Category Archives: Blogging

HOA Audit FAQ

HOA Audit
HOA Audit

1. Are HOA audits required?

The short answer is, “Yes.”

Lenders can require audited or reviewed financial statements before granting sizeable loans to HOAs. Insurers can require audited or reviewed financial statements before granting coverage to board members for director and officer liability.

The long story is that one has to piece together unrelated sections of the Texas State Statues to conclude that HOAs are required to be audited. The word audit doesn’t even appear anywhere in the Texas Statues that govern cooperative associations.

Title Six, Chapter 251 Subchapter H
http://www.statutes.legis.state.tx.us/Docs/BO/htm/BO.251.htm#251.353

However, the statutes do make associations keep records in accordance with standard accounting practices and submit a balance sheet and income statement to members at annual meetings. It also says, “A committee of members who are not principal bookkeepers, accountants, or employees of the association shall report on the quality of the annual reports.” The, “not” clearly rules out a self-assessment. The words, “quality of the annual reports”, implies that an audit and not merely a review is required by the statues. A review is limited to testing reasonability but does not test quality.

A separate title five of the Texas Statues authorizes only CPAs licensed in the state of Texas to attest whether a balance sheet or income statement is in accordance with standard accounting practices. ()

Title Five, Subtitle A, Chapter 901, Subchapter A
http://www.statutes.legis.state.tx.us/Docs/OC/htm/OC.901.htm#901.003

2. Are HOA audits needed?

Embezzlement by board members or community managers has occurred and harmed HOAs. Only California requires HOAs to insure against theft by the board. A search for the word, “insurance”, in the Texas Statues governing associations can find no instances of the word, “insurance”. Typically, HOAs don’t require bonding of those who collect and deposit assessments or pay vendors with HOA funds leaving homeowners at risk of their hard earned dues to theft.

An independent audit gives homeowners a greater degree of assurance that the HOA fairly represents its financial condition and has effective internal controls.

3. What does the auditor audit?

The auditor inspects assets and debts to validate their existence and compares recorded values to fair values. Assets are typically cash in checking accounts, investments in reserve fund accounts, and common area furniture, inventory, equipment, buildings and land. Debts include trade payables and loans taken out for un-funded projects.

Internal controls are also reviewed for how transactions are recorded. Transactions include deposits of HOA dues assessments, payments to vendors, acquisition and depreciation of assets, and payments of principal on loan balances versus payments of interest expenses.

The auditor also contacts a statistically representative sample of financial institutions, vendors and others listed as sources of revenues and expenses to independently verify each item selected for sampling..

4. Who sets the standards that govern the audit?

An audit guide for HOAs is available for $22 by calling the AICPA (American Institute of Certified Public Accountants) at (800) 334-6961 or (800) 248-0445 (in New York State). Mention product number 012481. The guide is for CIRA (Common Interest Real Estate Associations) which includes HOAs.

All CPA firms practicing in Texas must also register with the TSBPA, (Texas State Board of Public Accountancy) so each firm member undergoes a peer review process mandated in the Texas State Statutes. The peer review process is where the auditor gets audited. Not every audit or work performed by the CPA is selected for peer review, but the number of audits selected for review can be expanded if the initially selected audits were deficient in meeting auditing standards outlined in the peer reviewer’s checklist. The AICPA provides a 47 page checklist document entitled, “Not-for-Profit Audit Engagement Checklist”, to assist in the review. The auditor can also be hauled before a hearing to if a deficiency is found in the review of their audits and lose their license to practice if the deficiency is deemed to be significant.

5. When is it appropriate to change auditors?

When an HOA flips from builder to owners, the receiving board often seeks a new auditor as part of the transfer process to ensure an independent assessment of the builder’s financial data.

A change in management companies or a desire to keep a long-standing management company on it’s best behavior can also be a rationalization for a fresh auditor.

When over 10% of an auditor’s income comes from auditing the same management company used by the HOA, the HOA may seek out an auditor who is less reliant on the HOA’s management company as a source of income.

The HOA should be alert for situations that compromise an auditor’s independence and change auditors when an auditor or close family member or business associate of the auditor acquires property in the HOA or is involved with the operations or ownership of the management company.

Auditors can create the need for a new auditor by retiring or selling their practice to another auditor.

6. Is it good to keep the same auditor or re-bid each annual audit?

Insurance companies have data that prove frequent changing of auditors is a bad sign. Reluctance to resolve or insistence to keep secret embarrassing findings is seen by insurers and the audit industry as a more typical cause for changing auditors than all other causes listed above under, “When is it appropriate to change auditors?”

Auditors buy their errors and omissions policies from the same insurance companies who make it their business to track how often auditors are changed. A new auditor every three to five years or less will increase quotes from auditors to defray the risk of dealing with clients who are historically proven to be more prone to hide illicit on-goings.

Embarrassing findings can often be resolved with honest intent between when an audit is initiated during the year being audited and before the end of the year being audited. Issuance of the audit report can also be delayed to allow time to for the auditor to test on-going effectiveness of corrective processes implemented. Such flexibility leaves little excuse for management or a board to not work with an auditor over a period spanning at least two fiscal years. Depending on the size of an organization, the scope of unfavorable audit findings can be so vast that progressive effort can span two or more years to complete.

In order to stay independent from management, auditors are prohibited from personally altering internal records of an audit or review client or personally implementing internal processes and internal controls. The most an auditor is allowed to do is offer their findings and illustrate examples of for corrective action. Changing an audit firm makes it easy for management to avoid implementing any necessary corrective actions or adjustments. Changing auditors also adds cost for the next auditor to re-discover and re-explain the same findings. Keeping consistent auditors for at least three to five years allows the audit firm to follow-up and build progress risk assessments towards resolving findings that were already reviewed with management in prior years.

7. How can I reduce my HOA’s audit cost?

The HOA focus is best directed to benchmarking the HOA’s audit fees with similar HOA’s audit fees. The HOA can then ask their auditor to explain a higher cost and/or match a lower cost.

The HOA may also ask an auditor to provide the HOA board with a list of adjustments that were required during the audit. The HOA should review the adjustments with the management company and ask the management company to incorporate the internal processes and controls necessary to ensure that the same adjustments are not required in the next year’s audit.

One way auditors reduce their cost is by going paperless. Payroll to manually archive and retrieve paper files is the largest savings once files are only a few mouse clicks away. “Paperless” practices limit paper use to only the original signed copies of engagement letters signed by clients. Additional savings from not having to buy labels and label makers or folders, filing cabinets, rent office space and light-up and air-condition filing rooms will far offset the cost of a good scanner and hard drive.

The HOA should insist that their management company also strive to be as paperless as possible to help reduce cost of accessing and transferring data to the auditor.

8. What might make an audit cost more than initially expected?

When an independent verification solicited from a bank, a vendor or customer of a balance item selected for sampling disagrees with the current records, the protocols governing the audit require the auditor to expand the sampling.

The HOA can often reduce the cost of the adjustments by insisting that the management company provide the bookkeeper adequate time to learn and make the required adjustments so that the adjustments are made by the bookkeeper at the bookkeeper’s lower hourly rate instead of being continually reminded by auditor of the required adjustments at the auditor’s higher hourly rate.

Homeowners can self-inflict higher costs by allowing their board and management to ignore inadequate internal controls deemed worthy of disclosure by auditors. Such findings left unresolved will expose the HOA to higher costs not only for subsequent auditors but also higher interest rates from lenders and premiums from insurers. Until statues are in place to hold HOA board members more accountable to association membership, homeowners need to take active roles in their homeowner associations when audits disclose inadequacies.

9. What is a reasonable cost for an HOA audit?

The wide ranges presented below are due to the wide difference that two HOAs with identical revenues can have in the number of accounts requiring statistical sampling, the condition and format of the internal records and the level of cooperation provided by the management company and HOA to the auditor.

Homeowners of Texas, Inc.

Homeowners of Texas Matters
Homeowners of Texas Matters

The mission of Homeowners of Texas is to enact legislative reforms to protect Texas homeowners and provide a level playing field for dealing with contractors, insurance companies, lenders and service providers. After all, Texas is the largest homebuilding state, played a role in the economic collapse, and will play a role in the recovery.

THE PROBLEM: The lack of rules and enforcement (i.e. regulatory oversight) leads to market failures in a Free Market society where sociopathic homebuilder “bullies” can’t lose but everyone else does. As shown in our list of victims, below, good Americans everywhere are affected and not just those buying defective homes in Texas.

Wide spread government corruption under Governor Rick Perry helped create a $35 billion Texas homebuilding industry that deliberately sells dangerously defective products to the unsuspecting public while concealing known problems related to the health, safety & welfare of buyers. Texas laws allow builders to deny buyers their legal rights while protecting themselves from accountability and lawsuits from victimized homebuyers, ultimately contributing to the collapse of the worldwide economy.


No Accountability

Is it any wonder that Texas governor Rick Perry says, “Don’t mess with Texas”? Giant homebuilding corporations operating in our state have used a variety of ways to shield themselves from accountability, lawsuits and criminal prosecution, and to protect their personal assets, including:

  • Tort Reform was sold as a way to reduce “frivolous lawsuits” and the impact of “greedy trial lawyers” by imposing limits on claims and damages.
  • RCLA, the Residential Construction Liability Act, gives builders a “right-to-repair” problems they caused and to inspect their own work while further limiting claims against them.
  • TRCC, the Texas Residential Construction Commission, posed additional roadblocks between homeowners and their legal rights in disputes with builders. HOT helped get the TRCC abolished (see TRCC Eulogy).
  • Arbitration clauses in sales contracts force disputes into a private and secret Kangaroo Court that is stacked against homebuyers who then lose their Constitutional Rights to a jury trial and equal justice under law. To restore fairness, HOT proposes a ban on such contracts for Texas homesteads and urges Congress to pass the Arbitration Fairness Act.
  • Corruption within state agencies has been used to conceal criminal activity in the Texas homebuilding industry, and even when Attorney General Greg Abbott has been told about them, he has refused to prosecute, treating these cases instead as civil contract disputes.

Economic Collapse

Greed in Wall Street is mostly blamed for the global economic collapse, but the big banks and mortgage lenders learned the art of predatory lending from watching the big, vertically integrated homebuilders that owned their own mortgage, title and insurance companies, promoted subprime loans to sell more homes to speculators and consumers ill-suited to own homes, offloaded their mortgage risks to 3rd party investors and ultimately taxpayers. Resources that support this view include “Texas Homebuilding and the Global Collapse” (1-page version) and TIME Magazine’s “Who’s to Blame for the Financial Crisis?

Urban sprawl onto rich farmland – land with expansive clay soil, contaminated with decades of pesticide use – contributed to the serious construction defects that made homes unlivable and led to loan defaults, just as predatory loans with artificially inflated appraisals did. Those vacant and foreclosed homes, in a market with more supply than demand after the housing bubble, have lowered the home values in entire neighborhoods and across the nation, fueling a spiraling decline that has affected the tax base that funds public services. The intentional hiring of undocumented workers encouraged illegal immigration. Abuse of these workers included nonpayment of wages and uncollected tax revenue.


 

Millions of Victims

  • Homebuyers and Neighbors – Both first-time and experienced buyers suffer when serious defects make homes unsafe to live in and lead to mortgage defaults and foreclosures, as well as affecting home values in entire subdivisions when homes stay vacant. The problem is not limited to starter tract homes but also affects million dollar custom homes, as shown in our collection of HOT Case Studies.
  • Workers and Subcontractors – When builders don’t pay subcontractors, homebuyers can end up with mechanics liens on their homes and face mortgage foreclosure. And because many construction workers are undocumented, builders often don’t pay them, don’t insure them or provide safety equipment, or otherwise abuse them while failing to collect taxes. For more on the impact of the abusive practices of homebuilders and their mortgage subsidiaries, read “CRUEL HOPE.”
  • Investors – Just as Goldman Sachs knew the housing bubble was about to burst and bet against homebuilding while selling mortgage derivatives to investors, the big builders knew too. They had been warned for years (see shareholder letters) but continued to push for government incentives to grow the bubble, including mortgage interest tax deductions, artificially low interests rates, subprime and adjustable loans with no money down, and the latest New Homebuyer Tax Credits.
  • Tax Payers and their Children – As if our record unemployment, loss of personal wealth, and rising national debt wasn’t enough, after buying up toxic assets related to the housing collapse, the FHA has become the new AIG. Between the FHA, VA, USDA, Fannie Mae and Freddie Mac, taxpayers now guarantee over 80% of all U.S. home mortgages, many made with nothing down and no accountability. The government is complicit in encouraging risky loans and bad business practices, including USDA loan guarantees for homes built in rural areas on soils that its own Web Soil Survey says is highly expansive and unsuitable for building.
  • Nations – Widespread corruption in Texas and our state’s homebuilding industry impacted the whole world. Maybe that’s why June Melton describes a delegation from China’s supreme court as attending Sandra Bullock’s civil suit trial against her builder, in his historical mystery fiction, “The Mysterious Adventures of Marshal Yeager, Professional Engineer – Book 1: In the Matter of Sandra Bullock’s House, Governor Rick Perry, and Corruption at the Texas Board of Professional Engineers.”

Bullies

HOT describes “Crony Capitalism” as the corrupting influence of big business on big government. It’s now in all three branches of Texas government: Legislative, Executive and Judicial. Houson homebuilder Bob Perry contributed over $21 million to the champaigns of all but six Texas legislators, all nine Texas Supreme Court justices, Texas Attorney General Greg Abbott and Governor Rick Perry. He also used his money to influence political races in Virginia and other states around the nation.

HOT describes “Selected Capitalism” as government policies, influenced by moneyed special interests that choose preferred winners & losers. National examples include Wall Street and banks too big to fail. Texas examples include big builders, the Trans-Texas Corridor and Cintra, the Spanish company that Rick Perry wants to run our toll road system.

Sixteen of the largest builders broke from the pack of over 200,000 members of National Association of Home Builders to form a new trade group. Leading Builders of America executive director Ken Gear said to Reuters that the group wanted a more “direct connection to lawmakers” after their experience lobbying the government for the Home Buyer Tax Credit and other tax concessions. His statement speaks volumes about the influence of large builders on Congress too.

Texas used to be a state where you could do business with a handshake, but now even a contract won’t protect you from the cronies. They’ve manipulated the politics to remove accountability, liability and oversight, and corrupt Texas politics is just like corrupt Washington politics.

To understand why so many big builders &  finance companies behave badly, watch the award-wining video documentary, “The Corporation,” Michael Moore’s “Capitalism a Love Story,” and “FOOD, Inc.” To learn why good policy is more about public interests than special interests, read “Economics in One Lesson.”


Lobbying in the Sunshine

Corruption happens when special interests meet in secret behind closed doors; it does not happen in the light of day with public transparency. That’s why HOT, as a consumer advocacy, seeks the warming light of day and shines attention on corruption we find.

While consumer activist organizations complain publically about issues and “rally the troops” to get media attention, HOT has a different approach. We apply our unique legal, legislative, analytical, engineering, and marketing strengths to the task of understanding the root cause of problems, crafting alternative legislative solutions, and selling them through the legislative process. It’s what allowed us to accomplish in our first year what other Texas consumer groups were unable to do over 20 years.

HOT gives homeowners an effective voice to help balance the power of special interests. We propose legislation and testify on your behalf, which means we need your support and need to hear your story. HOT can also help you improve the effectiveness of your personal testimony when you want to give it.