Shelmon, John A. Mattie)
· Inclusion of additional recommended guidelines provided by the American Institute of Certified Public Accountants (AICPA), a nationally recognized organization.
· Inclusion of Federal guidelines for Board of Directors of non-profit organizations per legislation passed 2009-2013 and IRS instituted regulations for non-profit organizations for the same period.
· Inclusion of guidelines published by Authenticity Consulting including Checklist to Assess Financial activities in Nonprofit Organizations (2013, Carter McNamara, MBA, PhD)
The purpose of the review was to obtain reasonable assurance about whether the HLA financial statements are free of material misstatements. I also reviewed how HLA financials are gathered and tracked and looked for evidence of standards, policy, process or procedure to ensure accuracy for same on a sample basis. I believe that this review provides a reasonable basis for my opinions.
Findings are divided into three categories; Critical Indicators Needing Work, Recommended Indicators Needing Work, and Indicators Needing Special Attention. There are a total of 35 Indicators used in this audit and are defined as:
· Critical Indicators are those which represent the potential for adverse impact to HLAs financial position, or to those who create, execute, and receive HLA funds, and should be considered for immediate resolution.
· Recommended Indicators are opportunities to improve HLAs accounting practices, and do not pose a foreseeable threat to HLAs financial stability or to those who create, execute, and receive HLA funds.
· Indicators Needing Special Attention are where HLA adheres to a policy, practice or procedure but could be enhanced to improve HLA fiscal activities and information.
Recent federal regulatory changes regarding financial institutions and corporate financial fiscal responsibility, especially for those in leadership positions, drove the need to include three indicators (numbers 33, 34 and 35), and are provided in the Indicator Checklist which is shown below.
Opinion:
It is my opinion that the HLA financial statements give a true and fair view of the financial position of HLA. To date, the record keeping of HLA transactions are accurate and have no material misstatements.
HLA has made significant changes to correct areas that could be of concern. Examples are:
· Procedures established for the periodic billing, follow-up and collection of all accounts, including the lien of property, and having the documentation that substantiates all billings.
· Contracts, purchase of service agreements and grant agreements are in writing and are reviewed by a staff member of the organization to monitor compliance with all stated conditions.
· Tracking of service points has significantly improved and is verifiable with appropriate documentation of service point transactions available to all members of HLA.
· HLA annual report is detailed enough to show the line item expenses that has been incurred for the fiscal year for each budgeted area.
In all, seventeen indicators are noted in this report. Six indicators are critical, eight indicators are recommendations, and three indicators are noted for special attention of the BOD.
I have made recommendations according to the level of the indicators defined above. There is no obligation for the BOD to act upon these recommendations as they are only suggestions for improving the financial records handing for HLA.
Should there be any questions about how the review was conducted, please feel free to contact me.
Sincerely,
Mark Jensen
Critical Indicators Needing Work:
Indicator #1: This indicator was presented in the previous audit and still has not been fully corrected. The recent passing of our HLA treasurer highlighted the difficulties in managing HLA financials by not having a documented standard. In addition, HLA’s move to a software solution (QuickBooks) also created challenges to maintain proper accounting and bookkeeping standards.
The software does provide steps for entry of financial information, however, these steps are not specific to the way that HLA wishes to track and monitor its finances. There is a learning curve to how HLA finances are input to the system, and adjustments are often made through trial and error. The knowledge gained through this process is not clearly documented for future reference.
While documented standards do not ensure that financial deviations will not occur, they do provide the standard that can be applied to help the organization make sound fiscal decisions and practices.
Recommendation: HLA should DOCUMENT all accounting practices, fiscal policy, and procedures that follow accepted standards to benefit setting the guidelines for current and future members who maintain HLA financials. As new accounting practices are introduced (such as move to new automated solutions) these standards should be updated.
Indicator #5: HLA’s budget process is an annual event held by the BOD where budgets are prepared and proposed for approval. The budget process provides an annual amount to be funded by dues collected from HLA members based on their membership type, with the overall budget process being a mix of expenses for base operation of HLA and incremental expenses for projects proposed for the year. While it is recognized that the overall objective of the budget meeting is obtained, that being the approval for the next years expense budget, the question of projects and how to fund them often becomes the focus of the overall budgeting process, and can create an opportunity for misunderstanding the required (base funded) needs versus project (incremental funded) requests.
Recommendation: The following step should be used to better clarify the expenses required for a yearly budget:
1. All areas should present their required expenses for operations for approval first. This would be only the base expenses needed such as taxes, utilities, yearly required maintenance, etc. HLA BOD should vote to approve those expenses before approving project expenses.
2. All project proposals should be identified as incremental spend items, and discussed after base expenses are approved.
3. Project proposals that span more than one year should only receive the required funding approval for the work to be performed in the upcoming year. Expenses that will occur in following years should be approved in the appropriate year. Please see Indicator #7 in the Recommended Indicators Needing Work section below for details regarding future year projects and their impact to HLA cash flow projections.
Indicator #14: HLA does not have a process in place to ensure that all contracted personnel meet Federal requirements for this form of employment.
Recommendation: HLA should include in their fiscal policies and procedures language that will be sufficient to cover reimbursement to contracted labor and/or services which meet Federal, State and Local requirements for this type of employment.
Indicator #15: HLA has made great strides in improving the internal controls over payment of invoices or Check Requests. However, there are still inconsistencies in BOD member submittal of these requests. While this has not been an issue in the overall track of financial records, it does introduce the possibility of funds being inappropriately used.
An example is the invoices submitted for funds from the recently added discretionary line item under the President and/or Vice President. This line item has been used for special projects or supplemental funding for other HLA areas where they may have a budget shortfall. Invoices have been sent to this line item without indication of what expense item in the other HLA area this refers to.
There is still a lack in consistency regarding Check Requests in: expense allowance amounts (i.e. travel, meals, etc.), guidelines for what is considered an appropriate expense, and guidelines as to who can claim these expenses.
Recommendation: Documented internal controls should outline the process for handing cash, checks, deposits, and the approval and disbursement of funds including the documentation to support the approval.
Requests for funding from the Presidential discretionary line item should indicate the HLA area that made the request. Example: Request for additional funds to cover a shortfall in snow removal would indicate that the money was used to supplement item 310 – Snow Removal.
In addition, the type of expense allowances that HLA will cover, including minimums and maximums that can be claimed, need to be documented. These controls and allowances should be made known and accessible to all members of HLA, not just BOD members.
Failure to submit payment of invoices or Check Request per the requirements set forth by the procedures outlined and agreed to in previous BOD or Association meetings and outlined in any communications in this regard, should result in the request being denied, with no exceptions.
Indicator #17: HLA does require that all expenses have an approver who is not the payee. In the last audit it was found that this policy was significantly ignored. Since then, HLA has taken great strides in ensuring that this policy is followed on every expense request. There are still a number of instances where the payment approver is the same individual as the person receiving the reimbursement. Most of these are considered an exception to the process as a means to expedite the payment process. Example: BOD Chair uses own funds to purchase an item to be used within his area. The BOD Chair requests reimbursement, which he should, but then approves the reimbursement from his own area budget. While a receipt shows that the item was purchased, there is no separation between payee and approver to pay.
In no case should the requestor and the payee be the same individual. This practice places HLA financials in question of possible serious fraudulent activities up to and including theft of funds. Every BOD member should be aware of the seriousness of this practice and the loss of indemnification that can be imposed should they ignore the policy.
Recommendation: As part of the documented internal controls stated for #15 above, it should be explicitly defined that all expense reimbursements show a clear separation of payee and approver. Failure to have separate approver/payee for an HLA expenses should result in denial of payment, with no exceptions. One possible solution is to have the treasurer be the defacto approver where evidence of the purchase is from personal funds and the payee is the BOD Chair who would normally approve the purchase. This should be noted in the Check Request Form to provide clarity.
Indicator #34: HLA funds are for the sole purpose of HLA operations. Budget expenditures are to be used to acquire and maintain the association's property (including insurance, fees, maintenance, etc.). Any expenditure not consistent with this purpose IS NOT AUTHORIZED in the Articles of Incorporation or any other rules, regulations, or by-laws set forth by the association.
The IRS has strict instructions for the special tax treatment of a non-profit organization such as HLA. Use of funds for charitable donations would require HLA to file declaring the contribution and could result in a tax liability.
Because charitable contributions are NOT explicitly covered in the guiding documents of the association, any actions taken by the BOD where the use of HLA funds are given to said charity is NOT covered by the indemnification vote of the general membership, and the BOD can be held liable for the use of these funds outside of the purpose for which it was intended including any taxes incurred.
Recommendation: HLA members wishing to donate to a specific charity in the name of the association should do so individually. No funds from HLAs operating budget should be used for donating to charitable organizations.
Recommended Indicators Needing Work:
Indicator #3: HLA has detailed records of every financial transaction. With the use of the automated solution this detailed information is readily available. However, guidelines as to when and where that information needs to be available are not clearly understood.