1. “Fiscal Fitness” for Board Treasurers A Presentation of CWD Group University © 2015 Thursday, September 17, 2015 6:00 – 9:00 pm 1

2. Our Agenda for this evening:  6-6:05:Welcome and Introductions – Paul Grucza PCAM®  6:05-6:25:The CWD Group Fiscal Process – Jacque Haynes, CPA, MBA  6:25-6:55:Audits – Cathy Kuhn, CPA  6:55-7:25:Investments – Kris Gjylameti, Mutual of Omaha Bank  7:25-7:40: Treasurer’s Role – Paul Grucza, PCAM®  7:40-7:50:Break  7:50-8:30: The Budget Process – Marshall Johnson, PCAM®  8:30-8:50:Q&A  8:50-9:00:Wrap up – Paul Grucza, PCAM® 2

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4. The CWD Group Financial Process  The financial process is made up of many components and people that contribute to the preparation of your monthly financial statements. 4

5. The Association’s Approved Budget  It all begins and ends with the annual budget!  The budget determines the chart of accounts (COA).  Communicates expected income and planned expenditures.  Assist with monthly accruals.  Provides a picture of where the association’s money is going and a tool in preparing next year’s budget. 5

6. The Accounting Support Team  Accounts Receivable (AR) post charges and payments to owners accounts. Sends out delinquency letters.  Accounts Payable (AP) watches cash flow and pays vendors weekly. Resolves vendor issues. 6

7. The Community Manager Role  Assist board of directors with the creation of the budget using historic data.  Approves and codes invoices according to the budget’s COA. Submits to AP for processing. Signs checks as final approval.  Reviews monthly delinquency report. Tracks progress of legal collections.  Reviews monthly financial and prepares summary. 7

8. Staff Accountant (GL) - Monthly Review and Reconciliations  Each month the financial entries are reviewed for obvious posting errors and needed adjustments.  Accruals are determine based on usage dates and contracts.  Bank statements are reconciled.  Actuals are compared to budget.  Supporting documents are compared to Balance Sheet line items. 8

9. Staff Accountant (GL) – Other duties  Works with auditor providing necessary information  Reconciles Prepaid Insurance  Reconciles Special Assessments.  Reconciles Insurance Claims.  Provides additional information as requested by the manager and/or board. 9

10. Accruals-It is a timing issue  Not everything can be accrued if it is unknown and the invoice has not been received.  It is the best presentation on the closing day of the association’s books. 10

11. Accruals-It is a timing issue  CWD Group’s accrual policy  Accrue utilities and known monthly contracts.  Accrue actual invoices received after month end close and before closing the financials for the month. 11

12. Year End Close  Obtain Bad Debt estimates from Board.  Inquire amount contracts completed but not invoiced.  Hold open books a few extra days to capture as much year end activity as possible.  Variances from year end financial and annual audit are common due to the timing of when the association books are closed. 12

13. The Accrued Financial  Balance Sheet Focus-provides information regarding the health of the association.  AR/PPD Assessments-high AR affects cash flow and may affect ability to pay vendors. High PPDs means an association is borrowing from future income.  AP/Accruals-high AP/Accruals may indicate a ongoing cash flow issue.  Interfund Payable-may indicate the association is borrowing from reserves to pay operating expenses. 13

14. The Accrued Financial-Cont.  Balance Sheet Focus-provide information regarding the health of the association.  YTD Operating Fund Equity-current years profit or loss.  Retained Earnings-is all prior years profit or loss combined. A negative/loss should be a red flag and should be address in the following years budgets.  The monthly financial summary-provides the association cash flow position. 14

15. AUDITS- 20 Questions!  AKA Stump the Auditor!  Cagianut & Company, CPAs//Catherine Kuhn, CPA 15

16. Let’s Play 20 Questions  20 most commonly asked questions about the audit and tax process  20 minutes – 1 minute per question – FLYOVER!  10 minutes - YOUR questions~  I will be available afterward~  Hoacpa.com 100 “FAQs” 16

17. #1 – WHAT is an Audit?  Independence (CPA)  MATERIALLY correct financial statements (We don’t look at EVERYTHING)  GAAP - Generally Accepted Accounting Principles – “In accordance with”  Adequate Disclosures in the Footnotes (Readers are current and FUTURE members) 17

18. #2 – WHY have an Audit?  State Requirement (in some cases) - See next slide  BOD Duty – Accountable to Membership, Oversight  Run it like a business – Internal Controls, Accounting practices  Error and Fraud prevention/awareness  Materially correct financial statements and impact on owners/potential owners 18

19. # 3 When is an Audit REQUIRED?  New Act (1990) Condo – WA RCW 64.34.372 50 or more units (Under 50 waiver/60%)  Old Act (pre-1990) Condo - Defaults to New Act, EXCEPT, Governing Docs over-ride if an audit is required  HOAs – 64.38.045 - ASSESSMENTS $50K Over or under $50K can be waived/67%  Developer Transition -64.34.308 Required @ “transfer of control” – (waived 2/3 other than Declarant units) 19

20. # 4 -When is an Audit RECOMMENDED?  Large Settlement (Defect, Insurance, or otherwise)  Large Reserve Fund projects  Mgmt Company Change  Suspected Fraud (FORENSIC, NOT GAAP Audit)  Board politics, changes  Little or no Internal Controls 20

21. # 5 – WHAT does an Auditor DO? “Walk through the Balance Sheet”  Cash- Accuracy of Bank Recs -  ALL ACCOUNTS including CDs-  Assessments Receivable/Assmt Income-  AR Aging, Bad Debts  Assmt Income – Compare to Bgt  Special Assmt Income/testing 21

22. #6 What does an Auditor DO?  Prepaid Insurance – Verify & test Expense  Accounts Payable- Are accruals complete?  Federal Tax Payable – Calculate Liability 22

23. #7 What does an Auditor DO?  Reserves – Largest risk area:  Allocation – Compare to Bgt and RS  Trace the cash in and out for the year  Compare BOD minutes to reserve expenses  Compare reserve expenses to RS  Examine reserve expense invoices  Check exp coding between res/ops/SA  Adjust Due to/Due From Res if necessary 23

24. #8 What does an Auditor DO?  Income:  Compare to prior year and budget  Test unusual items e.g. Insurance settlement  Completeness: Is it all there?  Expenses:  Compare to prior year and budget  12 months?  Examine selected invoices  NOT “value auditing” 24

25. #9 What does an Auditor Do?  Yes, more….. OTHER ITEMS:  Read governing docs (financial impact)  Evaluate Internal Controls (for the audit)  Read BOD Minutes including Exec  Learn the “story” of the Assn  Approval of financial transactions  Information for Footnotes (e.g. Litigation) 25

26. #10 Why does Auditor look at the months AFTER Year End?  Responsible for events up to DATE of the Audit Report (e.g. 3/31/15 for 12/31/14 year end)  Called “Subsequent Events”  Similar to what may be disclosed in re-sale certificate- these items are in the Footnotes  Litigation, loans, SAs, Settlements, Uninsured damage/claims 26

27. #11 What does an Auditor look at for Subsequent Events?  Minutes up to report date  Financial statements  General Ledger  Representations from Mgmt/BOD 27

28. #12- What does Auditor’s Report SAY?  “Opinion” - Only thing we “own”  Rest are the Financial Statements- Assn’s  “Clean Opinion”  Materially Correct Financial Statements  In accordance with GAAP  Adequate Footnote Disclosures  “Qualified Opinion” – Clearly Stated –  Lack of evidence to support balance(s) 28

29. #13 Is the Reserve Study a Required Disclosure?  YES  “Required Supplementary Information”  If NOT:  Statement in the Auditor’s Report that the information has been OMITTED 29

30. #14 Do we AUDIT the RS information?  NO!  We are not reserve professionals  We DO compare components and assumptions for material changes from year to year and disclose if necessary 30

31. #15 What else is disclosed from a Reserve Study?  % Funded  Components  Estimated Lives  Replacement cost (current or future)  Minimum required annual allocation if materially higher than budget  Recommended large Special Assessments 31

32. #16 Why does the BOD sign a “Letter of Representation”?  Financial Statements are the responsibility of “Management”  “Management” is those “charged with governance” (BOD and Mgmt Co)  Current BOD asked to sign “to the best of their knowledge”  Dated the same as the Auditor’s Report  Signifies the BOD is ready to Issue the Report “Final” 32

33. #17 What are SOME Financial Matters that should be documented in the Minutes?  Opening/Closing Bank Accounts  Major Contracts- Approval  Reserve Expense approval (amt/desc)  Collections/AR write offs  Financial Statement review- Budget/Actual  Approval of Budget, Assessments, SA, Large Projects 33

34. #18 Do Auditors LOOK for Fraud?  Not specifically  Need to evaluate risk, modify procedures as appropriate  If find fraud, notify next level up of Mgmt  This is a financial statement (GAAP/GAAS) audit, not a “forensic audit” 34

35. #19 How do we PREVENT fraud?  Corporate culture – Ethical, policies  Tone at the Top  Segregate duties  Bank reconciliations different from issuing checks  Bank deposit separate from AR posting  Rotate duties, random checks 35

36. #20 Do HOAs file tax returns and pay taxes?  YES!  What else do I need to know about taxes?  That’s a whole different class!  See FAQs hoacpa.com 36

37. Questions?????????????? 37

38. Investments  Kris Gjylameti - - Mutual of Omaha Bank Session to be presented separately by Mr. Gjylameti 38

39. Break Time! 39

40. Treasurer’s Role  Financial voice of the board and community.  Board’s liaison to the association’s auditor.  Treasurer should implement the reserve program.  Treasurer works with manager to monitor expenses month over month. 40

41. Treasurer’s Role  Responsible for ensuring that the draft annual budget is prepared and approved.  Typically will delegate initial preparation to the community manager.  Treasurer will review and work with a Finance Committee on it.  Typically the treasurer will present the proposed budget being considered. 41

42. The Budget Process 42

43. 43 What is (and is not) Budgeting?  IS NOT something you do once a year. Budgeting:

44. 44 What is (and is not) Budgeting?  IS an annual, monthly, and daily process  IS a system of financial controls  IS a philosophy of financial management  IS simple in concept, complicated in execution  IS worthy of work and attention. Budgeting: 44

45. 45 Definitions & Concepts: Historically-Based Budgets  Uses the prior expenses of the Association to justify the expenses for the future  Older Associations have more history, resulting in increasingly accurate budgets  Takes into account seasonal, annual, and multi-annual variations in expenses  Adjusts for inflation, published increases, or contract amounts.

46. 46 Definitions & Concepts: Zero-Based Budgets  Assumes $0.00 as a starting point for all line items  Justifies each line item as important to the operation of the Association  Obtains information from other associations, municipalities, or others in absence of historical data  Adjusts for inflation, published increases, or contract amounts.

47. 47 Definitions & Concepts: Accruals, Assets, & Cash  The annual budget must work closely with the monthly financial statements  Accurate, detailed budgets assist in the preparation of accurate accrual financial statements: Monthly budgeted utility numbers come from budget  Fund balances and activity should be reflected in the budget for the full financial picture.

48. 48 What is the Manager’s Responsibility?  Support the development of the budget and keep the Association in compliance  Provide a draft for discussion purposes  Provide historical data that supports the budget  Provide future projections  Provide industry perspective of relative costs  Act as the ‘scribe’ for the final budget.

49. 49 What is the Board’s responsibility?  Responsible to ensure the budget development  Must stay in compliance with the documents  Review the draft budget and consider the information contained within the draft budget  Get folks involved and utilize the broad base of experience – the more eyes the better  Inform owners of the realistic costs of operation  To not not pick the percentage of increase first.

50. 50 What Is Our Mutual Responsibility?  To present a budget done completely, and correctly  To present the budget to the membership  To develop useful and meaningful reports to educate the owners  To help the owners understand that a budget is part art, and part science.

51. 51 What Is NOT Our Responsibility?  To apologize for the costs of operation  To try to artificially limit increases  To take it personally

52. 52 Why Do We Budget?  Short term planning (12 months)  Mid-range planning (5 years)  Long-range planning (20 years)  Future fiscal prudence  Audit and review financial controls  Look for errors & audit transactions

53. 53 When Should We Start?  Be mindful of your declaration requirements  Various fiscal years  New act condominiums call for the ratification of the budget, with specific timelines  Count backwards from the date the budget needs to be approved according to declaration requirements (2 - 3 months)  Provide owners with sufficient time to adjust their payments.

54. The budget may be reviewed and revised by the membership at any annual meeting or special meeting called for that purpose, but if the membership does not review the budget or if no change is made it shall be deemed approved. (Generic Language, old Act) Board Approval 54

55. RCW 64.34.308(3) Within 30 days after adoption of the proposed budget the board shall provide a summary budget to all owners and set a date for the unit owners to consider ratification of the budget not less than 14 nor more than 60 days after mailing. Unless at that meeting the owners of units to which a majority of the votes are allocated or any larger percentage specified reject the budget the budget is ratified whether or not a quorum is present. (Generic Language, New Act) Ratification Requirement 55

56. 56 What Are The Primary Drivers Of Budget Development?  Current cash position  Last year’s budget performance  Next year’s increases  Trends from prior year’s budget performance (5 years or more)  Remember: Mistakes, over-budget expenses, and un-budgeted spending compound next year.

57. 57 The Process: Develop A Plan And Philosophy The four basic budget goals:  To protect, maintain and enhance the value of the Association  To determine and maintain a particular standard of living and/or lifestyle  To encourage a sense of community  To use the least amount of resources to obtain maximum benefits.

58. 58  Administration: Telephone, permits, fees.  Maintenance: general maintenance, contract vs. non-contract, major components only  Professional Services: legal, audit/tax return, management costs, building inspections, designers for upgrades  Reserve Transfers: Common and limited common replacement, insurance, contingent reserves, uninsured loss reserve for deductibles. The Process: Review The Categories

59. 59  Track enough line items to be meaningful, but not so many that it is confusing  Combine similar and small dollar line items  Separate contracts from additional contract costs  Separate major expense categories to track useful life costs for reserve purposes  Less is More. The Process: Finalize The Categories

60. 60 Operating Cash Position  Determine the Association’s cash position as of the end of the fiscal year  Operating cash position = short term operating fund assets (cash + receivables) minus short term operating fund liabilities (prepaid assessments + unpaid bills)  Short term = 90 days or less.  Reserve cash is not included in cash position calculations

61. 61 The Process: Learn From History  Be sure to review the current financial statements with YTD actuals, cash balances, cash position, paid invoices, projected year end projects, bids & proposals, etc.  Read the declaration – you may be building in an error from prior years – errors may come back to haunt you or future Boards & managers.

62. 62 The Process: Supplement With Current Info  Understand contractual increases in existing service contracts  Where not specified, request increase information from vendors  Learn about requested utility increases  Investigate insurance policy, coverage, limits, and value  Update reserve study.

63. 63 The Process: Supplement With Current Info Current 2015 projected utility increases:  City of Seattle: Electricity  3.5 %, Water .3 %, Sewer .8%, Garbage  4.3%  Significant water & sewer increases in 2016 and beyond – up to 300% over 10 years  Puget Sound Energy: all costs TBD - Natural Gas  TBD, Electricity  TBD%  General contract costs:  3%  General contractor (construction) costs:  10% - 15%+

64. 64 The Process: Zero-Basis To Reduce Costs  Budget “real” dollars – don’t count on volunteer or “free” services.  Solicit and evaluate Owner expectations  Zero-Basis the largest expenses Utility audits Insurance coverages Vendor Contracts /staffing  Communicate, Communicate, Communicate when making changes to service, staffing, or ‘security’.

65. 65 Decreases  Deduct meters  Lighting retro-fits  Service options  “Service” line items make up between 10% and 15% of the annual budget, with 85% to 90% going to utilities, insurance, and other non-negotiable “consumables”. Decreasing “service” in the name of low assessments results in low quality of community life.

66. 66 Increases  Contract increases  Cost of Living & CPI increases  Projected utility increases  Don’t pick the increase first  Is an annual increase wise?  Develop a budget “philosophy”….

67. 67 Wrap-Up  The Board is in charge  Protecting the association and planning for the future is the goal  Use facts and a process  Understand and believe in the numbers  Sell the final product  Live within your budget.

68. Questions/Answers 68

69. Session Wrap Up  On behalf of all our presenters this evening, our thanks to YOU for taking time to be part of our “Fiscal Fitness” session.  We recognize the value you bring to your community and appreciate your willingness to serve, learn, inspire and lead! 69