CALIFORNIA CIVIL CODE SECTION 1365.5
MORE BOARD LIABILITY?
By: Gary A. Porter, CPA
California Civil Code Section 1365.5, which is reproduced below, has imposed strict standards for an association's board of directors in reviewing the financial activity of it's reserve accounts. However, no documentation or enforcement procedures were designated. This places the board of directors of an association in the position of being second-guessed by it's members at a much later date.
CALIFORNIA CIVIL CODE SECTION 1365.5
(a) Unless the governing documents impose more stringent standards, the board of directors of the association shall do all of the following:
(1) Review a current reconciliation of the association'soperating accounts on at least a quarterly basis.
(2) Review a current reconciliation of the association's reserve accounts on at least a quarterly basis.
(3) Review, on at least a quarterly basis, the current year's actual reserve revenue and expenses compared to the current year's budget.
(4) Review the latest account statements prepared by the financial institutions where the association has it's operating and reserve accounts.
(5) Review an income and expense statement for the association's operating and reserve accounts on at least a quarterly basis.
(b) The signatures of at least two persons, who shall be member's of the association's board of directors or, one officer who is not a member of the board of directors and a member of the board of directors, shall be required for withdrawal of monies from the association's reserve accounts.
(c) As used in this section, "reserve accounts" means monies that the association's board of directors has identified, from it's annual budget, for use to defray the future repair or replacement of, or additions to, those major components which the association is obligated to maintain.
(d) This section does not apply to an association that does not have a "common area" as defined in Section 1351.
COMPLIANCE WITH CODE SECTION 1365.5
An association board of directors should perform the following procedures to comply with Civil Code Section 1365.5:
1. Make certain that the signatories to all reserve bank accounts consist of two members of the board of directors or one member of the board of directors and an officer who is not on the board of directors. No other individuals should be signatories to these accounts.
2.Review, at least quarterly, financial statements of the association, including both operating and reserve accounts, which should include current period and year-to-date actual amounts in comparison to budgeted amounts.
3.Obtain copies of, and review, bank statements of the operating and reserve accounts.
4.Review bank reconciliations of the bank account statements (reviewed in step three) to the amounts recorded in the financial statements for both the operating and reserve accounts.
5.Attach copies of the documents indicated above to the minutes in the meeting in which they were reviewed.
6.Document in the minutes that the documents were reviewed by the board of directors so that there is a permanent record of compliance with Civil Code Section 1365.5.
7.Document action to be taken to correct any deviations from budget that have occurred, or to investigate any anomalies noted.
The above procedures clarify and simplify how an association can comply with the civil code. The civil code itself is further evidence of California's method of forcing California community associations to utilize prudent business practices. The above procedures are not anything out of the ordinary, or what would be required by prudent business practices. However, because many board members are not aware that they should, as a prudent business person, be performing such procedures, California has enacted legislation to require it. This requires that many associations should opt for a checklist approach to make sure that they are complying with various state regulations to avoid liability to the board of directors or the association for non-compliance.
Gary Porter, CPA began his accounting career with the national CPA firm Touche Ross in 1971. He is licensed by the California Board of Accountancy and the Nevada Board of Accountancy. Mr. Porter has restricted his practice to work only with Common Interest Realty Associations (CIRAs), including homeowners associations, condominium associations, property owners associations, timeshare associations, fractional associations, condo-hotels, commercial associations, and other associations.
Gary Porter is the creator and coauthor of Practitioners Publishing Company (PPC) Guide to Homeowners Associations and other Common Interest Realty Associations, and Homeowners Association Tax Library. Mr. Porter served as Editor of CAI’s Ledger Quarterly from 1989 through 2004 and is the author of more than 200 articles. In addition, he has had articles published in The Practical Accountant, Common Ground and numerous CAI Chapter newsletters. He has been quoted or published in The Wall Street Journal, Money Magazine, Kiplinger’s Personal Finance, and many major newspapers.
Mr. Porter is a member of Community Associations Institute (CAI), American Resort Development Associations (ARDA), and California Association of Community Managers (CACM). Mr. Porter served as national president of CAI in 1998 – 1999.