How To Practice HOA Financial Transparency

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HOA financial transparency is an important part of community governance. After all, homeowners will be reluctant to pay their monthly dues if they suspect the board of malpractice or fraud. How can HOAs practice financial transparency? Keep these practices in mind.

How to Practice Financial Transparency in Your HOA

What are some ways you can practice HOA financial transparency? Here are some tips to keep in mind. 

1. Annual Reports

One way to create HOA financial transparency and accountability is by generating a comprehensive annual financial report. By doing this, homeowners can stay informed about the HOA’s financial condition — good or bad. Be sure to include the following in the report:

  • Capital expenditures
  • Replacement reserve statements
  • Income and expense statements
  • Insurance coverage
  • Pending litigation and judgment statuses

2. Regular Financial Reports

Practicing financial transparency in HOA accounting reports can be as simple as generating reports more frequently. Your community can do this by generating reports quarterly or even monthly. 

With regular reports, the homeowners can keep the HOA accountable when they find an irregularity between the reports. For example, a sudden increase in miscellaneous expenses can be a red flag for some homeowners, prompting them to request an audit. 

3. Budget Presentations

HOAs calculate their monthly assessments based on the HOA budget, so residents naturally have a right to know what precisely the HOA is budgeting for. Make sure to present the budget clearly and thoroughly during the annual meeting before implementing it. Outline any proposed projects, reserve allocations, and planned expenses so the homeowners are up-to-date.

4. Record Inspections

State law typically requires HOAs to make records available to homeowners. In Texas, Texas Property Code Section 209.005 enforces this rule. It states that homeowners associations are generally required to make financial records open and readily available for inspection and copying by homeowners. 

Even without this requirement, record inspection is a great way to foster homeowners association financial transparency. Homeowners have a right to know about the HOA’s financial transactions even if they already have access to regular financial reports. It allows them to investigate discrepancies more thoroughly and determine if the HOA has been mismanaging funds. 

5. Open Board Meetings

Homeowners associations should conduct open board meetings that allow homeowners to participate. Doing so will enable them to understand what the board is doing to preserve and improve the community. Remember to provide an agenda for the meeting so homeowners can come prepared.

It’s also a good idea to create a segment where there’s open dialogue between the board and homeowners. Many HOAs host an open forum wherein each homeowner gets a few minutes to raise questions or concerns. They may also host debates so the homeowners can discuss what to do about various issues.

6. Audits and Reviews

If you want to take HOA financial transparency seriously, one of the best ways to do so is to review or audit the community’s finances. Hiring a third-party auditor or CPA can thoroughly examine the HOA’s finances. The CPA can verify the accuracy of reports, determine whether they follow official accounting practices, and find discrepancies.

Consider performing reviews every year and doing an audit once every five years. Doing so will reassure the homeowners that the board isn’t misrepresenting the HOA’s financial data or committing fraud. 

7. Regular Communication

Homeowners associations have a bad habit of keeping things under wraps regarding finances. However, while keeping sensitive information private is advisable, it’s usually a good idea to regularly communicate with the homeowners about the HOA’s financial situation.

Let’s say the HOA is over budget because of an unforeseen disaster and needs to increase its HOA fees to cover the cost of maintenance. The HOA should communicate why the HOA dues are growing and why it’s necessary.

In addition, the HOA should be honest about its blunders. In the previous example, the reserves should have been able to cover the cost of repairs from natural disasters. However, the HOA didn’t have enough reserves because of poor planning. The HOA should communicate that and rectify it by allotting a budget for reserves. 

Now, constant communication may be overwhelming for homeowners. However, overcommunication is always better than lack of communication. It fosters understanding and builds confidence. On the other hand, lack of communication can make homeowners feel less involved and might create feelings of distrust. 

8. Homeowner Involvement

It may not seem apparent initially, but getting the homeowners involved is a great way to practice HOA financial transparency. This gives the homeowners a say in the community’s budget and expenses. Consider sending out requests for volunteers in the community’s finance and budget committees. 

Why Is HOA Financial Transparency Important?

HOA financial transparency is one of the most important aspects of running a community. It creates an honest and open environment within the neighborhood and builds trust with the homeowners. 

With financial transparency, the board demonstrates its commitment to responsible stewardship. It prevents conflicts within the community as residents are reassured of the HOA’s responsible practices. 

Besides building confidence, the board has a fiduciary responsibility to the community. They must act for the residents’ good — and financial transparency is precisely in the community’s best interest. Armed with detailed knowledge of the community’s finances, the residents can make more well-informed decisions during meetings and elections.

Finally, financial transparency prevents mismanagement and fraud. Even if you trust the current board members, the homeowners might have their doubts — especially if HOA dues are high. Moreover, transparent financial practices prevent the next set of board members from attempting theft.

The Key to Trust and Harmony

Finances are often a source of contention within homeowners associations. However, it doesn’t always have to be that way. Associations that practice HOA financial transparency can build trust with their community members. It doesn’t guarantee a lack of economic hardships, but it does allow board members and homeowners to see eye-to-eye and make better decisions.

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