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WilliamS1
(South Carolina)

Posts:58

08/02/2006 4:52 PM
I am on our audit committee - which shall supervise the annual audit of our associations books, approve the budget and income statements which are presented to homeownership at the annual meeting. Today I contacted our CPA to inquire about the audit, and he told me that it is very unusual to do a full audit - very expensive ($10K), rather he suggested to do what is called "Agreed Upon Procedures" Basically he told me that we can request him to look at a number of income and expense transactions to make sure our management company is handling things properly with no errors. I asked if this there was any state laws that governed the extent or frequency of the audit and he said no. Does this sound right and is there any advise? Thanks all.

GeraldT1

Posts:0

08/02/2006 6:45 PM
WilliamS1, Curious, how may units are in your community? Mine is 213 members of an HOA of which consists of 125 townhomes that are also part of a COA. Each association's audit cost $2,500.00. What do your by-laws state regarding auditing and budgets to be provided to unit owners? GeraldT1 NNJ

RogerB
(Colorado)

Posts:3725

08/02/2006 8:12 PM
William, it appear the CPA gave you a very reasonable cost for a full audit. I know of no HOA which does a real audit; only do a limited audit of the financials is done at best. Some do not even do a financial review and still call it an audit. I have previously posted some of the items necessary for a real audit.

Roger Borcherding Official HOATalk.com Sponsor DARCO Property Management (Colorado) (303) 925-0150 *See legal notice below (end of page) or go to www.hoatalk.com/legal

ChristineZ
(Michigan)

Posts:1

08/03/2006 8:21 AM
Hi William, Our association just went through our very first official "audit" and yes, it is expensive and quite time consuming for the comptroller and other staff. Our Bylaws require an audit, but in 30 years, this was the first time it was conducted. We are in the process of amending our Bylaws to remove the term "audit" and replace it with "review", and to give the board the authority to conduct a full audit when deemed necessary. You will need to reference your governing documents to determine what your requirements are. I would not recommend an annual audit, but if it's never been done and you are looking for something specific, and you can justify and afford the cost of doing it, it might not hurt. Good Luck, Chris

WilliamS1
(South Carolina)

Posts:58

08/03/2006 11:25 AM
To answer some of the questions: We are a 106 unit townhome community in Charleston South Carolina. We are to supervise, as representatives of the unit owners (HOA), the "audit", to assure them that the MC is handling things properly. Gerald, is yours a full audit or some type of "review" because we were quoted in the range of $10K? From what I understand, the order of involvement and likely cost is audit, review, AUP (Agreed Upon Procedures). From what I understand, the "Agreed Upon Procedures" is a list of agreed upon procedures, crafted by the CPA (Practiioner) in conjuction with the audit committee (cliant) which will when performed, statistically represents specific activities of the MC's bookkeeping lending credability to the HOA (third party or specific users). The activities are up to us to choose from, set the expectation , and the threshold of pass or fail. No opinion by the CPA is given - only data. My problem with this is 1. We difinetly want an professional opinion as to the condition of the books. 2. I don't feel like I know enough to determin what activeties should be looked at and where a threshold of satisifaction would be. To me that is why you hire the CPA. I sure will appreciate your help on this. William

WilliamS1
(South Carolina)

Posts:58

08/03/2006 11:37 AM
Ok - I just talked with the CPA and have asked him about a "Review". He again has come back and said " many people speak of a review in general terms as in having a review of their books". He asked if I could get a copy of the "Accountant's Report" from your "reviews" so that we can compair the contents of your report to what we are wanting. Please black out names or amounts or ... we just need the reports "template" Please help on this. I will appreciate if you could fax me a copy. Thanks William Fax # 843-571-7022

WilliamS1
(South Carolina)

Posts:58

08/04/2006 2:33 AM
Refer to last post. Can anyone send me the page? Thanks William

GeraldT1

Posts:0

08/04/2006 6:14 AM
WilliamS1, Hate to sound "Clintonian" but....I guess the comprehensivness depends on what the definition of "audit" is. I will need to transpose category but general information from our audits and provide it to you. Hopefully, I can get to it this weekend. As for opinion from a CPA to solve a threshold of satisfaction, or the condition of the books: Financial data is appropriate, opinion to do this or that is not, nor will you find concrete answers to numbers that can be crunched to achieve a multitude of resolutions. General advise, or some forecasting, perhaps. My "audits" have a little bit of general advise or "heads up" statements. But nothing that will expose our CPA to liability. Your level of conciousness will become greater after this experience, but it will not be 100% until you do this excersise a couple years in a row. Live and learn as they say. Basically to be 100%, you'll need to know what you don't know. Impossible. A professional is only going to show you the numbers, perhaps offer some general advise, but leading the horse to the water should not happen. If it does, I'd question the guide. If you can pay for an audit that is comprehensive to include all the items, go for it. You may want to forgo the expense however and go for something in between until next year when your level of conciousness is more broad. A full audit will mean more information to sift through and it sounds like the committee needs some vetting. Solvency is what you are looking for. It may sound extremely basic but your revenues must exceed your expenses. Your revenues must be placed in reserves, operating, deferred maintenance, and working capital accounts that will maintain and replace the elements you are to budget for. You should be looking at your existing budgets. Your annual budget should be in a table that details all year to date expenditures per line item, forecasted amounts for the following year, revenues from maintenance. The forecast column could be based upon cost of living increases, fixed increases in your contracts, miscellaneous items, etc. Best of success! GeraldT1 NNJ

DonN
(Michigan)

Posts:242

08/04/2006 7:55 AM
I believe that all should treat the financial records as a trust obligation. The funds involved are not the board's funds or the audit committee's funds. They are the members' funds. Only an independent audit, conducted according to GAAP, can provide the required report to satisfy this trust (fiduciary) requirement. Read a CPA's report carefully, If it is not an audit, the CPA's report will likely state that the representation of the numbers is by management, meaning the board of directors for POAs. Moreover, in executing a resolution of the board of directors, one of the directors likely signed a letter of engagement so stating. The directors could be personally accountable for the veracity of the numbers, a certification that they may not have the knowledge and capability to perform. What liability the board assumes if it signs a document defining "agreed upon procedures" should be investigated before agreeing to such, in my view. Typically, laws and governing documents state, "Books and records shall be kept in conformance to GAAP." The board has a fiduciary duty to determine exactly what this means. What are the GAAP requirements for POAs? It isn't just the audit or review that must conform; the POA's books and records must conform. For POAs, called common interest realty associations (CIRAs) in the AICPA literature, GAAP is a level two "AICPA Audit and Accounting Guide for Common Interest Realty Associations." This A&A Guide was first issued in 1991. A paper by Marilyn Z. Rutledge, available at > http://www.nysscpa.org/cpajournal/old/12106213.htm < provides a background and summary. This Guide applies to books and records, not just to audits. Search the internet on > "marilyn z. rutledge" < to obtain the qualifications of this author. A good paper on the use of this A&A Guide for CIRAs is provided at Radford University at > http://gnac.radford.edu/commonintfinanrept-content.html <. As stated in the paper, Virginia POA Act requires "books and records of Common-Interest Community Associations (CIRAs) shall be kept in accordance with generally accepted accounting principles (GAAP)". Florida HOA law recognizes the trust obligation regarding financial records and specifies minimum requirements for audits, reviews and compilations for HOAs. I have summarized my research concerning accounting standards at > http://swagman.typepad.com/poa_governance/2005/08/aicpa_audit_and.html#more <. Please provide your comments to help in the improvement of my post. Thanks. Don Nordeen Governance of Property Owners Associations http://swagman.typepad.com/poa_governance/

Don Nordeen Governance of Property Owners Associations

RogerB
(Colorado)

Posts:3725

08/04/2006 9:51 AM
Thanks for all the great information Don.

Roger Borcherding Official HOATalk.com Sponsor DARCO Property Management (Colorado) (303) 925-0150 *See legal notice below (end of page) or go to www.hoatalk.com/legal

GeraldT1

Posts:0

08/04/2006 7:27 PM
DonN, Would you question the veracity of the audits or numbers if the D & O premium jumped significantly from the previous years? Just kidding.....well kind of. The post you provided is invaluable, I appreciate your research and information. My NNJ HOA/COA by-laws and gov. docs. do not state, "Books and records shall be kept in conformance to GAAP". Rather, it states Annual Audit: The Board shall submit the books, records and memoranda of the Association to an annual audit by an independent CPA who shall audit the same and render a report theron in writing to the Board and in summary form to the Owners and such Eligible Mortgage Holders or other persons, firms or corporations as may be entitled to same. While the Developer maintains a majority of the Board, the Developer shall have an annual audit of Association funds prepared by an independent public accountant, a copy of which report shall be delivered to each Owner within ninety (90) days of the expiration of the fiscal year of the Association. The audit shall cover the operating budget and reserve accounts. As you can see, there is nothing written into the language regarding GAAP but the CPA practices must be governed by something. However, if the books submitted by the Boards are garbage, what does that say for the end product? I have not clicked on your links and researched, will do so, but I ask you is there any state law that superceeds so that the HOA/COA's books and records must conform prior to submission to a CPA? GeraldT1 NNJ

DonN
(Michigan)

Posts:242

08/05/2006 9:14 AM
GeraldT1 Thanks for the kind remarks. The large increase in the D & O insurance premium illustrates the magnitude of what is at stake in a POA. The board members are not just your neighbors; they have a significant fiduciary duty. Absent a good law concerning governance of POAs, each POA is on its own. The governing documents are dominated by the developer and/or developer's attorney. Often the rights of individual owners get left out. The statement in your governing documents concerning audits is quite explicit and has good content. While not stated, the implicit requirement for the audit is GAAP. A CPA would appear foolish to argue otherwise. But a board of directors might argue that books and records don't need to be kept in adherence to GAAP. Hopefully, the CPA doing the audit would note the deficiencies with "garbage" bookkeeping. How would members persuade the board to use GAAP if the board claimed it wasn't required in the governing documents? That is where an effective dispute resolution method, guaranteed by law and low cost to members, is needed. Unfortunately, no state has such a method. Good, simple and clear statements in the POA law are appropriate and required to avoid problems within POAs with their volunteer boards.

Don Nordeen Governance of Property Owners Associations

LeeS1

Posts:0

08/06/2006 7:00 PM
We recently learned that our own state statutes for non profits don't even mention an audit (strange). The prevailing view among parliamentarians is that the organization conduct an "Internal Financial Review." Then set the rules for that. Since it is administrative in nature, those rules would go into your association's "Standing Rules."

EdR
(Texas)

Posts:170

08/12/2006 12:11 PM
I do not believe the board should EVER be the ones responsible for the review. The review/audit is of their work and perhaps mismanagement. Although a review might not be needed every year, it is certainly necessary every few years, and I would think a new treasurer would want a review before taking over what might be someone elses' errors. BTW, in the Houston Chronicle a few months ago, an attorney who frequently writes about the rules and laws regarding HOAs (Lip(p)man) (although, I haven't seen anything anywhere to govern enforcement of those rules) gave an example of the wording to be used when requesting an independent audit (i.e., your rights as a homeowner to do so). FYI, and would appreciate your comments on this, Roger, the management company replied to a homeowner who requested an audit because there was an accusation that a former director had misappropriated funds, and the board had just gotten a new treasurer after two years, and the MC told them it could not be done. Shouldn't the board have complied with the request, and who gives the MC the authority to respond in such a way to a homeowner? EdR

RogerB
(Colorado)

Posts:3725

08/12/2006 12:36 PM
Posted By EdR on 08/12/2006 12:11 PM Roger, the management company replied to a homeowner who requested an audit because there was an accusation that a former director had misappropriated funds, and the board had just gotten a new treasurer after two years, and the MC told them it could not be done. Shouldn't the board have complied with the request, and who gives the MC the authority to respond in such a way to a homeowner? EdR Ed, the management company did not handle this request properly. Usually the managing agent does not have the authority; this agent appears to be ignorant or incompetent. They should have relayed the homeowners request to the Board. The Board does not have to comply with a homeowners request. But if I was the new treasurer, I would certainly request a financial review. HOA's should have a financial review done by an independent authority on a periodic basis. I definitely recommend a transitional audit when taking over from the Developer. This would include a real financial audit; not just a bookkeeping review done by a CPA which the HOA calls an audit. Otherwise, based on HOA income compared to the high cost of a thorough audit, I seldom see the justification.

Roger Borcherding Official HOATalk.com Sponsor DARCO Property Management (Colorado) (303) 925-0150 *See legal notice below (end of page) or go to www.hoatalk.com/legal

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