As a new or current HOA board member you may often hear terms that you’re unfamiliar with. It’s important to ask questions and stay educated when something is unclear, and nothing can be more convoluted than financial jargon.
From time to time you may hear that the Board of the homeowners association operates in a fiduciary capacity for the homeowners. Or you may read about the Board’s fiduciary responsibility in the governing documents. Just exactly what does this mean? And how is that different from the duties of the Association’s accountant?
What is Fiduciary Duty?
Fiduciary duty simply means the HOA board has an ethical and a legal obligation to make decisions in the best interests of the entire Association. That’s a small explanation for a very big responsibility.
Fiduciary duty includes a duty of loyalty to the homeowners association, which means that Board members should never use their position to take advantage of the Association. They should never make decisions for the Association that benefit themselves at the expense of the Association and its members.
Fiduciary duty also includes the duty to exercise ordinary care. This means HOA board members must perform their duties in good faith and in a manner they believe to be in the best interest of the Association, with such care as an ordinary prudent person in a similar position under similar circumstances would use.
In short, HOA boards must act in the best interests of the Association and act reasonably.
How do Board members fulfill their fiduciary duty?
- Developing and using a formal budgeting process
- Establishing and adhering to budgetary guidelines
- Making sure the budgeting process reflects the wishes of the Association members
- Promoting understanding and acceptance of the reserve accounts among the members
- Collecting sufficient fees to adequately operate the Association
- Soliciting bids and negotiating appropriate contracts
- Authorizing expenditures
What are the accountant’s responsibilities?
The accountant is a vital part of the Association’s professional team. The accounting department of the management company, a staff member or volunteer may take care of the bookkeeping for the Association, but the CPA is needed to conduct an audit at the end of the year. In addition, the accountant:
- Conducts Association financial audits or reviews
- Prepares Association tax returns
- Reviews financial data, answers financial questions and provides financial advice
- Participates in reserve studies and advises on reserve funding strategies
- Assists with budget preparation and long-term financial planning
- Develops accounting policies and procedures and recommends internal controls
- Prepares monthly or quarterly financial statements
- Educates board or committee members on financial matters
- Makes presentations at meetings
- Helps obtain financing
The Association accountant is a valuable partner who works closely with the manager and the Board to ensure assessments are managed and invested wisely and legally.
In conclusion, the HOA board has a responsibility to act with the best interest of the Association in mind when making financial decisions. It also has the resources of the management company and the homeowners association’s accountant at its disposal to advise on these matters.
Want to learn more? Download the free accounting cheat sheet below!
Considering hiring the expertise of an HOA management company? Contact The Hignell Companies for a free evaluation.