We conduct a lot of HOA and community association audits and related financial procedures each year. The vast majority uncover nothing more than a few easily corrected mistakes or minor procedural errors – a testament to sound financial oversight by boards and property managers.
Every once in a while, we’ll uncover a serious problem, including theft, fraud, and financial negligence. We want to share these experiences so you can learn from them, improve your community’s financial management, and avoid similar situations in your community.
Here are three tales from recent HOA audits and other financial engagements. Note that certain information has been adjusted to protect confidentiality.
- Poor reserve planning. We were asked to review a community association budget as part of an agreed-upon procedures engagement. Even though the budget included $250,000 for the reserve fund, we determined the actual need was much higher – $1 million now, growing to $2 million in the next two years.
The board suggested raising dues by 10%, but no annual increase could make up for that funding gap. Bank loans were out of the question. No lender would finance with depleted reserves. Ultimately, the board implemented a $20,000 per unit special assessment.
The association had prioritized current operations over major reserve fund repairs and replacements. Our advice? Don’t kick the can down the road. Conduct a reserve study, adequately fund your reserves, and handle major repair/replacement projects as recommended. When more money is needed, raise dues.
- Condo corruption. A new community association board president could not reconcile the books. Collections and other assets didn’t match up to the liability and reserve side of the balance sheet. The financial statements showed accounts receivable from members who claimed to have paid their dues. And, reserves were funded on paper, but the account balance wasn’t growing. The board president noticed some errant checks and finally called us in to review the situation.
This was a rare situation where the outside accountant appeared to be guilty. Our review found that the accountant was writing checks to himself – around $40,000 and spiraling upward. The red flags were the use of a starter checkbook along with some unusual fund transfers. The accountant thought that entries could be deleted from Quickbooks, but there’s an audit trail if you know where to look.
Each month, the property manager and a board member (normally the treasurer) should review the financial statements, the reconciled bank statements, and other reports. When there’s an unexplained discrepancy, bring in an experienced CPA.
- Bad condo building books. This situation was unusual in that we were working with a condo owner suing the community association, rather than the association. The community association claimed that the owner hadn’t paid dues, but the owner had proof of payment. In the discovery process, we were presented with thousands of pages of documentation, in which we found the items that identified the real issue.
After investigation, it was clear that the “books” were in bad shape – so disorganized that the board didn’t really know who had paid. Our client was cleared. While reviewing the financial reporting, we also found some unaccounted-for payments, including to specific board members. Stay tuned for more details as we continue to unravel this mess!
Learn a lesson from the mistakes of others
While we love sharing experiences, and they are sometimes amusing, our goal is to keep you from ending up in one of these situations. Here are a few key takeaways:
- Run the community association like a business. Take your job seriously. You may be liable for negligent acts.
- Have financial expertise on the board. Someone, hopefully the treasurer, should have financial experience.
- Pay close attention to the financials. With a careful monthly review, these issues probably could have been avoided or at least minimized.
- Keep up with property maintenance. Projects become exponentially more expensive over time.
When in doubt, hire a professional
If you have questions or concerns about your community association’s financial reporting, give us a call. Our CPAs, with decades of community association experience, would be happy to answer questions, assess your community’s financial health, or conduct an audit or other financial procedure.
Don’t forget! Community association tax returns are due April 15. Yes, you have to file.