Over the last few years, Bach, James Mansour & Company has conducted numerous audits and other financial engagements for HOAs and community associations. Most of these engagements confirm that the association and property manager are following the right financial procedures, or maybe there are a few minor mistakes that can be easily corrected. Every once in a while, we find a major issue that can impact a community’s future.
Good things come to those who audit
Regardless of the situation, the act of requesting an audit, along with a quick and decisive response to any identified issues, helps build stronger and more trusting relationships between residents, board members, and property management companies. It’s well worth the effort every 1-3 years.
Here are the types of issues we typically uncover during HOA audits and agreed-upon procedures engagements. Note that some of the examples have been adjusted to maintain client confidentiality.
- Bank balances don’t agree with the financials. What starts out as a small issue can fester into a major problem over time. This occurs most often during the reconciliation process, when checks or financial adjustments are documented in the books but not the bank, or vice versa. I’ve seen discrepancies of over $10,000, which can be a very unpleasant surprise if the financials were overstated. The good news here is that these mistakes can normally be fixed quickly and easily.
- Misstated financial information. Similar to the reconciliation issues mentioned above, errors in financial reporting can make it appear as if much more or less money is available for community operations. In one example, the board incorrectly double-counted the ongoing resident assessments required to pay back a loan for facility repairs. This artificially inflated future revenue, which caused the reserve account to be underfunded. Fortunately, both the HOA president and property manager suspected the problem and were instrumental in hiring us.
- Not enough money allocated to reserves. Underfunded (or unfunded) reserve accounts are also a common issue uncovered during audits and other financial engagements. In one community, the reserve study noted that the retention pond needed to be dredged every 10 years. In reality, dredging was a 3-year cycle, meaning that the reserve account was underfunded by nearly $70,000. Make sure your reserve study is current, and plan for the worst case. In our experience, neighborhood maintenance costs seem to escalate when the facilities approach the 15-year mark.
- Insufficient insurance coverage. As part of these financial engagements, a CPA with community association experience will be able to confirm adequate insurance coverage. For example, employee dishonesty coverage is normally built into the basic liability policy, but with limits of only around $25,000. What if an unscrupulous employee, board member, or property manager siphons $250,000 from the bank account? That’s a true story. We recommend that your Directors & Officers (D&O) policy covers the community for an amount equal to at least 1 times the required reserve balance, plus 3 months of revenue.
- Inadequate petty cash and debit card controls. I’m a fan of quickly reimbursing expenses AFTER purchases are made, not handing out cash or debit cards. Both are hard to manage, and money can disappear without tight controls in place. One example that I often use is the board member being reimbursed for fuel expenses – from gas stations in other states. We had to review the individual receipts to figure out what had occurred.
We all make mistakes. Let’s proactively fix them.
It’s not easy to run a community association as a board member or property manager. The best property management systems, including CINC and VMS, are only as good as the inputs. Mistakes will be made. As leaders and managers, you should seek out opportunities to identify and resolve any reporting or operational issues. This proactive approach builds stronger relationships, with all parties comfortable that the right checks and balances are in place. Have a neutral third party review your association’s financial health every 1-3 years.
Neal Bach, CPA