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Subject:  Audit During Transition
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MaureenM1
(PA)

Posts:340


03/19/2013 3:36 PM  
I have started a new post because all others are outdated. Our HOA in the process of transitioning from our developer and have a new board since our developer stepped down November 2010. He is still the Declarant, however, he wants nothing to do with the development and takes no responsibility for deficieces (reported on our engineering report) etc. His attorney has informed our attorney that he considers himself released from the Declarant (although not release paperwork has been signed by the board).

Our attorney has strongly suggested that we have an audit before we release our developer. Some of my board members are opposed because they feel its a waste of time and money. They also feel that the builder/Declarant will try to take monies back that he MAY say he overpaid to the Association.

Our attorney also suggested that the board do a walkthru and give him a list of deficiencies the board would want to negoiate with. The Declarant feels that he has transitioned when he resigned and that is all he feels he needed to do to turn the development over the Association. Our attorney disagrees and has been in contact with the developer's attorney.

Our attorney has advised the board to have the audit done(cost split by HOA and Developer) and said that we could be liable in the future.

Any advice would be appreciated.
DavidW5
(North Carolina)

Posts:565


03/19/2013 4:28 PM  
Maureen,

If there are concerns as to whether the association's books accurately portray its financial condition, then yes, you should have an audit done at transition. This audit should be paid for solely by the association so that the developer has no means to influence its outcome.

Of even more importance is to have a professional engineer conduct a transition audit and provide a written report identifying any deficiencies. With such a report in hand you will be in a strong negotiating position with the developer. If you wind up in court, that report will be extremely valuable.

Our HOA did not have a transition financial audit done on the basis that our regular annual financial audits gave sufficient assurance that the books were in good shape. Our transition engineering audit identified 67 construction defects. This formed the basis for a financial settlement with the developer of nearly $300,000.
LarryB13
(Arizona)

Posts:4099


03/19/2013 4:41 PM  
Posted By MaureenM1 on 03/19/2013 3:36 PM

Our attorney has strongly suggested that we have an audit before we release our developer. Some of my board members are opposed because they feel its a waste of time and money. They also feel that the builder/Declarant will try to take monies back that he MAY say he overpaid to the Association.



How much will the audit cost and what percentage is that of your annual budget.

When I was on my board all I ever heard from the eight others when we needed professional assistance was "It's a waste of time and money." My first guess is that no one on your BOD has any significant experience in running a corporation or managing large amounts of money but they will now make decisions that will effect the value of millions of dollars worth of real estate.

MaureenM1
(PA)

Posts:340


03/19/2013 5:02 PM  
fortunately one of our board members is a CFO of a major corporation and handles budget of millions of dollars. He is the one who is opposed to the financial audit and he said he did his own audit and the association's is in good financial shape. He does admit he doesn't know how much roads would be to replace and feels we are collecting enough in dues to cover them years from now.

We have conducted an engineering study. Our board attorney feels it is "over kill" because it uncovered many deficiencies.
CarolR11


Posts:0


03/19/2013 7:27 PM  
OK, Maureen, there are at least three different topics here:

1. Should you have an audit done? I believe that you should despite Mr. CFO's DIY audit. All homeowners need to know exactly what kind of financial shape you're in.

2. Related to #1 is that it doesn't sound as if you've had a reserves study done. A certified reserves analyst needs to tell you what elements you should be reserving for, e.g., roads, signage or whatever, and how much should be contributed monthly to each. Mr. CEO's speculation that you all are contributing enough. wouldn't satisfy me. To lure buyers by keeping dues low, developers often underestimate the cost to replace certain components and overestimate the estimated life expectancy of some.

3. You absolutely must know what construction defects you have and hopefully the "engineer" you hired is a certified "professional engineer." Since the developer turned it over to you in '10, it sounds like your HOA already is, what?, 4 years old. You may be reaching the statute of limitations on some defects. I'm baffled why your HOA attorney says the engineer's report is "overkill"? If there are defects they should be handled! Was that attorney originally hired by the developer? Or connected with the developer at other projects? Since you already have an engineer's report, your board should bring in the principals of three law firms that specialize in construction defect litigation. They are the ones who should advise you on this topic. You can interview them free.
TimB4
(Virginia)

Posts:16414


03/20/2013 2:28 AM  
Full blown audits are expensive.
However, there are other options that can be used that are not as expensive (a financial review for example). I agree with your attorney that having a third party (CPA preferred) look at the books to tell you if something is wrong or not is a good idea.

We do financial reviews. The last one cost us $2,000 to have three years worth of books looked at.

Here are some links to an article that may be helpful in explaining the difference between services a CPA could provide:

What Is the Difference Between a Compilation, a Review and an Audit? a Comparative Overview

Understanding Compilation, Review and Audit

What comfort level is there from an audit, review or compilation report?


Hope this helps,

Tim
BruceF1
(Connecticut)

Posts:2535


03/20/2013 3:47 AM  
As an FYI, at least in Connecticut, the Common Interest Ownership Act requires that when the association is transitioned from Declarant control to the homeowners, that an independent audit be performed by a CPA and that the expense for the audit be paid for by the Declarant.
TimB4
(Virginia)

Posts:16414


03/20/2013 4:00 AM  
Maureen,

If you haven't found this yet on this site (as it has been in many threads), attached is a check list for transitioning from decalarant to membership control.

Attachment: 132003614671.doc

LarryB13
(Arizona)

Posts:4099


03/20/2013 4:03 AM  
Posted By CarolR11 on 03/19/2013 7:27 PM


3. You absolutely must know what construction defects you have and hopefully the "engineer" you hired is a certified "professional engineer." Since the developer turned it over to you in '10, it sounds like your HOA already is, what?, 4 years old. You may be reaching the statute of limitations on some defects. I'm baffled why your HOA attorney says the engineer's report is "overkill"? If there are defects they should be handled! Was that attorney originally hired by the developer? Or connected with the developer at other projects? Since you already have an engineer's report, your board should bring in the principals of three law firms that specialize in construction defect litigation. They are the ones who should advise you on this topic. You can interview them free.




I agree with Carol. Her point about finding your own lawyer and not the one who was on the developer's payroll is especially important. The developer's lawyer has a built-in conflict-of-interest and you cannot trust him in matters where there may be an issue with the developer.

MaureenM1
(PA)

Posts:340


03/23/2013 3:44 PM  
We have our own lawyer and not one from the Declarant.
CarolR11


Posts:0


03/23/2013 9:28 PM  
Glad your HOA attorney is "yours" and not the declarant's, but often HOA attorneys aren't construction defect "(deficiencies") specialists.

We newbies on the board were very suspicious that there were defects here and that the developer--still on the Board because we have one commercial director (they own the large commercial space) though it was controlled by the owners. The developer had assured previous boards over and over that there were few defects and the ones that did exist, they'd fix. Because he'd been saying that for a few years, and because our then HOA attorney had been hired by the developer, we fired her and hired a new firm. They are the ones who alerted us to the possibilities of statutes of limitations' clocks running out of time. We interviewed them and two other defects firms and hired someone else as our HOA firm was too small.

By then, we were seven years old--that's how long our developer had sweet-talked previous boards! And, indeed, a $1/2 mill defect clock had run out of time--the statues on it had "run," which only was three years. It was not included in our eventual settlement. Luckily, we had enough proceeds to replace this defect, which we're doing right now.

Point: Do not wait on this important matter!
GlenL
(Ohio)

Posts:5491


03/23/2013 9:28 PM  
Depending on what the deficiencies are, don't forget your city/county Zoning Board and Building Dept. If things were not built to code they are your first line to force the builder to bring things up to snuff.

Studies show that 5 out of 4 people have problems with fractions
CarolR11


Posts:0


03/23/2013 10:51 PM  
I agree with Glen, but that's exactly how the developer reassured the early board, and how those boards assured us homeowners. "Well, it passed the inspections." Maybe it's not the case everywhere but in ca. 2001 lotsa construction was going on here and the building inspectors were way overburdened. Do not trust the well-it-passed-inspection argument!

In addition, it's not necessarily whether things are built to code but if the materials are up to industry standards for their unique settings. Here, for instance, the cooling towers on the roofs of our twin towers--that run our individual AC units were installed in a space that caused moist air from them to recirculate back into the drive shaft system, which caused them to corrode prematurely. . . but they met met code. These cooling towers were not stainless steel (but galvanized metal), which they should have been in our marine environment, but they met code . . ., etc.
RogerB
(Colorado)

Posts:5067


03/24/2013 11:30 AM  
Attached is a check list of things for the homeowners to do during a transition from the Developer. I have posted it several times on this board.

Attachment: 1324304519071.doc

MaureenM1
(PA)

Posts:340


03/24/2013 2:25 PM  
thanks to everyone who responded. I really appreciate all your help. Our CCR's state that our association should be getting an annual audit so not getting an audit during transition from the developer is NOT an option.

RogerB
(Colorado)

Posts:5067


03/24/2013 7:40 PM  
Posted By MaureenM1 on 03/24/2013 2:25 PM
thanks to everyone who responded. I really appreciate all your help. Our CCR's state that our association should be getting an annual audit so not getting an audit during transition from the developer is NOT an option.


You can require the Developer to allow a homeowners transitional committee to be involved in the selection the auditors; or if the Developer's Board of Directors refuses you can do another review upon takeover.
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