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Doug McLain wanted to expand the opportunity to provide highly effective but fairly priced audits to condominium associations in Oregon and Washington.  I was honored he asked if I would join him on this new adventure.  We officially spun off from Currie & McLain CPA’s, focused on providing audit and review services primarily to condominium and homeowner associations.

We officially kicked off on September 1 with the new company and immediately started to set up our condominium audit processes.  Since we are looking for new ways to leverage technology to provide us better audit results while also reducing time and cost, every step, every procedure, is evaluated to make sure it fits our model.

It is now November and we are into the exciting part of marketing to condominium and homeowner management companies so we can be informed when a board wants to receive a proposal for audit or review services.

We will explore various topics relevant to condominium associations, financial management and what board’s of directors may want to look for when evaluating their financial statements and reserve studies.

We would like the opportunity to discuss how we can be of help to your condominium and homeowner association.  Feel free to write us at info@core-acct.com or visit our website at http://www.core-acct.com.

C.O.R.E. Services, focused on helping stakeholders rely upon management.

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It’s about time

Phew.  It has been a mad 6 weeks.  We were asked to take over the accounting and finance management for a condominium project where the prior management company was in over its head.  We were engaged In early October and corrected 3 years of special assessment receivables, prepared the financial statement, fought with the new auditor (more on that in a moment) designed an Access application from scratch to manage the owner receivables and payments and also began beta testing our new software application HOA Fiscal.  Plus, we had to try and stay up on our regular work as well.

So, it’s about time I got back to writing.  The problems facing condominium associations and HOA’s are not going to fix themselves without a little sunlight.

On Monday we were contacted by a management company to propose an audit of the upcoming 2018 financial statement.  As part of our process we ask for a copy of the most recent audit report.  When Doug received it, he immediately buzzed me to take a look at it.

There it was, in black and white, an audited financial statement which stated that the financial statements were prepared in accordance with GAAP.  And lo and behold guess what else was there; disclosure G: Serial Assessment.

I shouldn’t be surprised.  After all, I am certain that any accounting professional who has taken college courses, passed the exam, and taken all of their CPE for dozens of years could come to the startlingly brilliant deduction that cash basis is acceptable under GAAP.  Sorry, sarcasm always seems more laughable in my head, but none-the-less…

The problem with the current school of thought – and it is very current – that a serial assessment should be treated differently than any other assessment is that it entirely contradicts established accounting principles.  I have written on this subject before and will continue to do so; GAAP clearly calls for financial statements to make a good faith effort to determine what the future cash flow of transactions is likely to be and record the present value of those cash flows at a realistic market rate of interest.

This approach works on both sides of the balance sheet: Assets and Liabilities and Equity.

The approach espoused by certain accounting professionals ignores this.  The argument is that a serial assessment is, by its very nature, a cash received issue.  And I call bullshit. The rules have been, and will remain, record the present value of the expected cash flows.

Another simplified example of this:

Association calls for a “serial assessment” for $1,200,000.  Each of the 100 unit owners has an option to pay  either up front $12,000 or pay $100 per month for 120 months plus interest at 5% per year.

By the way, this is exactly what was in the disclosure.

Let’s unpack this.  Association uses it’s levy power to Assess the unit owners for $1,200,000.  Not $10,000 per month, not $120,000 this year, but $1,200,000.

It provides the owners the option of paying it off in full by the payment date or paying it over 120 months.  If they elect to pay it over time, the owner must pay interest at 5.0% per year.  How is this any different from buying something with a credit card and agreeing to pay it off by the payment date and avoid interest charges (at 36%) or deciding to pay it off over 10 years?  Answer: It isn’t.

So, somehow, some over-educated but none-the-less not too bright CPA, says that this information should be ignored and the only receivable that should be recorded is any amounts past due and that the only “revenue” earned is the amount that was paid or was due and payable at the end of the period.  By the way, if you really think about it, the amount that is in arrears is the owners’ share of $1,200,000 less payments received!

By the way, remember that the disclosure provided for interest at 5%.  Guess what?  No interest was recorded on the audited financial statement.  Why?  Because the CPA firm is filled with minions who don’t question the bosses decision.  So much for professional responsibility.

I am not saying that allowing for owners to pay a special assessment over time is an easy accounting process.  It isn’t – and we know because we have to keep up several hundred special assessment amortization schedules which show how much of each payment was applied to interest and it has to be updated for each payment.  It is time-consuming.  Which is why we set up the Access system – to allow us to track payments to each assessment and make recording the transaction a little less error-prone.

But the fact that something isn’t easy doesn’t mean it should be ignored.  And the treatment of a special assessment on the cash basis ignores the reality.  The truth of the matter is, you can simply state that you are not competent enough to track a special assessment which allows payment over time and include it in your significant accounting policies.

It isn’t GAAP and the auditor should comment on it.  But for an auditor to pretend that cash basis is acceptable in a GAAP financial statement because it makes management and lawyers feel good is simply an auditor who practices malpractice for a living.  It will catch up with them sooner or later, but in the meantime, you as owners will pay the price.

Regarding the proposal – we wrote back to the manager that we would love to propose on the audit but the board will need to decide first if they are ready to restate the prior years’ financial statements as they are not GAAP; or live with a GAAP departure and possibly even an adverse opinion from us.  Once they face the truth, the board will no doubt take the easy road and stick with the current auditor.  Sometimes losing is better than winning.


Regarding our new software system!  HOA Fiscal is our HOA financial and accounting management software system we are rolling out.  It focuses on internal control and documenting which employee – and in what role – does certain functions.  We create groups for limited common elements, track the declared ownership and allow an association to track all the relevant details about regular assessments and special assessments.  Sorry, no “serial assessments” allowed.

In addition, we have a module to track fines and escalations so that managers and board members can see where things are and ensure compliance with policies on review and appeal.

And tons more.

We think it is awesome!  For a demonstration or to discuss how our new software system is going to make your life really easy, feel free to give us a call or shoot us an email.  The first 100 associations (and their manager’s) get free unlimited support by the accounting team that dreamed this up.  Seriously, your success is our success.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

The big picture

The past three weeks has, once again, provided proof that it is important to understand the big picture of a transaction before recording it.  Yes, it means really understanding what GAAP requires, but it is more than that, it is literally about seeing the big picture.

For instance, if the entity follows fund accounting, are your funds always in balance?  If you lose sight of the fact that each fund exists for its own purpose and instead think the association is simply one big mass of money coming in and going out, you are missing the bigger picture.  The funds exist for a reason.  Money is coming in for a purpose, are you ensuring that the purpose is being followed?

Do you really understand the big picture of why a particular charge exists?  Do you believe the invoice determines the transaction?  In other words, do you only look at the discreet transaction and say it stands alone?  Are you asking questions about how this transaction was created and its purpose for the organization?  If not, are you sure you are capturing all the relevant data for the entity?

We understand.  It is frankly easier on an entity to simply accept the individual transaction at face value.  It is soothing to the accounting team to receive a vendor invoice and post it to accounts payable and an expense account.  After all, everything we do is now triggered by some document which says that someone has a claim for payment based upon perceived value transferred.  Are you asking the question, “Have we received value for this transaction or is it for some future value?”

Yes, pondering the big picture is driven by understanding what is supposed to be happening and then ensuring the accounting system models that.  In the big picture, accounting is not recording invoices and payments, it is about ensuring the economic model is valid.  For instance, the big picture I envision for associations is recognizing that

  • Property units, not their particular owners, are customers.  Owners are transient, property lasts as long as the association, and maybe even longer;
  • Vendors want annual contracts (or longer) but don’t offer value through the annual period.  Some work is simply not conducive to seasonal cycles;
  • That if the reserve study says you should have $X today to deal with future replacement project and you have 25% of X, you have a funding deficit.  Ignoring this is dangerous to your association.  And someone’s pocketbook;
  • The goal of an association is to breakeven on its operations.  This is why the budget is created.  When things go right, your bank accounts end up where they started.  Internally generated financial statements which use words like “profit” or “loss” are intellectually misleading and defeat the actual focus on the need for funding.
  • All economic claims should be recorded and reported.  A well-designed information system can help identify economic claims but good old-fashioned questioning helps too.  The accounting literature uses the word probable – substitute commonsense; and finally
  • When in doubt, disclose.  Nothing is gained by hiding the picture from those who need it for making important decisions.

While it might seem that taking the time to understand the big picture is inefficient, I would argue that it leads to superior efficiency.  Spending an hour understanding why a transaction is created will save you 8 hours of recording it incorrectly, 4 hours of undoing your entries and then another 5 hours of doing it right.  Not to mention the time spent by auditors and lawyers arguing with you about how you should have handled it to begin with.

If you are struggling with the bigger picture, ask for help.  If no one in your organization seems to be able to grasp it, call your auditor.  Hopefully this firm can see the big picture and can help you get it recorded.  Or contact us.  We will be happy to help you identify the patterns and look at how the transaction fits into the bigger scheme of activity.  Doug and I bounce ideas off of each other 3 or 4 times a day.  Because we would rather spend 2 hours talking about an issue than 8 hours doing and undoing transactions.

Seeing the big picture helps you become more effective and in the process, more efficient.  Efficiency wins the game so stop working and start thinking.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

Getting Assessments Right is Important

GAAP is incredibly simple, at least as long as your activities are simple.  For a condominium association, you assess and your owners pay.  Your bills are taken care of and things go smoothly.  Until they don’t.

Things no longer go smoothly when one day the board wakes up and has to address a funding deficit.  I mean, to be clear, it was always obvious, but the board preferred to be oblivious.  Now, the roofs are leaking, the siding is falling off and your reserve is $3,000,000 in the hole.  It is time to pay the piper.

The first problem is that, unsurprisingly, your owners can’t come up with their portion of $3.0 Million.  This problem leads to the second problem.  You have to borrow the $3.0 Million from the bank.  And now your potential headaches as a board expand dramatically.

You are going to hear advice between two extremes: The current owners are on the hook for the bank debt and only future owners are on the hook.  Your lawyers will explain how they will try to make this to where you can collect as much money as possible from current owners and even future owners.  This is great.  It also has nothing to do with the underlying accounting.

GAAP is all about the economics.  As we spelled out last week in our research article, accounting standards spell out exactly how to treat this transaction.  You have to look at the substance of this transaction.  If the substance is you are dealing with a funding deficit, then you need to record a receivable on the books of your association.

Yes I know.  Your manager and his cousin who once practiced as a CPA before taking a lucrative position selling ice cream, tell you that it isn’t a receivable.  That your resolution says that the owners are only on the hook for the monthly assessment.  That the form of the transaction says it is a regular assessment and you can safely ignore the actual reasons you are here.

Wonderful sentiments, but bad advice.

GAAP is clear.  Because you are dealing with a funding deficit, you are acknowledging that your owners owe it.  Think about it.  How can you say that you are $3,000,000 in the hole and not say that somehow your owners aren’t on the hook for it?  By saying there is a fund deficit, aren’t you implicitly stating that your ownership, past and through the day you pass the resolution, didn’t pay enough?

Had they paid in their extra $50 a month for the past ten years, do you really think you would be here today?  You didn’t wake up this morning and suddenly realize that some mythical owner in 5 years might have a fund deficit – you notice it is a problem now.

And the now part of this is what causes it to be recognized.

Oh, we understand.  You will hear all sorts of advice.  You can defer the maintenance, you can fix the leaks one at a time, you can borrow money and the owners won’t be liable.  Possibly true.  We aren’t hear to tell you how to handle those management problems.  We are here to tell you how you should record the transaction for purposes of your financial statements; those statements you claim are GAAP.

The moment you officially recognize that you are short, you create the receivable.  Just like when you bounce a check, you are responsible for the overdraft now.  Not in 10 days when your paycheck comes in, now.  If the bank has overdraft protection, you are still responsible for the overdraft now but they are giving you the 10 days to pay it; at a stiff price we might add.

Logic and economics rule accounting, not legal niceties.   The bottom line is, if you are getting into the banking business by “loaning” money to your owners so your association can get needed repairs done, then you should be treated like a bank for accounting and reporting purposes.  Our strongest advice is, “DON’T!!!!!”  Assess what needs to be assessed and demand owners pay it.  Today.  In full.

If you don’t, or can’t, deal with the real problem, then simply face the fact that you are creating a nightmare reporting problem and don’t listen to those who whisper in your ear that there is an easy way out.  There isn’t.

Neither a lender nor a borrower be.  Sage advice for most of us and even more spot on when you are a condominium association.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

Recording Serial Assessments

The accounting treatment for the special assessment called Serial Assessment

Addressing the recognition and reporting of a complex transaction under accounting principles generally accepted in the United States (GAAP).

Over the last four or five years, there has been an attempt to create a hybrid mechanism to protect condominium assessments and the associated lien rights which attach to those liens. This research does not address the individual claims against property and owners and instead focuses on the specific accounting treatment to ensure that the transaction is recorded correctly under US GAAP.  Our concern in this analysis is the appropriate accounting treatment of assessments under existing GAAP.  We do not attempt to clarify the impact of the new pronouncement of ASC 606 as it pertains to assessments.

The Basics of a Serial Assessment

  • It derives its power to assess from the bylaws of the condominium organization which typically grants the board of directors broad powers to levy assessments for “special” situations.
  • The special situations are those which lie outside the standard budget and assessment cycle – the operating assessments
  • The special situation generally addresses funding shortfalls in the reserve fund when specific reserve projects are required to be done
  • Serial assessments attempt to levy a sum of money on a periodic basis over a period in excess of one year.
  • Serial assessments might incorporate an interest charge for those periods in excess of one year
  • Serial assessments may grant the right to a unit owner to pay off the serial assessment, either in the beginning or at certain times during the assessment period
  • If a serial assessment is not paid at time of transfer of a unit, the buyer takes the unit with that serial assessment still outstanding
  • The serial assessment is “levied” periodically instead of at the time of the original assessment, which attempts to ensure that there is a continuing lien against the property regardless of transfer of title or default and discharge

 GAAP on Serial Assessments

The Financial Accounting Standards Board (FASB) has issued the Accounting Standards Codification (ASC) which details accounting principles generally accepted in the United States of America (GAAP). GAAP are based on the economic qualities of a transaction, not necessarily its legal structure.  The objective of financial reporting is to provide information that is useful in making decisions about providing resources to an entity.  The purpose of financial reporting is to provide decision makers with useful information.

Some of the qualitative aspects of financial reporting include

  • Usefulness for decisions
  • Relevance
  • Faithful representation
  • Understandability

ASC 972 provides GAAP for Common Interest Realty Associations (CIRA), of which condominiums are a specific type of CIRA.

ASC 972-605-20 provides that CIRA’s are typically funded by periodic assessments of its members so that the CIRA can provide ongoing management, maintenance, administration, repair and replacement services on behalf of the organization’s members.  These are the annual operating and reserve assessments which are approved by the board of directors and which may need to be ratified by the ownership at an annual meeting.

Any other assessment is a special assessment.  Boards of directors are given the power, typically stated in the bylaws, to assess the ownership and members for non-budgetary transactions, i.e. special transactions.  This special transaction could be to address a deficit in the operating fund due to unforeseen common operating expenses or to address a deficit in the reserve fund for either specified reserve projects or to build up the general reserve fund for unspecified future projects.

ASC 927-605-25-1 states that “Special assessments shall be reported as revenue, unless they are deferred in accordance with the guidance in paragraph ASC 972-403-25-1.”

ASC 972-403-25 states, “Deferred revenue may include items such as a special assessment designed for specific costs that have not yet been incurred.  Such amounts shall be reported as revenues when the corresponding liabilities and expenses are reported.”

Both ASC 972-603-25-1 and ASC 972-403-25 are built upon the conceptual framework.  For the purpose of this analysis, we provide the following definitions from CON 6:

Assets – Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Revenues – Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major and central operations

An event is a happening of consequence to an entity. It can be an internal event or an external event with another entity or with the environment in which the entity operates.

A transaction is a particular kind of event. It is an external event that involves transferring something of value to another entity.

Accrual is the accounting process of recognizing the effects of future cash receipts and payments in the current period. Accrual accounting attempts to record the financial effects on an entity of transactions and of other events and circumstances that have consequences for the entity in the period in which those transactions, events, and circumstances occur rather than in the periods in which cash is received or paid by the entity.

Matching is the simultaneous recognition of the revenues and expenses that result directly and jointly from the same transaction or event.

Analysis of the Facts and Conclusions

A serial assessment is a special assessment.  It is a special assessment as it is prepared outside the normal budgeting and assessment process for determining the operating assessment and the reserve contribution to be levied against the owners in the upcoming fiscal year.

There is no legislative support for the concept of a serial assessment.  As a matter of fact, most state laws are silent even as to the power of a special assessment.  The right to assess the owners and memberships outside the standard budget cycle is generally a power given to a board of directors by its bylaws.  It is generally understood that where state law does not directly contradict a governing document, the governing document will prevail.

There is also no specific codification to be found in the accounting literature addressing serial assessments.  That is because the serial assessment can be analyzed as either an operating, or common, assessment, or a special assessment.  If the assessments has the characteristics of an operating assessment, it should be treated as an operating assessment; if it has the characteristics of a special assessment it should be treated as such.

This means the serial assessment must be judged based upon its economic consequence.  In order to determine how the transaction should be recorded, we must look to the underlying reason why the assessment is being levied to the owners and members.

Example 1: Large construction project coming due

In this example, the hypothetical condominium association AB Condo Association has identified that in three years, it will be required to expend approximately $5,000,000 for a series of reserve projects.  The board has determined it will have a reserve funding deficit of $2,000,000 when that project is done.  The board passes a special assessment and calls it a serial assessment where the $2,000,000 is going to be levied monthly to the ownership over 36 months.

The board identified that there is a reserve fund deficit and calls for an assessment of $2,000,000.  Because the board called for a special assessment for the full amount but is allowing owners to pay in monthly installments over 36 months, the Association should record the receivable and a deferred revenue item for the $2,000,000 which will become revenue as the reserve project is completed.

From an economic standpoint, the board and owners have acknowledged a funding deficit exists.  The board and owners have agreed to a process to address the funding deficit.  This meets the requirements of an asset as laid out in the Concept Statement 6 and should therefore be recorded at is present value.

While our analysis is focused exclusively on the appropriate accounting treatment of the assessment, the interest factor should not be ignored.  Because this assessment is being collected over 36 months, ASC 835 Interest should be taken into consideration.  Since the board has not stated that there is an interest component on the payments from owners who elect to pay over the 36 months, the interest should be imputed at a market rate.  This is necessary as financial statements prepared in accordance with GAAP should have assets and liabilities stated at their present value. (ASC 835-30-10)

Example 2: Desire to build up the reserve account

AB Condo Association board of directors has a concern that the Association could be underfunding its replacement reserve.  It decides to assess a 12 month serial assessment against the units for a total of $1,000,000 and levy it monthly until all units have paid.

From an economic standpoint, the board and owners also acknowledge a funding deficit exists.  The board and owners have agreed to a process to address the funding deficit.  This is a special assessment for the full amount with installment payments due in under twelve months.  Because the special assessment is for less than twelve months, ASC 835-30-10 will not apply.

Example 3: Large construction project coming due and board borrows funds for the construction

Similar to Example 1 ,only the AB condo board has identified that it cannot collect the full assessment due for the deficit which exists for this reserve project.  The board borrows $2,000,000 from a bank.  It states that owners have two options: pay their portion of the special assessment up front or pay it over 120 months with interest due on those payments equal to the bank’s rate of interest it will charge on the loan.  The board calls this a serial assessment and owners have the option, but not the obligation, to pay their outstanding balance on their assessment at the time of sale of their unit.

As in example 1, the board recognizes a deficit in the reserve fund to pay for the construction.  To facilitate the immediate construction, the board addresses the funding deficit by borrowing funds.  The Association will record revenues to match the construction costs paid for by the bank financing and will have a receivable from the owners for the total amount of the construction costs above what has been financed from the established reserves.

Example 4: Large construction project coming due, board borrows funds for the construction and there is no special assessment

Similar to examples 1 and 3, only the board does not pass a special resolution to assess the deficiency to the owners.  Instead, the board agrees to increase the annual operating assessment in an amount sufficient to pay the bank a monthly principal and interest payment.

The board recognizes that there is a deficiency in the reserve fund.  The borrowed funds are used to pay for the construction.  To match the construction costs, revenues should be recorded and properly charged to the owners as a receivable.  The amount of the receivable is the present value of the discounted cash flows of the excess operating assessments charged to the owners.  If, for instance, the actual operating expenses of the association are $200,000 and the board increases the operating assessment to collect funds to pay the bank its principal and interest by $200,000 per year and this will run for 15 years, the present value, at an appropriate market interest rate (assume 5% for this example) would be the present value of that additional assessment charge.  In this case, $200,000 over 15 years at 5% interest rate is a present value of $2,075,000.

Conclusion

The authoritative guidance for assessments all support the premise that the Association has an economic claim against the unit owners for the present value of the payments which are incurred to pay for addressing a funding deficit.  GAAP calls for matching the revenues to the expenses in a given reporting period and, to the extent that funding deficits are identified and a plan put in place to address it, the funding plan has economic substance and should be recognized as an asset.

The determination of its recording as income earned by the Association or deferred is a matter of the facts and circumstance which led to the special assessment.  If the special assessment is for a designated purpose, the assessment should be deferred until the related costs are incurred and then recognized as revenue.  If the special assessment is put in place to address an overall funding deficit, the amounts are likely revenue upon the assessment.

The economic reality is that the owners, especially in a condominium, own the common elements.  Charges to repair or rehabilitate the common elements are, in fact, the responsibility of the owners.  Thus, either the Association has pre-collected those funds and have established a reserve for those future amounts, or the Association has an obligation to assess the owners upon the identification of the actual funding deficit.   Either way, the Association clearly has an asset under the accounting standards.

What is Independence?

I know I beat on this subject constantly but it is important.

Board’s, your CPA firm must be independent to issue an audit or a review report on your financial statements.

Case in point, we were engaged by a group of owners suing their association.  We determined the factual errors in managements’ underlying work and the deficiencies in the reviews performed by the CPA firms.  In our report to the owners and board of the association, we stated they needed to engage new CPA’s to independently review the years after the accounting errors were corrected.

We stated explicitly our independence was impaired and thus could not perform the reviews.  (Not that they asked)

Fast forward six months.  The board engaged a CPA firm to correct the accounting errors.  This firm apparently issued a report which identified the errors and the steps necessary to correct said errors.  The board and its attorney relied upon that report to levy a special assessment.

Is the CPA firm independent?

No.  In order for this firm to be independent, their accounting work needed to be supervised and ultimately the firm had to identify someone in management who could take responsibility for that work.  It is important to note:

  • This is the same management who got it wrong for 7 years and who refused to correct it when the suing owners said there were errors.
  • This is a new board who replaced the original board who signed off on management’s incorrect accounting for 9 years.

Who is taking responsibility for the accounting fix? The CPA firm.  We know this because the special assessment demand notice refers back to the CPA and their report on the accounting corrections and that owners could rely upon their work as being accurate.  It didn’t say management, it didn’t say board, it said CPA.

Because the firm is identify as responsible for the correction of the accounting error, they have taken the place of management.  Taking management responsibility impairs independence.  Impaired independence means you cannot do a review of the financial statement.

Sadly, this firm agreed to perform the reviews of the financial statements.  I am not certain that they should but more importantly, I think the board should seriously reconsider this firm’s performance of the reviews.  Especially in light of the extenuating circumstances around their particular association.

The board ultimately has the responsibility to engage INDEPENDENT CPA’s to audit (or review) the financial statements.  The board needs to ensure that the firm is truly independent and if they are the least bit unsure, not engage that firm.  The CPA is obligated to disclose to you any situation which could lead a reasonable party to believe that their independence is impaired.  If you don’t ask, don’t blame the CPA – although again, they should know when they are auditing (reviewing) their own work and decide accordingly.

If you are on a board of directors for your community association, take this seriously!  You engaging a firm whose independence is impaired casts doubts on your decision making.  Yes, the firm should know that independence is impaired and should state so – it is their ethical responsibility.  But it is the board’s duty to engage only qualified professionals and when you have nagging doubts, don’t engage.

If you have questions, we are here to help.  We are here to assist board’s in performing their oversight duties more effectively and efficiently so if a few minutes answering a question like this keeps a lawsuit from happening, we think it is time well spent.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

Some Takeaways from CA Day

Last Saturday Doug and I attended CA Day, put on by Washington CAI, in Seattle.  We had a great time and met lots of board members and several community managers.

Some takeaways from the event:

  1. Board members in attendance are overwhelmingly concerned about their associations’ financial health.  We received some great questions regarding how to read financial statements, why an audit can’t always detect fraud and how to take steps to ensure owners pay their assessments.
  2. Community managers are indifferent to the audit.  I mean, we don’t blame them.  It is at best a legal compliance issue which eats up time and energy and worse it identifies things that upset boards but are not practical concerns of management.  There were numerous comments about how the manager things that the audit is a complimentary service designed to fix the “minor” accounting errors created by bookkeepers.
  3. Board members do not feel comfortable questioning management.  Trust is a good thing but too much trust can lead to problems.  When we probed board members about decisions, many replied they rely upon their management company to make the right decision and did not feel it right to require additional explanation.
  4. Most people don’t understand the purpose of generally accepted accounting principles.  Not too surprising but I am concerned it is a continued trend to other accounting practices that don’t allow for easy understanding of financial position and activity for associations.  Cash is great, but it is often not the entire picture of an association, especially condo’s with bank loans.
  5. Board members often cannot identify their auditor.  We had three different boards come up and tell us how much they appreciated our audit, only to have us point out that we did not perform their audit but would be glad to submit a proposal to do so.  The hardest issue we face is keeping our name in front of boards without the message becoming obnoxious and turning off boards.
  6. Doug and I were about the only people from southwest Washington in attendance.  I spoke with Tracy of WSCAI about the need to build a better outreach to that area of the state.  Getting people to travel from Vancouver to Seattle is tough; attending Portland events is much easier.  The problem, obviously, is that Oregon Law is really quite different from Washington as it relates to community associations, particularly condominiums.  I will continue to advocate for a better presence down south.

Overall, I give the event a solid A.  Attendees received lots of benefit and we made some really good contacts.  For a state-wide event, I think it unfortunately deserves a C since few attendees were from our neck of the woods.  But we will be working with WSCAI to try and bring some great events to SW Washington so that boards can benefit from great information without the 5 hours of travel.  I don’t blame the state chapter, they did try and do outreach.  It is a matter of geography and it is going to take a lot of energy to counteract the pull from Portland.

If you have questions or concerns, or would like to weigh in on what a local CAI outreach effort might look like for SW Washington, feel free to shoot me an email.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

 

Reserve Fund Planning

September and October are the months where calendar year-end associations start budget planning.  And one of the most challenging aspects of planning is dealing with the reserve fund deficit.

The reserve fund deficit is the cruel fact that the amount of money you should have on hand is substantially less than the amount your reserve study calls for.  For HOA’s, the amount is usually pretty small since there are not a lot of common property; maybe a community park with a swing set and fencing.  Others, like my HOA, have a gate, gate control system, and private streets.  It is condominium properties that have substantial common property and the biggest funding gap.

So, if your association’s reserve fund is less than 75% of the amount your reserve study thinks you should have on-hand, you, as a board, need to deal with this issue.  This is especially true if you are within 5 years of having to pay out a substantial amount for reserve projects.  You simply do not have the luxury of time to slowly accumulate the additional amounts.

The best approach is some mix of special assessment due now and slowly increasing your reserve assessments.  While every association is different, the one basic commonality is that reserve shortages will not correct themselves.  Demand the current owners pay in to bring the reserve up to a healthy balance and then start increasing the monthly/annual contribution requirement.  It is the only way to avoid taking out a bank loan.  Loans for special assessments seldom end well for owners.

If you are considering buying into a condo, look closely at the reserve study and compare that to the amount held by the condo for the reserve.  Is it close?  If not, it would probably be in your best interest to demand that the seller agree to contribute that units portion of the short-fall to either an escrow or to the association.

For instance: lets say the reserve study says that the association should have $1.0 Million today in reserves.  You look at the financial statement and it reports reserve funds at $500K.  If there are 100 units and each pays the assessment equally, then that unit’s portion of the shortfall is $5,000.  Trust me, this shortfall is going to be called sooner or later by the board and you want that money ready to be paid in.  By the current owner since they are responsible for it.

If you are thinking of running for a board seat, don’t  run on the platform of cutting assessments.  Especially don’t call for cutting reserve assessments.  That bill is coming due; likely sooner than you realize.  Cutting assessments simply forces the association, you and your neighbors, to come up with larger sums later on.  If you are going to call for a special assessment, why wait until the pain is so great that it can’t be dealt with?

If you would like us to look over where you are and provide you some options, send us an email attaching your reserve study and most recent balance sheet.  We will analyze the documents and provide you our free, no obligation assessment on your options.  We are here to be of service to you.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.