Halloween is around the corner and along with scary clowns and vampires come HOA Audit Tales of Terror from your BJM team. The word “audit” alone can be scary and bring up fears of long hunts for missing receipts or accusations about erroneous accounting treatment. In reality, most audits confirm sound fiscal procedures and financial statements within material guidelines. Only the occasional HOA audit turns up fraud or theft. When they do, it makes for a good tale!
Here are some real stories of HOA audit terror. Note, some of the details have been changed to protect the innocent – and sometimes, guilty.
The Missing Gift Cards
In exchange for exclusive rights to provide cable service in the community, a local cable company gave the HOA a gift card each time a homeowner signed on. Instead of giving the cards to the property manager, the cable representative handed them to the same board member. When the promotion was over, the HOA had earned a significant amount in rewards but the cards were nowhere to be found.
Ultimately, an agreed-upon procedure engagement (AUP) uncovered the sticky-fingered board member. The accountants asked for proof of use on HOA expenses, but the invoices, receipts, and other expense documents didn’t match up. One receipt was a duplicate of a restaurant receipt already reimbursed through the property management company and another a Kroger receipt for cranberry sauce purchased two days before Thanksgiving. The HOA is pursuing restitution from the now-former board member.
Case of the Absentminded PM
This HOA was so behind on utility payments it was about to have its water turned off due to a $90,000 unpaid bill. The bank statement showed a balance of over $600,000 but nothing had been paid and no one knew why. Board members never received a monthly financial package.
During a review of accounts payable, auditors found countless unpaid bills and unrecorded liabilities. A bank confirmation procedure revealed that money shown in the books to have been transferred from the operating account to reserves was never physically moved. Yet, the PM and management company were consistently paid on time.
The auditors are still awaiting answers from the management company, but reviews thus far point to an unskilled or absentminded PM being at fault. It’s critical for HOAs to hire an experienced PM, as well as to have a board member review the monthly financial package and confirm that invoices have been paid.
Turnover audits or AUPs are a good idea when a developer is turning common property over to the HOA. Developers might not use regular accounting procedures. An audit or AUP can assess the prior accounting and set the HOA up on good financial footing.
One such recent AUP revealed countless questionable developer transactions. In the books being turned over to the HOA, the dastardly developer had recorded a $1 million loan due back to him for money he claimed to have spent on amenities. In fact, those expenses were uncollectible and the developer had to ultimately write them off.
The auditors also found that the developer had taken $300,000 out of the reserve account to cover what he called excess development costs. The cash in the reserves bank account had come from homeowner initiation fees and the board had to sue the developer to retrieve the funds. Further investigation also revealed the developer’s management company had contracted with several vendors linked to the developer. Needless to say, the board is seeking bids from other vendors.
How to Escape Becoming an Audit Tale of Terror
The best way to avoid becoming an audit tale and showing up on our annual terror list is to make sure your board receives monthly financials and at least one board member reviews these. The financial statements should be prepared using generally accepted accounting principles. In both the operating budget and reserve account, revenues should match with expenses.
The auditor’s job is to test systems and provide a detailed report of the work performed as well as of any issues or errors uncovered. The auditor must be independent from the board; there should not be even the slightest appearance of a conflict of interest. When choosing an auditor, remember just as in other areas of business the low-cost leader isn’t always the best alternative.
Neal Bach, CPA