Full Disclosure

New homeowner association clients occasionally ask, “Why do we need to provide the management company the bank statements for Board-controlled accounts, such as CDs or money markets?”  Since the management company doesn’t draw on these monies, the confusion is understandable.

Although not directly handling these funds, the management company is required to provide a full picture on the financial health of the community.  Incomplete disclosures impact several areas:

• Insurance.  The fidelity/crime coverage must be adjusted based on actual dollar amounts held.  Besides not receiving back all funds in the event of a loss, lenders may also refuse to provide home loans if the Association is under-insured in this area.
• Tax Returns.  These could be delayed or require re-filing if the CPA does not have full, timely access to bank statements of all assets.
• Homeowners & Lender Inspection Rights.  Georgia Statutes and the Association’s Bylaws require that financials be made available for review, often within five days of a request.  Providing inaccurate balance sheets (by not listing all funds) exposes the Association to potential litigation which may not be covered by the Directors & Officers (D&O) insurance carrier.
• Speaking of D&O:  Withholding account information may be considered a violation of fiduciary duty, which can be used as an excuse to deny coverage for any D&O claim, not just one directly related to financial disclosures.  It gets expensive litigating with the insurance company afterward, trying to reverse a denial of coverage.

To ensure information is getting forwarded to your management company in a timely fashion, be sure to notify all of your lenders to automatically mail copies of bank statements to the manager.  You want to reduce human error and avoid any appearance of impropriety:  Failing to fully disclose only raises red flags.