When to Conduct an HOA Audit in Maryland

Ok people.... I need some help here! I serve as a member on the board of directors of my HOA Association and I am very much concerned about the way my management company handles our savings and operating expense accounts. I am not alone in my concern and frustration on my board; 5 out of 6 active board members agree that a financial audit is very much needed. We haven't had one in over 10 years! Keep in mind that the management company (and the previous board members) had remained pretty much dormant for years yet the association continued to collect assessment fees from everyone. As recent as 2 years ago, demographics changed in our neighborhood and more young and diverse families began owning properties in the community (total 38 units). Since then ALL but 1 member has resigned from the board and the management company changed hands and reassigned a new representative to deal with the new board members. That alone struck a nerve and seem 'suspicious'.

We want to have an audit conducted but our management company inists that we use the law firm that is currently under contract with the HOA. Lets keep in mind that this law firm has a personal relationship with the previous mangeer of the management company over our HOA and we are not comfortable using that firm. We would like an independent firm to come in and conduct our audit. Are there any comments out there about this issue? Any recommendations how to proceed?

"management company inists."
The Board needs to be more assertive, the MC works for them, not the other way around. Below is an extract from your "Condominium Law", which I suspect may be the same basic requirement for Maryland Corporations, i.e. independent certified public accountant.

§ 11-116.
(a) The council of unit owners shall keep books and records in accordance with good accounting practices on a consistent basis.

(b) On the request of the unit owners of at least 5 percent of the units, the council of unit owners shall cause an audit of the books and records to be made by an independent certified public accountant, provided an audit shall be made not more than once in any consecutive 12-month period. The cost of the audit shall be a common expense.

I am going to assume that operating expense refers to your operating account, and that savings refers to your Reserve Account. The time and amount really have no relatiuonship. The purpose of the Reserve account is to allocate funds for the future repair or replacement of common elements, such as roofs, roads, etc, etc, without members being assessed a sudden and unexpectedly large special assessment.
In order to ascertain if your current balance is adequate, you will need to have a Reserve study done by a qualified individual.
You will have to give them notice, since the CPA will need their cooperation to get his job done.
"the active board members agree that we already have funds in place" seems like the Board knows that the budget is adequate.

Lynnora, I presume the MC handles your bookkeeping so when your Board determines who will be doing the audit they will need to notify the MC and request the MC coordinate with the auditor.

The audit is an operating expense so it is paid out of the operating account. Normally that is in an approve budget prior to doing the audit and the audit done after closing the books for the current year. You can select the auditor beginning now; include the expense in the 2008 budget; and audit in early 2008 immediately after the 2007 books are closed (presuming your fiscal year is the calendar year).

I can see why you are concerned about financial mismanagement. No financial review for 10 years; not obtaining a sufficient yield on funds; a MC which is not providing guidance on investing funds for optimum yield; etc. And what about your long range reserve plan? How much is being placed in the reserve fund(s) each year? What kind of investments? What rate of return? More questions to look into

As crazy and wild as Florida sometimes seems to be, I must say that our H.O.A. and Condo laws and statutes are really quite well done. One item that is covered quite well is all financial aspects of association operations.
We are required to have financial reporting and audits, depending on the incomes of each association on a yearly basis. No exceptions. When I read about an association that has not had any financial inspections of any type, I cringe. I highly suggest that you check your state statutes on line and find out if indeed your association might be in violation of such.
P.S., Lawers don't count as C.P.A.s

Go for it Lynnora

In fact, (not knowing who is completing your income tax returns) at the time your tax returns are completed, you should also have the CPA firm do an audit. the cost, though sounding a bit expensive to an individual, should only be about $1,000 to $1,500 for an Association of your size to complete both the audit and the Federal and State tax returns.

It's well worth the cost. Better that, than have someone walk away with all the Associations money undetected.

Also, if I read you correctly, the MC also handles your Reserve funds? If so, that should be taken away, and placed in the hands of the board members. Requiring the signatures of at least two board members to withdraw any funds. The statements can still be mailed by the financial institution to the MC to insure the board is also complying with it's fiduciary duties.

We are now beginning to have dicussions on our financial matters and I hope that we (my HOA board members) will get more involved and begin to learn more about the business matters that concern our HOA. I feel that I am doing what I can but I made it known that its going to take everyone to get involved! I came onboard less than 3 years ago and I had no idea what I was getting in to initially however; I feel that I've come to far to back out now and if I have to be the catalyst to help bridge the gap between the information out there and getting it back to our members then I guess this is my calling... for now!

It is my understanding that we have 2 signatures on the reserve account and one of them happens to be from the management company. I know for a fact that I personally inquired about that and I was told that the reason why one signature is from the management company is because only one elected member volunteered to have their name on the account. I am not an elected position holder on the board, simply a member and at first I did not want the responsiblilty (or blame) of having my name on the account when I feel that there may be some discrepancies over the years. I guess no other members want that burden either. I still do not want to be the one associated with the accounts at least until we can have a financial review and ease the concerns that many of us have. I agree that the management company should not have direct access to those accounts but I'm just not sure how to handle that right about now.

Lynnora,
I am familiar with many accounting firms in the MD area that specialize in the HOA industry and would be more than happy to send you a few names if you would like to email me. Depending on your size of the association, you may consider a full audit or a review. In regards to the account, the signature cards required for banks is typically spelled out in the Associations bylaws. Two signatures is prudent and I have seen one signor as the manager and one board member. To prevent any fraud, I would always have at least one board member. You also can be making a lot more on your savings accounts. I can also put you on our rate list.

Here are accountants from the local Maryland chapter of the Community Associations Institute. CAI (Chesapeake Chapter). If you are not a member, I would recommend joining this chapter. The website is

http://www.caimdches.org/outside_frame.asp

Accountants:

DeLeon & Stang, CPAs (301) 948-9825

Goldklang, Cavanaugh & Assoc., PC (703) 391-9003

Pigg, Krahl, Stern & Co. (410) 546-5600

Strauss & Associates, P.A. (410) 363-1011