HOA Audits
Is it a state mandated law that an HOA must do an annual audit?
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Is it a state mandated law that an HOA must do an annual audit?
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Karen,
The way the state law is interpreted depends on your governing documents, specifically the CC&Rs or Bylaws. If they use the word “audit,” then the association must conduct an annual audit. If those documents do not use the word “audit then state law requires the association to do one of the three types of financial reviews, either an Audit, Review, or Compilation. These are listed in order of complexity and thoroughness, and conversely, costs. Most associations produce compilations, which are the cheapest and essentially useless parroting of the financial statements.
Dennis
We have an annual compilation since our bylaws don’t require a true audit.. I understand those are to be completed June 30 since our fiscal year is JAN to DEC. If the compilation is completed prior to the 180 day window do I still have to wait for it and ask for it in writing? Our association doesn’t advertise them.
I’m concerned because the President and Treasurer recently said they do not have access to our accounts (bank, loan etc) and they don’t periodically check the accounts either, only our property management company does. The Board says they do not review the checking account. They simply look over the invoices given to them monthly. They say if they need access to the bank accounts they could get it but they don’t currently now. I asked who from the board is an authorized signer on our financial accounts and the answer was just the property management company is.
Also, I just received a records request after waiting months for the board to simply look into the answer. To my dismay an invoice for another HOA community was paid by ours in error. The amount was low but it stood out to me for a year because the cost is fixed and doesn’t change. Not only that but the different community stopped being managed by our same property management company back in 2023. The invoice was dated 2024. Sure, Mistakes happen, the blame was put on the vendor for mislabeling the invoice, but no one on our side noticed that the location address and pool permit number didn’t match our community at all, or that we’d actually already received our true pool permit invoice at the same time. The manager said he’d get our money back.
I’ve tried three times to get on the board but no luck. The newly elected treasurer just reads off the balance sheet summary each month, doesn’t have access to our checking accounts, is being taught how to do the job by the property manager, and Madame President says the CPA at year end will look everything over. The treasurer literally said it’s an easier job than being the Secretary. It pains me to think just what else is going unnoticed. Garbage in garbage out in terms of a “compilation” for sure
PJ,
This is a totally unacceptable situation.
The association’s accounts are the responsibility of the association and the board of directors. they are not the property of the management company. If the management company stole all the money the associations board of directors would be held responsible for the breach of duty to secure access to those accounts. No association should grant access to any management company without also having the account in the association name alone and having at least two current board members as signatory authority over those accounts at all times. It’s fine to have management companies as signators of the accounts but it is the boards responsibility to review both the financial statements from the community manager and the bank every month and make sure that they say the same thing. The entire board and in fact anyone in the community must have access to the bank statements upon demand as a financial record of the association. A compilation would never identify embezzlement as it is a very basic and superficial type of financial review and does not validate all transactions or for the most part compare financial statements from the community manager to the banks statements. Even if it did on an annual basis do you realize how much money could be gone from your accounts in any 12-month period. To depend on that tool to protect the financial assets of the association is totally irresponsible.
While the treasures job is made easier by allowing the management company to actually pay all the bills and deposit all the assessments, their job is to as the adage goes “trust but verify”. The treasurer’s job is to review all financial statement from the management company in detail and compare them to actual transactions recorded by the bank. The treasurer should understand every transaction and provide to the board his/her recommendation for either more questions to the management company or approval. There is no job on the board more important than that of the treasurer.
Your community is in grave danger until they change how they do business. The management company works for the board not the other way around.
Dennis
Thank you, Dennis.
When you write:
“Even if it did on an annual basis do you realize how much money could be gone from your accounts in any 12-month period.”
Do you mean embezzlement could slip past during the 12 month period because the compilation is done once per year after the fact?
Can the board or the association attorney request a TRUE financial audit? If so, what is best approach to do so when dealing with an incompetent property management company?
PJ,
As I mentioned your community is in true financial risk if the board does not review the financial product of the community manager with factual information from the banks. You have no one truly reviewing the product produced by the management firm and are directly violating your fiscal duty to the homeowners by that total lack of oversight. With the knowledge that no one from the association is actually reviewing financial reports than that open a very large door for unethical individuals to falsify the financial report provide to the association and rob you blind. One such management company did just that to a community in Scottsdale to a total of $3 Million over 10 years, all without the knowledge of the board or any scrutiny of the board. They also used financial compilations in their annual reviews, and the embezzlement was never discovered by the CPA.
As for the code of conduct issue I’ve never been a fan of these policies because I’ve found that they are most often used as a means of silencing board members or community members that disagree with the specific factions of the board. The fact is the board has absolutely no authority to remove or censure any duly elected board member. The only way a board member can be removed under Arizona law is by resignation, recall by the members, or by court order. While the board could initiate a petition for a recall they cannot by themselves remove any duly elected board member. The actions of your board directly violated Arizona Law, not that anyone actually cared about any of that.
Any board is free at any time to request that a full audit be done on all association accounts. But only the board can order such an action.
Dennis