Independent accountant

Hi, I just recently became a new HOA board director in CA and gradually found something bugging me in the finance area. I by chance read a long thread (CPA, though it ended a year ago) and thought might worth posting my question here in hope getting a helpful answer. According to CA state law, my association is required to have an "independent accountant" to prepare the financial statements due to the fact that our annual income exceeds an amount specified in the law. Then I found out that HOA's financial reports are actually prepared by the management co (done by its accounting staff and charge $1950/yr for non-GAAP reports, in my opinion). But I read someone here stated: "there is a natural conflict of interest between management and the stockholders (members, as pertains to HOAs)" If so, is the MC who prepares HOA's financials an "independent accountant" which is required by the state law for this matter? If no, I guess we are not complying with state law and need to correct this. What are the options our HOA have now?

All responses and helps are appreciated.

Note: the original question was posted in the thread "CPA" and then the first replier (Robert) suggested that I post it in a new thread. Below is the copy of Robert's reply:

KW3,
Although you waded through this thread and that's commendable, please cut and pasts your post on a new thread. Be much better for all concerned.
A quick answer, if your post is completely accurate (and I don't imply you aren't), the answer is you do indeed have to fix this and do it the right way, and you know how to do that.
Problem is, most times, this kind of action, which is questioning the MC will draw some fire from someone. Just keep in mind however this turns out, the MC works for the Board the owners have nothing to do about who the Board hires. I suspect the very fact the MC does not follow this restriction is a sign they will not accept this lightly. For the most part I'm guessing based on reading a lot of posts and considerable experience living in HOA's of all kinds. I would first check and see what kind of a contract the Board has signed with the MC, there could be a surprise or two there.
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KW3,

Copied below is the Davis-Stirling statute to which you refer. What this law means is that the assn must have a certified CPA conduct a review (in lieu of an audit) any year that the gross income exceeds $75,000. This law has nothing to do with who prepares the financial statements. It's not uncommon for a mgmt co to employ accountants to perform the accounting and prepare the financial statements of the assns which they contract with. As some people may think, this is not something the managing agent does although the managing agent should be able to read and understand the financials.

In answer to your question: "does an independent accountant have to be a CPA?" The law requires a ". . .licensee of the CA Board of Accountancy. . ." to perform the review, that means a licensed CPA. Nowhere does the law say an "independent accountant", whatever that is.

BTW, why do you think your financials are not being prepared in accordance with GAAP?

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(c) A review of the financial statement of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the California Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement shall be distributed within 120 days after the close of each fiscal year.

KW,

First of all, let me tell you that State law overrides your gov docs, unless the state law if prefaced with "unless the community documents state otherwise" (or something to that effect).

I can't comment on what your bylaws say since I don't know what "subsection xyz" says. However, I'm assuming it talks about an annual review or audit of the assn's financial records.

The financial statements prepared by the MC will not become a part of an annual review or audit prepared by an independent CPA -- the CPA will prepare his own financial statements after completing his review or audit. The MC's financial statements are not audited or reviewed; the assn's books are audited or reviewed.

When the accrual method of accounting is used, a true picture of the amount of actual cash in the bank is not given. So a cash flow statement is prepared to show how much cash is really being generated (what is actually coming in and going out). All the general ledger accounts will not be shown on this statement.

BTW, this is what GAAP means: The set of standards of the AICPA (Amer Institute of CPAs) used for recording and reporting accounting information is referred to as GAAP (genrally accepted accounting practices).

Just because you may not understand the financial statements does not mean they are not being prepared properly. If there is something that you don't understand, you should just ask for clarification. You say the other board members ". . .approved it as usual any way". Well, this is not uncommon because most board members do not really understand everything about the financials (especially if the accrual method is being used) so they place their trust in mgmt co. It's always a good thing to have a treasurer who understand accounting, but that is not always possible. So, don't be afraid to ask questions until you thoroughly understand what you're looking at.

KW3,

CA state law REQUIRES the assn to have a review performed by a certified CPA at the end of each fiscal year where the gross income exceeds $75,000. If the BOD has not done this then they are in violation of state law. It doesn't matter that nothing about a review or audit are mentioned in the bylaws. This is a state law and it overrides your assn's gov. docs.

Your bylaws require the BOD to provide each member with a financial statement (a balance sheet and income & expense statement) at year-end. They have 120 days after the close of the fiscal year to provide this info and if they do not then they are in violation of the assn's bylaws.

With regard to the above 2 requirements, as a board member you can remind the BOD of their obligations to uphold the requirements of the assn's gov docs and state law if they are not doing what is required of them.

I'm not surprised that the MC is not able to answer your questions. Perhaps you can contact the mgmt co accountant resp. for your assn's financials and put your questions directly to that person. Are you the treasurer? If so, then the mgmt co should be most receptive to answering all your questions regarding the finances of the assn. BTW, the accountant who handles our assn's financials is present at most all of our board meetings. And, we are fortunate to have a CPA serving as our board treasurer. Of course, I understand our situation is somewhat unique in that we contract with a small mgmt co wherein the PM is the owner and her husband is the accountant. However even a large mgmt co should be receptive to having an accountant attend the board meetings to explain the financial statements expecially if the MC is not able to do this and the BOD treasurer is also not capable.

KW3

You will find what you're looking for below in 1365(c)

Davis-Stirling Act Civil Code §1365. Financial Records and Reporting.

Unless the governing documents impose more stringent standards, the association shall prepare and distribute to all of its members the following documents:

(a) A pro forma operating budget, which shall include all of the following:

(1) The estimated revenue and expenses on an accrual basis.

(2) A summary of the association's reserves based upon the most recent review or study conducted pursuant to Section 1365.5, based only on assets held in cash or cash equivalents, which shall be printed in boldface type and include all of the following:

(A) The current estimated replacement cost, estimated remaining life, and estimated useful life of each major component.

(B) As of the end of the fiscal year for which the study is prepared:

(i) The current estimate of the amount of cash reserves necessary to repair, replace, restore, or maintain the major components.

(ii) The current amount of accumulated cash reserves actually set aside to repair, replace, restore, or maintain major components.

(iii) If applicable, the amount of funds received from either a compensatory damage award or settlement to an association from any person or entity for injuries to property, real or personal, arising out of any construction or design defects, and the expenditure or disposition of funds, including the amounts expended for the direct and indirect costs of repair of construction or design defects. These amounts shall be reported at the end of the fiscal year for which the study is prepared as separate line items under cash reserves pursuant to clause (ii). Instead of complying with the requirements set forth in this clause, an association that is obligated to issue a review of their financial statement pursuant to subdivision (b) may include in the review a statement containing all of the information required by this clause.

(C) The percentage that the amount determined for purposes of clause (ii) of subparagraph (B) equals the amount determined for purposes of clause (i) of subparagraph (B).

(D) The current deficiency in reserve funding expressed on a per unit basis. The figure shall be calculated by subtracting the amount determined for purposes of clause (ii) of subparagraph (B) from the amount determined for purposes of clause (i) of subparagraph (B) and then dividing the result by the number of separate interests within the association, except that if assessments vary by the size or type of ownership interest, then the association shall calculate the current deficiency in a manner that reflects the variation.

(3) A statement as to all of the following:

(A) Whether the board of directors of the association has determined to defer or not undertake repairs or replacement of any major component with a remaining life of 30 years or less, including a justification for the deferral or decision not to undertake the repairs or replacement.

(B) Whether the board of directors of the association, consistent with the reserve funding plan adopted pursuant to subdivision (e) of Section 1365.5, has determined or anticipates that the levy of one or more special assessments will be required to repair, replace, or restore any major component or to provide adequate reserves therefor. If so, the statement shall also set out the estimated amount, commencement date, and duration of the assessment.

(C) The mechanism or mechanisms by which the board of directors will fund reserves to repair or replace major components, including assessments, borrowing, use of other assets, deferral of selected replacements or repairs, or alternative mechanisms.

(D) Whether the association has any outstanding loans with an original term of more than one year, including the payee, interest rate, amount outstanding, annual payment, and when the loan is scheduled to be retired.

(4) A general statement addressing the procedures used for the calculation and establishment of those reserves to defray the future repair, replacement, or additions to those major components that the association is obligated to maintain. The report shall include, but need not be limited to, reserve calculations made using the formula described in paragraph (4) of subdivision (b) of Section 1365.2.5, and may not assume a rate of return on cash reserves in excess of 2 percent above the discount rate published by the Federal Reserve Bank of San Francisco at the time the calculation was made. The summary of the association's reserves disclosed pursuant to paragraph (2) shall not be admissible in evidence to show improper financial management of an association, provided that other relevant and competent evidence of the financial condition of the association is not made inadmissible by this provision. Notwithstanding a contrary provision in the governing documents, a copy of the operating budget shall be annually distributed not less than 30 days nor more than 90 days prior to the beginning of the association's fiscal year.

(b) Commencing January 1, 2009, a summary of the reserve funding plan adopted by the board of directors of the association, as specified in paragraph (4) of subdivision (e) of Section 1365.5. The summary shall include notice to members that the full reserve study plan is available upon request, and the association shall provide the full reserve plan to any member upon request.

(c) A review of the financial statement of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the California Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement shall be distributed within 120 days after the close of each fiscal year.

(d) Instead of the distribution of the pro forma operating budget required by subdivision (a), the board of directors may elect to distribute a summary of the pro forma operating budget to all of its members with a written notice that the pro forma operating budget is available at the business office of the association or at another suitable location within the boundaries of the development, and that copies will be provided upon request and at the expense of the association. If any member requests that a copy of the pro forma operating budget required by subdivision (a) be mailed to the member, the association shall provide the copy to the member by first-class United States mail at the expense of the association and delivered within five days. The written notice that is distributed to each of the association members shall be in at least 10-point boldface type on the front page of the summary of the budget.

(e) A statement describing the association's policies and practices in enforcing lien rights or other legal remedies for default in payment of its assessments against its members shall be annually delivered to the members not less than 30 days nor more than 90 days immediately preceding the beginning of the association's fiscal year.

(f)

(1) A summary of the association's property, general liability, earthquake, flood, and fidelity insurance policies, which shall be distributed not less than 30 days nor more than 90 days preceding the beginning of the association's fiscal year, that includes all of the following information about each policy:

(A) The name of the insurer.

(B) The type of insurance.

(C) The policy limits of the insurance.

(D) The amount of deductibles, if any.

(2) The association shall, as soon as reasonably practicable, notify its members by first-class mail if any of the policies described in paragraph (1) have lapsed, been canceled, and are not immediately renewed, restored, or replaced, or if there is a significant change, such as a reduction in coverage or limits or an increase in the deductible, as to any of those policies. If the association receives any notice of nonrenewal of a policy described in paragraph (1), the association shall immediately notify its members if replacement coverage will not be in effect by the date the existing coverage will lapse.

(3) To the extent that any of the information required to be disclosed pursuant to paragraph (1) is specified in the insurance policy declaration page, the association may meet its obligation to disclose that information by making copies of that page and distributing it to all of its members.

(4) The summary distributed pursuant to paragraph (1) shall contain, in at least 10-point boldface type, the following statement:

KW,

Some state's make it very difficult to find the HOA laws. But, generally speaking, the HOA and Condo specific statutes are found under property statutes and the nonprofit corp statutes are found under corporations. Many states have only condo statutes but most, if not all, have nonprofit corp statutes which Condos and HOAs must also abide by.