BillF7 (California)
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There is unrest in many of the “common interest developments” (CIDs) in California. A substantial and growing portion of California’s population resides in CIDs. We deserve and we need help from our Legislature. It is time that we demand the help we need. Please read on.
Often the problem flows from the difficulties residents have in ascertaining the true facts about the issues that concern them. One solution to a large part of that problem would be for California to mandate standards of independent accounting for CIDs along the lines of its existing mandate to public benefit corporations (charities, for example). This means requiring that boards of directors of CIDs shall have “Audit Committees.”
The “Audit Committee” proposed would be charged with direct responsibility for the appointment, compensation, and oversight of the accounting firm engaged to structure, to oversee, and to audit accounting by employees of the CID’s own funds and of funds it controls on behalf of other entities within the common interest development. This direct management responsibility would be wrested from employed management and entrusted to the Audit Committee of the Board of Directors to assure that the auditing process is not compromised by causing auditors to align their principal alliances with hired management -- as opposed to the full Board of Directors, the Audit Committee, and the resident members or shareholders.
Compliance with Government Code §12586(e), reproduced below, is not mandated at this time for “associations” that are subject to the Davis-Stirling Common Interest Development Act (CID’s), but the statute exists and it is mandated presently in California for public benefit corporations (charities, for example) for the good reason that it is unreasonable to expect any outside contractor that is hired by employed management to criticize work done under the direction and control of those who hire it.
The American Institute of Certified Public Accountants has input on this subject at: http://www.aicpa.org/Audcommctr/guidance_resources/auditors_and_audit_committee/homepage.htm
The problem is the same, whether it is addressed for corporations with listed stocks, for charities, or for Common Interest Developments – to get actually independent accounting, it is essential to isolate the function of hiring accountants from any influence, whatsoever, of hired management.
Because more and more Californians live in CIDs, it seems reasonable for the Legislature to think about whether it will extend the protections it now affords to beneficiaries of charities, museums, etc. to residents of CIDs.
A simple chart of accounts is sufficient for income tax purposes. A more comprehensive chart of accounts will report critical information to the Board of Directors and the residents. Hired management can be expected to resist meaningful disclosures of what they have done, but without this proposed reform, access to truly independent accounting in California common interest developments can be compared to the situation where the fox has control over the information the farmer wants to know about what happened in the henhouse.
California Government Code §12586(e)
Every charitable corporation, unincorporated association, and trustee required to file reports with the Attorney General pursuant to this section that receives or accrues in any fiscal year gross revenue of two million dollars ($2,000,000) or more, exclusive of grants from, and contracts for services with, governmental entities for which the governmental entity requires an accounting of the funds received, shall do the following:
(1) Prepare annual financial statements using generally accepted accounting principles that are audited by an independent certified public accountant in conformity with generally accepted auditing standards. For any nonaudit services performed by the firm conducting the audit, the firm and its individual auditors shall adhere to the standards for auditor independence set forth in the latest revision of the Government Auditing Standards, issued by the Comptroller General of the United States (the Yellow Book). The Attorney General may, by regulation, prescribe standards for auditor independence in the performance of nonaudit services, including standards different from those set forth in the Yellow Book. If a charitable corporation or unincorporated association that is required to prepare an annual financial statement pursuant to this subdivision is under the control of another organization, the controlling organization may prepare a
consolidated financial statement. The audited financial statements shall be available for inspection by the Attorney General and by members of the public no later than nine months after the close of the fiscal year to which the statements relate. A charity shall make its annual audited financial statements available to the public in the same manner that is prescribed for IRS Form 990 by the latest revision of Section 6104(d) of the Internal Revenue Code and
associated regulations.
(2) If it is a corporation, have an audit committee appointed by the board of directors. The audit committee may include persons who are not members of the board of directors, but the member or members of the audit committee shall not include any members of the staff, including the president or chief executive officer and the treasurer or chief financial officer. If the corporation has a finance committee, it must be separate from the audit committee. Members of the finance committee may serve on the audit committee; however, the chairperson of the audit committee may not be a member of the finance committee and members of the finance committee shall constitute less than one-half of the membership of the audit committee. Members of the audit committee shall not receive any compensation from the corporation in excess of the compensation, if any, received by members of the board of directors for service on the board and shall not have a material financial interest in any entity doing business with the corporation. Subject to the supervision of the board of directors, the audit committee shall be responsible for recommending to the board of directors the retention and termination of the independent auditor and may negotiate the independent auditor's compensation, on behalf of the board of directors. The audit committee shall confer with the auditor to satisfy its members that
the financial affairs of the corporation are in order, shall review and determine whether to accept the audit, shall assure that any nonaudit services performed by the auditing firm conform with standards for auditor independence referred to in paragraph (1), and shall approve performance of nonaudit services by the auditing firm.
If the charitable corporation that is required to have an audit committee pursuant to this subdivision is under the control of another corporation, the audit committee may be part of the board of directors of the controlling corporation.
(f) If, independent of the audit requirement set forth in paragraph (1) of subdivision (e), a charitable corporation, unincorporated association, or trustee required to file reports with
the Attorney General pursuant to this section prepares financial statements that are audited by a certified public accountant, the audited financial statements shall be available for inspection by the Attorney General and shall be made available to members of the public in conformity with paragraph (1) of subdivision (e).
(g) The board of directors of a charitable corporation or unincorporated association, or an authorized committee of the board, and the trustee or trustees of a charitable trust shall review and approve the compensation, including benefits, of the president or chief executive officer and the treasurer or chief financial officer to assure that it is just and reasonable. This review and approval shall occur initially upon the hiring of the officer, whenever the term of employment, if any, of the officer is renewed or extended, and whenever the officer's compensation is modified. Separate review and approval shall not be required if a modification of compensation extends to substantially all employees. If a charitable corporation is affiliated with other charitable corporations, the requirements of this section shall be satisfied if review and approval is obtained from the board, or an authorized committee of the board, of the
charitable corporation that makes retention and compensation decisions regarding a particular individual.
The fiduciary duty of “reasonable inquiry,” that is imposed upon Directors by Corporations Code §309(a), reproduced below, encompasses wondering how aggressive purportedly "independent accountants,” who were hired by employed management and who can easily be fired by employed management, would be at asking them penetrating questions or at structuring the chart of accounts so as to reveal possible failed expectancies of loyalty and integrity.
California Corporations Code §309(a)
A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
If you agree, please contact your Assemblymember and ask for help.
Often the problem flows from the difficulties residents have in ascertaining the true facts about the issues that concern them. One solution to a large part of that problem would be for California to mandate standards of independent accounting for CIDs along the lines of its existing mandate to public benefit corporations (charities, for example). This means requiring that boards of directors of CIDs shall have “Audit Committees.”
The “Audit Committee” proposed would be charged with direct responsibility for the appointment, compensation, and oversight of the accounting firm engaged to structure, to oversee, and to audit accounting by employees of the CID’s own funds and of funds it controls on behalf of other entities within the common interest development. This direct management responsibility would be wrested from employed management and entrusted to the Audit Committee of the Board of Directors to assure that the auditing process is not compromised by causing auditors to align their principal alliances with hired management -- as opposed to the full Board of Directors, the Audit Committee, and the resident members or shareholders.
Compliance with Government Code §12586(e), reproduced below, is not mandated at this time for “associations” that are subject to the Davis-Stirling Common Interest Development Act (CID’s), but the statute exists and it is mandated presently in California for public benefit corporations (charities, for example) for the good reason that it is unreasonable to expect any outside contractor that is hired by employed management to criticize work done under the direction and control of those who hire it.
The American Institute of Certified Public Accountants has input on this subject at: http://www.aicpa.org/Audcommctr/guidance_resources/auditors_and_audit_committee/homepage.htm
The problem is the same, whether it is addressed for corporations with listed stocks, for charities, or for Common Interest Developments – to get actually independent accounting, it is essential to isolate the function of hiring accountants from any influence, whatsoever, of hired management.
Because more and more Californians live in CIDs, it seems reasonable for the Legislature to think about whether it will extend the protections it now affords to beneficiaries of charities, museums, etc. to residents of CIDs.
A simple chart of accounts is sufficient for income tax purposes. A more comprehensive chart of accounts will report critical information to the Board of Directors and the residents. Hired management can be expected to resist meaningful disclosures of what they have done, but without this proposed reform, access to truly independent accounting in California common interest developments can be compared to the situation where the fox has control over the information the farmer wants to know about what happened in the henhouse.
California Government Code §12586(e)
Every charitable corporation, unincorporated association, and trustee required to file reports with the Attorney General pursuant to this section that receives or accrues in any fiscal year gross revenue of two million dollars ($2,000,000) or more, exclusive of grants from, and contracts for services with, governmental entities for which the governmental entity requires an accounting of the funds received, shall do the following:
(1) Prepare annual financial statements using generally accepted accounting principles that are audited by an independent certified public accountant in conformity with generally accepted auditing standards. For any nonaudit services performed by the firm conducting the audit, the firm and its individual auditors shall adhere to the standards for auditor independence set forth in the latest revision of the Government Auditing Standards, issued by the Comptroller General of the United States (the Yellow Book). The Attorney General may, by regulation, prescribe standards for auditor independence in the performance of nonaudit services, including standards different from those set forth in the Yellow Book. If a charitable corporation or unincorporated association that is required to prepare an annual financial statement pursuant to this subdivision is under the control of another organization, the controlling organization may prepare a
consolidated financial statement. The audited financial statements shall be available for inspection by the Attorney General and by members of the public no later than nine months after the close of the fiscal year to which the statements relate. A charity shall make its annual audited financial statements available to the public in the same manner that is prescribed for IRS Form 990 by the latest revision of Section 6104(d) of the Internal Revenue Code and
associated regulations.
(2) If it is a corporation, have an audit committee appointed by the board of directors. The audit committee may include persons who are not members of the board of directors, but the member or members of the audit committee shall not include any members of the staff, including the president or chief executive officer and the treasurer or chief financial officer. If the corporation has a finance committee, it must be separate from the audit committee. Members of the finance committee may serve on the audit committee; however, the chairperson of the audit committee may not be a member of the finance committee and members of the finance committee shall constitute less than one-half of the membership of the audit committee. Members of the audit committee shall not receive any compensation from the corporation in excess of the compensation, if any, received by members of the board of directors for service on the board and shall not have a material financial interest in any entity doing business with the corporation. Subject to the supervision of the board of directors, the audit committee shall be responsible for recommending to the board of directors the retention and termination of the independent auditor and may negotiate the independent auditor's compensation, on behalf of the board of directors. The audit committee shall confer with the auditor to satisfy its members that
the financial affairs of the corporation are in order, shall review and determine whether to accept the audit, shall assure that any nonaudit services performed by the auditing firm conform with standards for auditor independence referred to in paragraph (1), and shall approve performance of nonaudit services by the auditing firm.
If the charitable corporation that is required to have an audit committee pursuant to this subdivision is under the control of another corporation, the audit committee may be part of the board of directors of the controlling corporation.
(f) If, independent of the audit requirement set forth in paragraph (1) of subdivision (e), a charitable corporation, unincorporated association, or trustee required to file reports with
the Attorney General pursuant to this section prepares financial statements that are audited by a certified public accountant, the audited financial statements shall be available for inspection by the Attorney General and shall be made available to members of the public in conformity with paragraph (1) of subdivision (e).
(g) The board of directors of a charitable corporation or unincorporated association, or an authorized committee of the board, and the trustee or trustees of a charitable trust shall review and approve the compensation, including benefits, of the president or chief executive officer and the treasurer or chief financial officer to assure that it is just and reasonable. This review and approval shall occur initially upon the hiring of the officer, whenever the term of employment, if any, of the officer is renewed or extended, and whenever the officer's compensation is modified. Separate review and approval shall not be required if a modification of compensation extends to substantially all employees. If a charitable corporation is affiliated with other charitable corporations, the requirements of this section shall be satisfied if review and approval is obtained from the board, or an authorized committee of the board, of the
charitable corporation that makes retention and compensation decisions regarding a particular individual.
The fiduciary duty of “reasonable inquiry,” that is imposed upon Directors by Corporations Code §309(a), reproduced below, encompasses wondering how aggressive purportedly "independent accountants,” who were hired by employed management and who can easily be fired by employed management, would be at asking them penetrating questions or at structuring the chart of accounts so as to reveal possible failed expectancies of loyalty and integrity.
California Corporations Code §309(a)
A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
If you agree, please contact your Assemblymember and ask for help.