Guest Expert: Michael C. Kim, Esq.
Past Due
Q: Our full-time community manager does not find value in her bookkeeping duties. Therefore, bookkeeping is a low priority for her. As a result, our board is more than four months behind in receiving financial statements and month-end reports. While I have tried to explain the importance of accurate and up-to-date information, most board members just shrug their shoulders. Is the board violating any laws as a result of the poor financial practices? Could the board be held liable as a result of her lack of action?—Lake Bluff, Ill.
A: You need to get a new community manager and possibly new board members. The board members have a fiduciary duty to administer the financial affairs of the association with appropriate diligence and prudence. Such due diligence includes timely review and oversight of the financial information related to association operations. For example, board members should review the income and expenses of the association monthly to understand the financial footing of the association and to make appropriate decisions.
If the board is receiving statements, reports and bank reconciliations four months late, the board is dealing with stale information and cannot possibly understand the current financial status of the association. Board members are making current decisions without current information. Such a lag in receiving financial data potentially exposes the association to loss by either negligence or embezzlement. If the community manager "does not find value" in her bookkeeping duties, that manager does not understand her duty to assist the board in its fiscal management responsibilities.
The board has a duty to provide financial statements to owners upon request. How can the board provide an accurate statement if the financial reports are four months behind? A unit owner who is requesting such information for unit refinancing or sale will encounter a major problem. Similarly, some states require associations to provide financial documents for resale transactions.
In addition, a board can neither collect delinquent accounts nor budget properly if it lacks current information. How would a board know if the association's service providers and vendors are being paid on time and in the proper amounts?
The board members have a fiduciary duty. They can delegate the bookkeeping responsibilities to the manager, but if the manager is not performing them properly, the board members are ultimately responsible and liable for any harm or loss caused to the association.
Financial reporting is a top priority for the board, and a situation that breaches the board members' fiduciary duty is unacceptable.
Michael C. Kim is the principal of Michael C. Kim & Associates in Chicago and a member of CAI's College of Community Association Lawyers.
Have a question for our guest experts? Submit it online! Selected questions will be featured in an upcoming issue of Common Ground™.
Or, you may write to "Ask the Experts," Common Ground™, 225 Reinekers Lane, Suite 300, Alexandria, VA 22314. Fax: (703) 224-3123. E-mail: commonground(at)caionline.org. Due to the volume of questions we receive, we regret that we cannot reply to each one individually.