Audit Needed -- Cash Basis to Accrual Basis -- Discrepancy in Monthly Dues

Hi all,
My condo association hired a property management company in January 2022. Our fiscal year is October 2021-September 30, 2022.

When the property management company came onboard, it was uncovered that the treasurer had been misusing association funds for personal use. He paid back the thousands of dollars and the board decided not to prosecute.

No in depth audit was completed or has been completed for over a decade even though our bylaws state an audit is required every 5 years.

The monthly dues account for this fiscal year is under budget by @ $29,000. From October-January, it was already under budget by $24,000 which was quite alarming. Ive been questioning the board at each meeting and they brush me off. I sent an email to the property management company and they stated that the shortage is due to changing from a cash basis to accrual basis accounting. They said they didn't have enough information from the year ending 9-30-21 and the first quarter to make the proper adjustment. They said the $24,000 could be from prepayments.

Does this explanation make sense?

We have our annual meeting next week and the board wants residents to vote if they want an audit, a financial review or opt out.

Does this explanation make sense? I've requested to view the last audit, but I don't believe one has ever been done (ie 40 years)

Jennifer,

The change in methodology can cause some issues.
Most people can understand cash basis, as this is what most households use.
Accrual basis is different and can be confusing.

I agree with Max that an audit is due. I'm not sure you need a forensic audit. This should be done by a cpa chosen by the board not by the management company.

See:

Accrual Accounting vs. Cash Basis Accounting: What's the Difference?

GUIDE TO UNDERSTANDING COMMUNITY ASSOCIATION FINANCIAL REPORTS

Tim,

Where did I imply that a CPA should be chosen by a management company. Their problems were caused by a board member or mboard members?

My understanding, maybe I have been wrong, that a management company will help look for a vendor, but ultimately, it is supposed to be the board that chooses them.

A few observations:

-- From October-January, the (former) management company was using the cash basis accounting. When you say "From October-January, [the monthly dues account] was already under budget by $24,000", are you referring to what the (cash basis) balance sheet for the former management company said? If so, I caution the OP against thinking line items from the HOA's cash basis accounting are going to have the same meaning, dollar-wise or literally, as the line items for the HOA's new accrual basis accounting.

-- It appears there is concern that some $20,000+plus has gone missing. If I were in the OP's shoes, and as the new management company suggested, then the first thing I would check is what amount appears on the "Prepaid Assessments" line of the balance sheets. The Prepaid Assessments amount reflects money that, yes, should already be in the HOA's bank account but, per the financial statements for accrual basis accounting, is not yet counted as revenue to the HOA. Accrual basis accounting shifts "Prepaid Assessments" to revenue only after the date of invoicing for the assessments arrives. In other words, accrual basis accounting does not count prepaid assessments as income until the HOA actually "earns" the income. Said "date of earning" being, I presume, the date of invoicing (or the date the assessments come due).

Prior to hiring the property manager, wad your property self managed.

Clarify to whom you are asking. In our association, our Declarant/developer used a cash basis. When we hired an MC, they said we should change to an Accrual Basis as that is what financial/accountant people prefer. We did so.

The short answer is, YES you need a forensic audit.

Hi all,

To answer some of the questions, our association was self-managed prior to a property management company being hired. The property management company stated that they use the accrual basis method.

Our property management company issues the balance sheet each month, but a line item of Prepaid Assessments doesn't exist. Under Assets, there's a line item of Prepaid Operating Expenses and then under Liabilities & Capitals, there's a line item of Prepaids. Is it safe to guess that Prepaids under Liabilities & Capital would be moved to Assets for next month?

For an audit or financial review, our bylaws state a review is required annually with an audit every five years. In reaching out to the association, it appears an audit hasn't been completed since 2014 or never. The records aren't readily available even though the development has been around for 40 years. It hasn't been officially stated, but I'm getting the impression that the extreasurer isn't being cooperative in handing over all the documents.

As I suspected, some of your issues are going to be from acquiring complete financials from the individual(s) who were handling the finances of the community.

You would only have Prepaid Operating Expenses if you had accrual for both Income and Expense. If an association deposited an owners check prior to the date due, it would zero out on the 1st of the month. If an owner prepaid for the whole year, only the amount for the upcoming month would be taken out. The rest stays as a Prepaid Assessment.

I was absolutely, 100%, spot-on, referencing you.

I do not know if the problem here is the accrual basis's Prepaid Assessments end so on. But the Prepaid Assessments line of the Balance statement is one I would look at closely and see how it fits in with the monthly dues account numbers.
Based on your first five posts to this thread, there are no signs that you even saw one of the most obvious candidate explanations here. You had to have it pointed out to you.

I will take my 25 year old accounting course plus a google review plus way superior math skills plus way superior reading comprehension skills over your evident ninth grade (at most) math skills, Math SAT score of 400 or less, and repeatedly demonstrated inability to read, focus and think through any problem, any day of the week and twice on Sunday.