Some examples of pretty scary things uncovered during community association audits

Just the mention of the word “audit” can cause cold sweats and shivers up and down your spine. Visions of IRS agents, interrogation rooms, and jail cells dance in our heads. Community association audits seem to have the negative connotation of pointing out what we’re doing wrong, although most of the time they actually confirm the exact opposite – sound financial procedures and good financial health.

It’s fairly common for an audit to identify some opportunities for improved financial procedures and reporting. In rare instances, audits will uncover major financial issues, including theft and fraud. Here are a few examples of some audit horror stories, and how the dirty deeds were identified. Some of the details have been changed to protect the innocent, and the guilty…

Six scary audit tales

  • Nightmare on HOA Street. An unscrupulous property manager (solo practitioner) stole about $300,000 from an HOA’s bank accounts, fabricating financial statements to hide the theft. An audit identified the fact that the bank reconciliations didn’t match the financial statements. This story has a happy ending, in that the HOA’s insurance policy covered most of the loss.
  • The Silence of the Manager. The manager of a senior-living condo association and care facility had quite the revenue stream, including salary, management fees, and a revenue share agreement for building an addition to the facility. This secret was concealed for years, until a new board of directors commissioned an audit. I hear the manager is gone, but he’s still out there – waiting….
  • The Gas Card Massacre. Even board members are not immune to the allure of the dark side. One board member was being reimbursed for fuel expenses supposedly due to association-related travel. While scrutinizing receipts during an audit, we discovered that the charges were from gas stations in other states. Mystery solved.
  • Double Vision. A self-managed association accidentally double-paid a $15,000 pool company invoice. The overpayment went unnoticed for two years, until the review of invoices during an HOA audit uncovered the chilling secret. The pool company admitted its “mistake” and returned the money.
  • The Devil’s Insurance Policy. This was actually something that happened to my own HOA. After developer turnover, no one verified the insurance coverage on the developer’s policy. At renewal, competing bids were much higher than the original policy. Turns out that the policy covered only half the neighborhood homes, and amenities coverage – pool, tennis, courts, clubhouse, etc. – was very limited. That could have been a really scary situation had there ever been a major property or liability claim.
  • Night of the Missing Investment. An association invested some of its money in CDs to generate a little bit of interest. The CDs were on the books, but during an audit we couldn’t find actual proof that they existed. This actually happened twice in the last few years. One time, our bank contact was the hero and battled unseen forces to find the CD. The other time, we had to hunt down a previous board member who was still the main contact for the CD.

Don’t be haunted by a community association audit

Running a community association as a board member or property manager is a difficult task. The best processes and technologies are only as good as the inputs, and people do make mistakes. Conducting an audit – or a more cost-effective agreed-upon procedures engagement – helps proactively identify and resolve financial issues before they get out of hand, like the examples mentioned above.

Here are a few general examples of the types of issues an audit can uncover. Most can be corrected immediately, or with some additional research and planning.

  • Bank balances don’t match the balances on the bank reconciliations
  • Misstated financial information
  • Not enough money allocated to reserves
  • Insufficient insurance coverage
  • Inadequate petty cash and debit card controls

This tale has a happy ending

Since most audits confirm sound financial procedures, they can help build stronger relationships between residents, boards, and property managers. All parties have neutral third-party proof of the community’s good financial health. Knowing about this level of oversight may also help deter those with evil intentions in mind. They’re out there – waiting….

Neal Bach, CPA