David Allen Stockman, former director of the U.S. Office of Management and Budget, may have had the federal budget in mind when he said that, "None of us really understands what's going on with all of these numbers." But he might just as easily have been talking about condominium and townhome budgets, as well.

Fortunately, regardless of the nature of your common interest realty association, (which consists of condominium, homeowner or community associations), a certified accountant can help make sense of its vital financial statistics. Karen Sackstein, whose firm Karen P. Sackstein, CPA, works with 245 CIRAs in New Jersey, says that she tries to present financial information to board and association members in easily-digestible form.

"A lot of [board members] don't have a financial background," Sackstein says, "so we try to put it in simple terms, so they can understand it."

The Magic Triangle

The actual role that an accountant will play in overseeing the financial affairs of a particular association can vary considerably, and depends both on the nature of the property and on the level of service provided by its management company. Jules Frankel, of Wilkin and Guttenplan, P.C.—the largest providers of CPA services to CIRAs in New Jersey, and the second largest in the country—describes the relationship between CIRA, management company, and accountant as a "magic triangle."

"The board has ultimate responsibility for everything that goes on in an association," Frankel says, while the management company often handles both physical property management and financial management, keeping the association's books and preparing its annual budget for the upcoming fiscal year. Frankel says that accountants are typically called in to perform independent audits of the books kept by management companies—or, in the case of self-managed associations, by their bookkeepers—"And at times, to give input into the budget process when asked or required," as when an association lacks sufficient reserve funds to cover a major repair or replacement project. "Our role is not as substantial as the management company's," Frankel says.

The Big Picture

Most HOA accountants don't usually attend monthly board or association meetings, but they do present their clients with drafts of the year-end audits they prepare, walking them through the various documents to make sure board and association members understand them. The firm also publishes a financial survey of its clients every three to four years. Information on fees, reserves, and other financial details are gathered from approximately 400 of the 650 associations that retain Wilkin and Guttenplan's services. The data are then analyzed and presented on an anonymous basis so the firm's clients can get a sense of their financial standing in relation to other communities.

Sackstein adds that the degree to which an accountant may become involved in helping a CIRA manage its finances also "really depends on the level of service the board wants."

"Typically, we go once a year to present financial statements to the unit owners," Sackstein says. In addition to providing an overview of the past year's budget, Sackstein and her staff may also preview upcoming repair and replacement projects, explore various "what if" reserve fund scenarios, and open the floor to questions from board and association members. But Sackstein also works for associations whose members she has yet to meet in person. While smaller associations may ask her to sift through their annual budgets line by line, making recommendations as she goes, others—particularly ones that engage large management companies which agree to provide budget preparation as part of their management agreements—don't need nearly as much help.

Rick Fry, whose company RCP Management manages 65 properties in New Jersey, agrees. RCP works in concert with boards and associations to prepare their annual budgets. The company also offers guidance on reserve fund investments, helping to ensure, for example, that its clients have sufficient liquidity to fund expected replacement and repair projects, and that they understand the options presented to them by their investment brokers. As a result, the role than an accountant would normally play in overseeing the financial health of an RCP client would be limited to the yearly audit process: vetting the association's books and records to make sure they accurately reflect the history of decisions and transactions made over the course of the preceding fiscal year.

But Fry adds that his firm might also recommend that a client hire an accountant under other, special circumstances—for example, if the client had been self-managed for a lengthy period, and had dug itself "into a terrible financial situation." Or when a developer first hands control of a newly built property over to its board or association, and a transition audit is needed to verify that the developer has fulfilled its obligations to the association, and won't leave unit owners holding the bag for any unpaid fees or services. Or, in extremely rare circumstances, if misappropriation of funds by an association or management company is suspected, and a forensic audit must be performed to determine exactly where the money has been going.

Deciding Factors

If the size and expertise of the management company helps determine how much help an association will need from an accountant, the nature of the property helps determine the complexity of its budget. "The budget really depends on the structure," Sackstein says. "It typically costs more money to run a high-rise development, because there are more common elements." Frankel agrees, noting that the costs of maintaining the elevators, hallways, and other amenities and features of a high-rise can far exceed those found in a fee-simple townhouse community. As a result, Sackstein says, an accountant must understand the nature of the property he or she is dealing with.

When it comes to preparing reserve studies, however, even the most expert and well-informed accountant will usually defer to an outside party. According to Frankel, New Jersey accountants rarely perform reserve studies, unless they happen to be for initial public offering statements. Under most circumstances, reserve studies are handled by qualified reserve specialists who have been so designated by the nonprofit Community Associations Institute (CAI) by virtue of their experience and training, and who have agreed to abide by the CAI's national reserve study standards and professional code of ethics. Typically engineers by training, reserve specialists are required to analyze the physical condition of the properties they examine, in addition to the financial status of their reserves. They also help establish reserve funding plans to accommodate anticipated replacement and repair projects. "That's not really our job to do, because we're not engineers," says Sackstein. "We encourage the association to hire professionals to do it."

Assessing Options

Once a reserve specialist has submitted a reserve study, a CPA can help board and association members understand and evaluate the various reserve funding options available to them, from increased fees to special assessments and loan financing, along with the implications each option carries for the overall budget. According to Sackstein, once a major repair or replacement project is underway, an accountant may even present financial status reports to the association to explain how far along they are in the loan process, or what amount of money remains to be raised through assessments.

As a result, finding a good accountant can make a significant difference in a board or association's ability to make sense of its finances, and to successfully prepare for and manage a major replacement or repair project. Similarly, a CIRA's management company may be able to help prepare the organization's annual budget and sort through its investment options. But as Sackstein, Frankel and Fry all point out, while accountants and management companies can offer advice and make recommendations, all financial decisions must ultimately be made by the board or association, which is in turn responsible to the homeowners it represents.

"The buck stops with the board," Frankel says. Though it might want to check with an accountant to see just how much bang that buck actually carries.

Alex Gelfand is a freelance writer living in New York City.