1) Financial Records Review****** IMPORTANT INFORMATION REGARDING THE REVIEW OF THE ASSOCIATION'S FINANCIAL RECORDS ******
HLA has been very fortunate to have the financial records of the organization reviewed by Tracy Noga, a HLA member who is an Associate Professor in the Accountancy Department at Bentley University. She holds a Ph.D and is a CPA.
Her letter to the Board states in part:
"Board Members:
At your request, I recently reviewed the financial records for Hidden Lake Association (HLA) for the Fiscal years ending 2014-16. This review was merely for informational purposes and does not meet the standards for a compilation, review or audit under Generally Accepted Auditing Standards. As a result of my inquiry it is my opinion that the financial records fairly represent, within the standard of materiality, the activities of the association for the three most recent complete fiscal years. I did not observe any signs of fraud or impropriety."
Note that the term used in Tracy's letter "fairly represent" is defined in the Dictionary of Accounting Terms in part as follows: term used in the auditor’s report where there exists adequate disclosure, reasonable detail, and absence of bias. Adequate disclosure requires all management information necessary to interpret financial statements. Reasonable detail requires that certain particulars of broad statement classifications be presented.... Absence of bias means that the auditor is independent and impartial and does not favor one party over another.
Also note that in her letter she suggested several changes in procedures and improvedreporting. The Board intends to review and discuss each of her recommendations in detail and take any necessary actions.
===========================================================================================================================
Entire Financial Records Review Letter
Tracy J. Noga, Ph.D., CPA
August 6, 2016
Board of Directors
Hidden Lake Association
Stoddard, NH 03464
Board Members:
At your request, I recently reviewed the financial records for Hidden Lake Association (HLA) for the Fiscal years ending 2014-16. This review was merely for informational purposes and does not meet the standards for a compilation, review or audit under Generally Accepted Auditing Standards. As a result of my inquiry it is my opinion that the financial records fairly represent, within the standard of materiality, the activities of the association for the three most recent complete fiscal years. I did not observe any signs of fraud or impropriety. However, during my review I noted several areas that would benefit from changes in procedures or improved reporting. Each item is explained below.
Accounting Method and Activity Statement:
The purpose of accounting is to provide useful and relevant information to the users of the financial information and the stakeholders of the organization. In order to rely on the information, consistent accounting principles should be applied. These recommendations are meant to improve the consistency, and as a result comparability, of financial information from period to period. Additionally, these improvements will assist in responding to any Internal Revenue Service (IRS) inquires that may arise.
======================================================================================================================================
HLA Board of Directors' Responses to the Financial Records Review Letter's Recommendations
HIDDEN LAKE ASSOCIATION BOARD NOTES
December 2016
Notes on Tracy Noga’s Recommendations
Discussion was held at the Board’s December 8, 2016 meeting.
1. ACCOUNTING METHOD AND ACTIVITY STATEMENT
The accrual method of accounting is difficult and we have to be realistic about how
much time we have as volunteers, and how complicated we make our jobs. Assessments paid in April 2016 (for FY 2016-17) went into a separate account called “Prepaid Assessments”. Counting the money as part of the FY 2015/16 budget would have confused the numbers we were working with for the current year. The “Prepaid Assessment” account is open only until the start of the next fiscal year – the budget for which they are income. Generally, past due accounts are a wash-up year to year and overage is put into our Rainy Day Fund. On April 30 of each year we maintain a $0.00
balance. Our members are always concerned with the question “Is the assessment going up?” Our method most clearly explains to us how much money we have and where it goes.
2. Legal Reimbursement
We inherited the method we now use from the previous treasurer. It is very difficult to track every case and determine how much we are billed per case.
MOTION Bill/Jack “We move that the HLA Board adopt the recommendation made by Tracy Noga in regards to legal reimbursements’ accounting method.” CARRIED.
INTERNAL CONTROLS FOR CASH
1. Important definition here: CASH means ANY monies used, not just green money.
Jack researched LOCK BOXES for us. Savings Bank of Walpole does not use lock box services. Here is an example from Bank of America. First they would require we move all our banking to them.
Fees for a lock box account:
Monthly charge = $563.71
Lock Box charge = $175 mo.
Web access to check lock box images = $175 mo.
Charge per lock box check processed = $0.90
Charge per lockbox check image = $0.35
We agree that members should pay their assessment by check or money order.
We feel strongly that copying is important.
It appears that a lock box system is prohibitively expensive for a small organization like ours.
NOTE: Our assessments are viewed as a tax, but are NOT allowed for a tax deduction.
#2 As part of our rewriting and updating our By-laws, the Board will look into Tracy Noga’s recommendation that HLA checks be signed by more than one Board member.
This would be included in our “How we operate” section. The amounts should be stipulated and will probably have to be raised over the ensuing years.
#3 A change in the standard reporting by the Treasurer to include a cash
reconciliation will be looked into.
Jack will send us figures and get an idea of how much more time would be involved.
Right now Jack is using Quick Books and there is not a check register. Jack invented his own separately.
#4 Debit Cards
We currently have a system in place which has safe guards we fine comfortable and convenient for us. No one can use their debit card without the Treasurer’s knowledge
and approval. (Board consensus here.)
MOTION Dian/Donna: “We move that we amend our system of Debit card use to
include the authorization of the order and verification of products’ delivery by a different person (HLA member)”. This will be for large orders, amount to be discussed and specified.” Motion carried.
This is as far as the Board got. The section on “Miscellaneous” remains to be discussed
at a future date.
Dian Mathews, Recording Secretary
HIDDEN LAKE ASSOCIATION BOARD NOTES
March 9, 2017
Notes on Tracy Noga’s Recommendations (continued)
MISCELLANEOUS
1. HLA’s standard procedure for documents has been: the Treasurer keeps a copy of a contract so that he/she has a payment schedule on hand. The Secretary keeps a copy of a contract to file with HLA documents in the current notebook, by year.
Every disbursement has a receipt/record which is kept on file by the Treasurer.
2. The current version of Quick Books used by the Treasurer is about to become obsolete. (Intuit products expire every three years.) We’re not sure if there will be a user friendly version coming up. The online version costs $360 per year. We as a Board feel that the online version is too expensive given that we do fifteen transactions per month. (In 2016 we did 400 transactions, half of which were simple deposits.) We will wait and see what method the new Treasurer is comfortable using.
The Board feels that we don’t need more eyes on transactions. We are volunteers and don’t have time to look over the Treasurer’s shoulder in addition to our own HLA responsibilities.
3. Currently, at every Board meeting, the Treasurer presents the Board with an update of every transaction which occurred since the Board last met. We are given updated amounts for all accounts, including Accounts Receivable.
The Board went back to #4 Debit Cards
The MOTION made by Dian/Donna was amended by Jack/Bill.
“We move that we amend our system of Debit card use to include the authorization of the order
and verification of products’ delivery by a different person (HLA member). This will be for large
orders. Large orders to be defined as orders of $1,000 or more.” Motion carried.
Tracy Noga’s Recommendations and the Board’s Response will be posted on the HLA website.
Dian Mathews, Recording Secretary
HLA has been very fortunate to have the financial records of the organization reviewed by Tracy Noga, a HLA member who is an Associate Professor in the Accountancy Department at Bentley University. She holds a Ph.D and is a CPA.
Her letter to the Board states in part:
"Board Members:
At your request, I recently reviewed the financial records for Hidden Lake Association (HLA) for the Fiscal years ending 2014-16. This review was merely for informational purposes and does not meet the standards for a compilation, review or audit under Generally Accepted Auditing Standards. As a result of my inquiry it is my opinion that the financial records fairly represent, within the standard of materiality, the activities of the association for the three most recent complete fiscal years. I did not observe any signs of fraud or impropriety."
Note that the term used in Tracy's letter "fairly represent" is defined in the Dictionary of Accounting Terms in part as follows: term used in the auditor’s report where there exists adequate disclosure, reasonable detail, and absence of bias. Adequate disclosure requires all management information necessary to interpret financial statements. Reasonable detail requires that certain particulars of broad statement classifications be presented.... Absence of bias means that the auditor is independent and impartial and does not favor one party over another.
Also note that in her letter she suggested several changes in procedures and improvedreporting. The Board intends to review and discuss each of her recommendations in detail and take any necessary actions.
===========================================================================================================================
Entire Financial Records Review Letter
Tracy J. Noga, Ph.D., CPA
August 6, 2016
Board of Directors
Hidden Lake Association
Stoddard, NH 03464
Board Members:
At your request, I recently reviewed the financial records for Hidden Lake Association (HLA) for the Fiscal years ending 2014-16. This review was merely for informational purposes and does not meet the standards for a compilation, review or audit under Generally Accepted Auditing Standards. As a result of my inquiry it is my opinion that the financial records fairly represent, within the standard of materiality, the activities of the association for the three most recent complete fiscal years. I did not observe any signs of fraud or impropriety. However, during my review I noted several areas that would benefit from changes in procedures or improved reporting. Each item is explained below.
Accounting Method and Activity Statement:
The purpose of accounting is to provide useful and relevant information to the users of the financial information and the stakeholders of the organization. In order to rely on the information, consistent accounting principles should be applied. These recommendations are meant to improve the consistency, and as a result comparability, of financial information from period to period. Additionally, these improvements will assist in responding to any Internal Revenue Service (IRS) inquires that may arise.
- The most concerning issue is the lack of consistency in accounting method within and between the activity statements and tax returns. The association is strictly a cash accounting method organization for tax reporting purposes and this should also be maintained for internal reporting purposes. This cash method accounting principle needs to be applied to both revenue and expenditures. For example, if cash dues are collected within a certain accounting period they should be reported as revenue in that period, regardless of which fiscal year the dues apply to. In order for the users of the financial statements to understand the revenue streams it is important to report the dues collections by fiscal year on the activity statement. To continue the example, dues for the 2017 fiscal year collected during April of 2016 will be reported as income in 2016 but broken out on the activities statement to separate it from 2016 fiscal year dues. Additionally, dues collected from previous fiscal years (past due accounts) should also be broken out separately. Currently, it may appear dues receipts meet budget for a particular fiscal year but if the
account reflects income not from that fiscal year it will lead to inaccurate assumptions on the status of dues collections.
If the board prefers to use the accrual method of accounting for their internal reporting purposes (reporting dues revenue only in the fiscal year it applies to) then you need to report all revenue and expenses on the accrual basis. Additionally, the Treasurer would need to maintain a work paper that ties the activities statement given to the membership to the tax return that is filed so anyone (but in particular an IRS agent) would be able to easily reconcile the difference in reporting. - Reporting would also be improved by applying a consistent method of reporting legal fee reimbursements. Either they should consistently be reported as a separate revenue category (not included with dues collection) or netted against total legal expenses. Either is an acceptable method as long as it is applied consistently so the board could effectively use the information.
Internal Controls for Cash:
The board’s main purpose is stewardship of association assets. The asset most at risk is cash. The board should consistently prioritize safe guarding cash whenever possible. This is often difficult in a small organization where it is not always possible to separate duties of individuals. However, these suggestions should improve the current controls over cash.
- The most urgent cash control is a separation of duties between the person that collects/deposits cash and checks from the person that records the receipt in the accounting records. This is the simplest and most necessary form of cash control and should be implemented in every organization. There are several ways this could be accomplished; I will explain two possibilities. Most banks will host a lock box for a reasonable fee. HLA members will mail payments to the bank which will automatically deposit checks for an organization and then provide a list of receipts for the bookkeeper to record. This will also alleviate the inordinate burden on the Treasurer to repeatedly travel to the bank on a daily basis during peak times. If there is a reluctance to pay the bank for this service, alternatively, another board member should collect and deposit checks then provide a list of payments to the Treasurer for recording.
At the very least, cash receipts need to have procedures for a separation of duties. Currently, the Treasurer collects cash, photocopies cash, and deposits it. A receipt is issued to the payer if requested. First, a receipt should be issued on every occasion whether it is requested or not. This is for the benefit of HLA, not the member. Photocopying cash to be deposited provides no value. The cash should be collected by a board member other than the Treasurer (perhaps the secretary). The secretary, for instance, will record the receipt and deposit the cash. The Treasurer would then use the cash receipts to make the accounting entries. Please consider requiring (or at least strongly encouraging) all HLA members to pay all fees, dues, boat slip payments, etc. by check or money order. - Checking signing authority should be detailed in the bylaws. At a minimum, it should be passed by a motion of the board of directors. In addition, checks over a certain amount, as determined by the board, should require two signatures.
- The standard Treasurer’s report should reconcile cash in addition to reporting income and disbursements. This is accomplished simply by taking net receipts (disbursements) for the period and adding (subtracting) with beginning of the period cash. This should equal end of period cash. Both beginning and ending cash should tie directly to bank statements. This should also exactly tie to the cash balance reported on the tax return.
- Issuing debit cards is very risky. Although there is a need, distribution of these cards should be done sparingly and with much deliberation. Although there is a procedure in place to get prior authorization of spending by the Treasurer, I see no evidence of how it is determined if the purchase is necessary. For instance, each purchase of pool chemical was authorized in advance by the Treasurer but by my estimate there should be about three years’ worth of pool chemicals stored up as the association cannot possibly be using all those chemicals. The purchases should be pre-authorized by the Treasurer as well as the board member in charge of that area (in this example, recreation). This also ensures the goods are not merely being returned or sold second hand for someone’s personal profit. Please note, I am not insinuating that this is currently happening. However, putting proper procedures in place will help to ensure this does not happen in the future as board members and employees turn over.
Miscellaneous:
I have a few additional recommendations to help ensure the completeness, accuracy, accessibility and usefulness of information.
- The Treasurer should maintain records that completely support all activity reported to the board and on the tax return. For instance, although the board member in charge of roads would need a copy of the contract, the Treasurer should keep the original, including the invoice used for payment. The additional board member(s) should receive a photocopy. This will ensure the completeness of the records for future individuals serving as Treasurer as well as addressing inquiries by the IRS. As a result, every account balance could easily be tied to the hard copy of receipts as the IRS requires both proof of payment as well as the originating invoice. Simply put, every disbursement should have a paper trail included in the files.
- The Treasurer currently uses Quick Books for bookkeeping that is installed on a laptop. I suggest switching to the online version. This provides serval benefits. First, the Treasurer would be able to access the information from anywhere. Second, the software conveniently and securely interacts with the bank online to ensure that cash balances are consistently and accurately reconciled. Finally, the online version allows several people to be registered as “authorized viewers” of the information. This allows board members to view information quickly and easily without disturbing the Treasurer to keep track of
activity in their area. For instance, the board director in charge of recreation could easily check on a tally of their expenses so they could make decisions about their future or impending purchases. Finally, although only the Treasurer will have the ability to record entries, it is always helpful to have more than one set eyes on expense totals to make sure budgets are met and there is not an inadvertent mistake when categorizing expenses (e.g.
recorded in the wrong account). - As dues collection is one of the most pressing issues, the board might consider having the Treasurer provide regular reports to the board (for their internal discussion) on the dues status of HLA members. This should assist the board in understanding the number of lots where collection should be expected, evaluating the revenue reported on the activities statement in terms of current dues receipt and past dues receipts and understanding the amount of legal fees to be expected.
I would be happy to meet with the board, as my schedule allows, to discuss any of these items in further details. Additionally, I would be happy to address any questions via email or phone.
Respectfully submitted,
Tracy J. Noga
======================================================================================================================================
HLA Board of Directors' Responses to the Financial Records Review Letter's Recommendations
HIDDEN LAKE ASSOCIATION BOARD NOTES
December 2016
Notes on Tracy Noga’s Recommendations
Discussion was held at the Board’s December 8, 2016 meeting.
1. ACCOUNTING METHOD AND ACTIVITY STATEMENT
The accrual method of accounting is difficult and we have to be realistic about how
much time we have as volunteers, and how complicated we make our jobs. Assessments paid in April 2016 (for FY 2016-17) went into a separate account called “Prepaid Assessments”. Counting the money as part of the FY 2015/16 budget would have confused the numbers we were working with for the current year. The “Prepaid Assessment” account is open only until the start of the next fiscal year – the budget for which they are income. Generally, past due accounts are a wash-up year to year and overage is put into our Rainy Day Fund. On April 30 of each year we maintain a $0.00
balance. Our members are always concerned with the question “Is the assessment going up?” Our method most clearly explains to us how much money we have and where it goes.
2. Legal Reimbursement
We inherited the method we now use from the previous treasurer. It is very difficult to track every case and determine how much we are billed per case.
MOTION Bill/Jack “We move that the HLA Board adopt the recommendation made by Tracy Noga in regards to legal reimbursements’ accounting method.” CARRIED.
INTERNAL CONTROLS FOR CASH
1. Important definition here: CASH means ANY monies used, not just green money.
Jack researched LOCK BOXES for us. Savings Bank of Walpole does not use lock box services. Here is an example from Bank of America. First they would require we move all our banking to them.
Fees for a lock box account:
Monthly charge = $563.71
Lock Box charge = $175 mo.
Web access to check lock box images = $175 mo.
Charge per lock box check processed = $0.90
Charge per lockbox check image = $0.35
We agree that members should pay their assessment by check or money order.
We feel strongly that copying is important.
It appears that a lock box system is prohibitively expensive for a small organization like ours.
NOTE: Our assessments are viewed as a tax, but are NOT allowed for a tax deduction.
#2 As part of our rewriting and updating our By-laws, the Board will look into Tracy Noga’s recommendation that HLA checks be signed by more than one Board member.
This would be included in our “How we operate” section. The amounts should be stipulated and will probably have to be raised over the ensuing years.
#3 A change in the standard reporting by the Treasurer to include a cash
reconciliation will be looked into.
Jack will send us figures and get an idea of how much more time would be involved.
Right now Jack is using Quick Books and there is not a check register. Jack invented his own separately.
#4 Debit Cards
We currently have a system in place which has safe guards we fine comfortable and convenient for us. No one can use their debit card without the Treasurer’s knowledge
and approval. (Board consensus here.)
MOTION Dian/Donna: “We move that we amend our system of Debit card use to
include the authorization of the order and verification of products’ delivery by a different person (HLA member)”. This will be for large orders, amount to be discussed and specified.” Motion carried.
This is as far as the Board got. The section on “Miscellaneous” remains to be discussed
at a future date.
Dian Mathews, Recording Secretary
HIDDEN LAKE ASSOCIATION BOARD NOTES
March 9, 2017
Notes on Tracy Noga’s Recommendations (continued)
MISCELLANEOUS
1. HLA’s standard procedure for documents has been: the Treasurer keeps a copy of a contract so that he/she has a payment schedule on hand. The Secretary keeps a copy of a contract to file with HLA documents in the current notebook, by year.
Every disbursement has a receipt/record which is kept on file by the Treasurer.
2. The current version of Quick Books used by the Treasurer is about to become obsolete. (Intuit products expire every three years.) We’re not sure if there will be a user friendly version coming up. The online version costs $360 per year. We as a Board feel that the online version is too expensive given that we do fifteen transactions per month. (In 2016 we did 400 transactions, half of which were simple deposits.) We will wait and see what method the new Treasurer is comfortable using.
The Board feels that we don’t need more eyes on transactions. We are volunteers and don’t have time to look over the Treasurer’s shoulder in addition to our own HLA responsibilities.
3. Currently, at every Board meeting, the Treasurer presents the Board with an update of every transaction which occurred since the Board last met. We are given updated amounts for all accounts, including Accounts Receivable.
The Board went back to #4 Debit Cards
The MOTION made by Dian/Donna was amended by Jack/Bill.
“We move that we amend our system of Debit card use to include the authorization of the order
and verification of products’ delivery by a different person (HLA member). This will be for large
orders. Large orders to be defined as orders of $1,000 or more.” Motion carried.
Tracy Noga’s Recommendations and the Board’s Response will be posted on the HLA website.
Dian Mathews, Recording Secretary