Transition Audit?

I live in a Virginia HOA that is still under developer control. Transition to homeowner control is forecast to take place by the 4th quarter of this year. Last night I attended a meeting of the Finance Committee. The chairman of the committee reported that she had met with the auditor and discussed a number of issues. She reported that the auditor, when asked when and how a transition audit should be done, stated that he didn't think a transition audit was necessary. The committee (appointed by the developer controlled board) seemed inclined to go along with that recommendation.

What has been the experience of the members of this forum? Did you have a transition audit done? Did it cover all financial transactions since the inception of the HOA? How much did it cost? Was it conducted by the same auditor who did the annual audits?

It appears to me that the first elected board will have to order a transition audit, if the developer controlled board declines to have on done. Opinions? Thanks.

Dave

First, I would not go along with the developer controlled board commissioning a transition audit. The whole point is to get the audit done for the membership independent of the developer controlled board. And the same goes for any and all studies that you decide to do. Do not let the developer board decide or commission the study. That would automatically taint the study.

But it helps also to know what an audit does and doesn't do. I personally think that if you have had audits yearly, then an extra one is a waste. That is because an audit does not look at the issue you want to know. You want to know if the money was spent wisely. An audit doesn't consider this at all. It only looks to see that the money was tracked properly.

What you do want is for someone to open up the books and look through where the money has been spent for the last couple of years.

Another thing you will want is a reserve study if one isn't already in place. Make sure that there is enough money set aside and a plan is underway for the eventual large expense that will come. If the money isn't there, then you should look to the developer to make up the difference.

Mary asid "An audit could be very costly, so why subject the assn to this expense if not warranted?" IMO it is warranted. We recommend a complete audit immediately upon takeover. This should include a physical audit as well as the financial audit. Attached is some info.

Mary, I would still recommend a financial audit unless two conditions can be met.
1) The auditor is, without any doubt, truly independent. Can this be if the Developer pays the bill?
2) The auditor does not rely solely on the management companies financial records. We have found this is often done.

We took over an HOA in late 2007 which had recently completed an audit by an established firm of CPAs and found many errors which carried through from the MC's incorrect financial reports. Our accountant had to do a thorough financial review and make numerous corrections. This experience plus previous similar examples of a CPA simply regurgitating a MC's erroneous financials into impressive looking reports makes me skeptical. Rather than an HOA paying for a very expensive annual financial audit we recommend setting up policies and procedures for ongoing monitoring by the Board and having a yearly or quarterly financial review by the HOA's finance committee. Meanwhile, in Colorado an audit is required when over $250,000 per year.

I live in Michigan and have lived in my development for 10 years. The transitional control date from developer to Homeowners was not properly handled. The Hoa has been in control since 2006 and the actual transition date should have occured in 2003. The developers claim they misinterupted the Master Deed and State Laws. Michigan state law Act 59 specifically states that annual aduit must be performed. Our development has never had an aduit. Two years ago during the annual homeowners meeting, I asked how much was in the reserve fund. I was informed it was at zero. I asked what it was spent on and was told that the developers spent the money on normal expenses. When I pointed out that reserve funds could only be spent on major repairs the board later decide to absolve the developer of any wrong doings and then also voted not to follow state law and do annual audits. I now am on the board and serve as president. The Devolpers also failed to follow the by-laws and state laws concerning board member elections and how many developers may hold seats. The state law allows developers to hold a percentage of board seat in relationship to amount of property it owns until 75% of the lots are sold and then only one developer may hold a seat until less than 10% of lots are owned by the developer. The 75% threshhold was reached last year but the board ignored this law. I was elected to the Board in January, and challenged the board to follow the proper law. The board and developers agreeed that I was correct but the developer now feels that they can nominate a developer in the upcoming election stating that they(developer) can now run as a homeowner since they still own 17 lots. Can anyone tell me if a Developer in Michigan can dictate what hat they want to wear Developer and homeowner as they see fit?

Our hand-over will be 4 years because the developer just changed the CC&Rs to require a 90% majority and with the current economy I doubt we will reach that before the 15 year deadline.

Magda,

Good for you