More About C.O.R.E. Services

Featured

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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Abuse, Fraud or both?

maint cost graph.png

During an engagement last year we performed analytical procedures on operating maintenance and noticed that building maintenance costs were almost double what they were in the prior year.  The contract with the maintenance company was $1,500 per month plus $60 per hour for all hours over 40 in a month.  The graph above shows how this trended during the year.  We wanted to ensure that there wasn’t a problem and that the association wasn’t making a classic mistake of using operating funds to pay for reserve issues.  So we compared it to the same periods in the prior year.

maint cost q to q.png

So, the association went from essentially no extra costs in 2017 to $37K in 2018.  We went back to the minutes thinking we overlooked some reported problems – nothing.  We asked for the contractors invoices so we could analyze in more detail.

Surprise!  It wasn’t that the contracted maintenance company was doing more work, for some reason the association picked up a second contractor.  We couldn’t identify a reason, remember there were no reported problems which required more time and nothing was documented in the minutes.  So, we asked management.

The manager was a little vague and said that hiring the second contractor was authorized by the board.  We pointed out that there was nothing documented in the minutes. He said it was for work that the main contractor didn’t feel confident in performing correctly.  We asked if the contractor stated anything in writing stating that certain work was beyond their technical capability.  Nope.

You can see where this is going.  It is now a question of trust and trust needs to be earned through documentation and appropriate decision making.

As we have pointed out in another post, the contractor was owned by the community manager.  It is impossible to say whether the board gave permission as no member of the current board was there when the board allegedly agreed to this.  Convenient right?  There were invoices and checks over $1,000 were signed by the Treasurer.  There was never any question in the board meeting about the costs nor was it ever mentioned in the maintenance reports or the finance committee reports.  In short, absent some proof to the contrary, how can we say it wasn’t authorized?

But it is wrong.  Clearly this is a conflict of interest.  The manager should never have brought his company onto the association’s property, even if the board blessed it.  A conflict like this is an abuse of power – even had all the information been provided to the board it is difficult for a board to deny their manager.

Was the work necessary?  Who knows.  The invoices lacked any specifics and the community manager determined what work his company would perform and approved it.  Yes, the finance committee and the maintenance committee both reviewed the invoices and approved them, but their approval was based upon the word of the manager; who failed to disclose his relationship with the company.  Our instincts lead us to believe that the work was done but who knows?

Was it fraud?  Hard to say without digging into it.  The board looked it over and felt that it was their fault for not looking harder at the costs each month so they elected to approve the costs after the fact.  Does it change the reality that there was probably no need for a second contractor?  likely not, but it did get us over the hurdle for the audit.

Fraud, waste and abuse can eat up your budget in no time.  This is why it is so important to document everything and to ensure that things like contracts are approved and noted in the minutes to the board meeting.  The risk of fraud increases every time someone feels that a verbal approval is sufficient to get things done in your association.  Don’t fall for it.

 

 

Minimizing Fraud Risk

When we speak of fraud, we typically mean actions taken by one or more people to misuse the assets of another – for us, we talk about how association’s face fraud.  The single biggest reason that associations face fraud?  A lack of focus on basic control systems.  That is accounting-speak for basic checks and balances in association business.

As Doug and I work towards our goal of offering accounting and finance management services to managers and self-managed condo associations and HOA’s we are actively creating the checks and balances and realize how often these are overlooked in most situations.  We also note how many times we have heard one rationalization or another as to why basic steps aren’t taken and are convinced that what we offer is an ideal solution for everyone.

So, what are some of the basic checks that you should demand are in place for your association and how can you verify that these steps are being followed?  Are you proactively looking for opportunity to firm up your processes with as much gusto as you try to wring out cost savings?  Below is a list of steps that should be in place today and that are effective for any HOA or condo association, especially the self-managed association:

  1. Segregate duties.  We understand that trust is easy to give, easier to lose and almost impossible to regain so why risk it all because you want one person to do everything?  Don’t put your treasurer on the spot by making her responsible for bookkeeping and signing checks.  Decide what is most important and have the treasurer perform that role and then have someone else handle the other.  Do you want the treasurer to sign checks?  No problem, have someone else do the accounting.
  2. Record every financial decision.  Treat the minutes like they are going to keep you out of jail – and they will.  Every financial decision should be documented, in advance, in the minutes from the board meeting.  Engaging a landscaper?  Document the contract amount and payments terms in the minutes.  Hiring a street sweeper?  Document the contract amount and payments terms in the minutes.  Want to recognize a new owner in the ‘hood?  Don’t.  Not in the minutes anyhow.
  3. Create an audit committee.  Nothing says trust like bringing in a group of owners who aren’t involved in board decisions to review the finances.  We have a template checklist (Small association checklist for internal reviews) you can follow which will help your audit committee review transactions to ensure that all funds are accounted for and that documentation exists to support transactions.  Want to really spice it up?  Have someone other than the treasurer run that committee.
  4. Create and manage to an effective budget.  If your association has a history of taking the prior year’s budget and increasing it by 3%, don’t be surprised if your costs constantly increase at 5%.  Treat the budget as a tool to help manage your association finances.  Set realistic but aggressive spending targets for your major categories – such as landscaping, building maintenance, utilities and professional fees.  And aggressively analyze any budget category which is getting close to exceeding budget.
  5. Document all cost overruns in the minutes.  No matter how good your budgeting process, it is at the end of the day, a guess about how money will be spent.  The most important part of the budget is that it is designed to control spending, not limit it.  If you go over-budget, the important thing to do is document what happened and the amount of money that is being spent over what was budgeted.  This will help owners understand what happened and also allow the board to determine if the next budget needs to be increased to address similar issues in the future.
  6. Set the scope of work in advance of the work.  Don’t entrust your contractor with the hard part of setting up what you want for the money you are spending.  If you expect trees to be trimmed, make sure you stated so in the scope of work for the proposals.  If you left the scope of work up to the contractor, everything is an extra to the contract and your lowest bid turns into your highest cost.

Notice that none of these six steps require you to spend money.  Some steps, like the audit committee and setting the scope of work, might require additional time from some board members and owners but the results are worth it.  Controls do not need to cost money to work, but they do require thought and dedication to the cause.

At C.O.R.E. Services, we focus on preventing and detecting fraud so that owners can have confidence in their board.  The boards are dedicated but typically outsource the management who often do not understand the vital role of systems dedicated to rooting out the risks of fraud. Our services are designed to help the board and owners rely upon their accounting and financial statements to help with the decisions surrounding their community and home. You can find more information about us on our website.

 

 

When controls break down

Treating your condo association or HOA as a small business is misguided.  A small business seldom has more than a single owner and, even when it does have multiple owners, each owner gains benefit from the business carrying out its plan.  In an association?  Not so much as there is really no such thing as gain for the entity and the owners themselves never receive any of the funds directly.  Thus, while a small business can have its leadership make spur of the moment decisions, an association must focus on process.  It is the process of making decisions that puts the association on the right footing, not necessarily the decision itself.

We understand the importance of process.  Our years of auditing and accounting experience focused on condo associations and HOA’s has taught us the sad truth behind broken processes and their financial impact on associations.  This is why we have moved C.O.R.E. Services into management; to offer a strong emphasis on process and accountability.  We know the pain and agony that control breakdowns bring and want to help you avoid them if at all possible.

Our focus is on those areas where fraud can most easily occur if care is not taken to put system in place to detect and prevent fraud.  As we have identified in numerous articles here, fraud happens when processes are easily avoided or don’t exist.  And sadly,  broken processes are far more frequent than most people realize.

But even when you are fortunate enough to not suffer from a fraud when controls breakdown, your association often suffers from something equally damaging; a loss of trust.  Board’s no longer trust management, a director no longer trusts the treasurer, the unit owners no longer trust the board.  Suspicion runs rampant and regaining that trust may mean drastic steps are required: Throwing out everyone involved and starting fresh.  We have seen this happen far too often and it really doesn’t get to the heart of the problem, which is that there was never an adequate system in place to ensure things were handled correctly.

All systems eventually breakdown.  The key to handling this is to understand the purpose of the system and continuously asking if the objective is being met.  Thorough planning and continuous evaluation and testing of your system will help ensure that the results are consistent with your objectives.  And when you identify that the system might no longer be effective, you can modify it before it gets out of control – which can help keep trust in place.

Focusing on systems and processes is essential for a condominium association and HOA.  It starts with creating an effective budget and ends with your financial statements identifying how close to budget your actual activity was.  But there many, many important steps in between those two which help everyone feel confident their trust is not a mistake.  For instance, adequately documenting the board’s decision to hire a contractor to perform work at a stated price.  It goes without saying that this helps everyone understand what is happening and its cost to the association; it also goes without saying that far too often it goes undocumented, leaving everyone in the dark.

C.O.R.E. Services wants to help you with documenting your system and ensuring that your association money is working the way it should.  Contact us today for our free consultation and discover why working with a firm dedicated to preventing and detecting fraud in your condo association and HOA is the right step to having a great association.

 

Reconsidering Possibilities

Question: Should the manufacturer of Princess-line telephones continue to constantly double down on trying to convince the world that a landline is cooler than a cell phone?

Answer: Seriously?

Business leadership needs to constantly be surveying the real world and asking how their current product/service mix is doing.  At C.O.R.E., we do the same.  And what we see is making us reconsider how best to compete in this current reality.

Let’s cover some basics:

  • Association boards believe that an audit or review will uncover fraud or serious accounting irregularities;
  • Independent community management companies have no vested interest in preparing complete annual financial packages which conform to the association’s selected financial reporting framework;
  • Owners do not see the value of a financial statement audit at any price point;
  • The association, for the most part, is a passive bystander to management’s actions and have no real visibility into processes which record transactions;
  • Management’s accounting processes and control systems are an integral part of the financial statement process but no such controls are documented or tested;
  • Management believes that the auditor should be a member of the “team” and help their accounting department correct for mistakes in their error-filled general ledgers.

Some examples of the 50 plus attest engagements we have performed in the last 16 months:

  1. Management refusing to sign the representation letter as it requires them to affirmative state they understand it is their responsibility to establish a control system designed to detect and prevent fraud;
  2. A general ledger where management’s accounting team selectively posted transactions to equity accounts – making it almost impossible to reconcile to the prior year audited fund balances;
  3. Management charging a husband and wife, separately, the assessment for their jointly owned home over a three-year period and never identifying that they were overpaid;
  4. A board asking why we didn’t detect that their manager was overcharging them for services the manager didn’t perform;
  5. A manager who stated that it wasn’t their responsibility to reconcile any accounts but the bank accounts and that the auditor needs to clean up the books for them;
  6. A management company who charged their client by the hour but then stated they didn’t keep detailed time records because they are not a law firm;
  7. A management company who charged a premium because they were “experts” in managing insurance claims, only to have to amend prior year financial statements because they missed $35,000 of insurance-paid repair expense;
  8. A management company which buries non-exempt function income in assessments because, after all, no one wants to pay taxes;

This isn’t meant to be a whine session.  But, when we address the competitive environment, we begin to question if we are strategically in the right place: Would we better placed in addressing the systemic problems facing association accounting and finance?

It starts with us asking the basic question, what are we attesting to?  Theoretically we are attesting to the accuracy of management’s financial statements in relationship to the stated financial reporting framework.  It doesn’t exist as I showed above.  So, how do we issue an accountant’s report on something which does not exist?

More importantly, why should an association pay twice to get one service?  This is probably not a surprise, but your association first pays management to perform accounting and then pays for an accountant to come in and fix management’s accounting and then prepare the financial statement to finally attest to it.  The simple fact that this process is universally accepted doesn’t mean that it is logical though.

Or our other favorite, management charges an additional fee to cooperate with the attest service.  That’s right, management is now incentivized to make a mess of the books so they can charge you again later to create the schedules which should have already existed.  Management calls it unbundling, we call it creative price-gouging.  Its only purpose is to make the audit process so expensive that association board’s elect to avoid having the audit.  Even though, especially here in the state of Washington, an audit is required on practically every condominium financial statement issued.

I know, you want me to get to the point.  What possibilities are we reconsidering?

We are going to begin offering our Acclarit™ Services to management to address these very real issues.  We offer to completely take over management’s accounting and financial reporting for its clients.  You can keep the client contact and attend the meetings, we will keep the accounting straight and prepare everything needed for the board and owners.

We will

  • Bring our own accounting software, which will ultimately be licensed by the association
  • Help select the appropriate financial reporting framework for each association
  • Design the transaction recording system to support that framework
  • Post all transactions
  • Reconcile all accounts
  • Create a system of controls to detect and prevent fraud
  • Help develop the annual budget
  • Prepare standard and customized reports for management and board
  • Prepare the association’s tax returns
  • Prepare the annual financial statements including footnotes, as well as requested and required supplementary information
  • Respond to and prepare all requested schedules for the attest engagement

Heck, we will even sign the management representation letter.

And we will do all of this for one low annual fee, which you can pay monthly.  And, we will never mention the fact that we support your management company – you can have us be your secret weapon.  The only people who would know are those you tell.

We will even make this deal with you – we will match the current cost of your accounting department.  If you have two bookkeepers and a manager with a total cost to you of $120,000, we will do everything above for that same cost.  Superior results, greater benefits and no additional out-of-pocket expense for you or your clients.

We are even willing to create a strategic partnership with you in servicing clients.  All you would do is agree to reduce your fee for the accounting portion of your bill to the association and we will match that amount – provided it is reasonable – and we will work directly for the association.  You can wash your hands of the entire process except for how your work interacts with ours – and you will simply need to agree to follow our work flow so we can ensure that all bills submitted comply with association requirements.  The association wins by having a firm passionate about getting accounting and finance right from the start, you win by shedding your responsibility for accounting and finance management, and we win because we want this process to work while making money.

And if you are a self-managed condo association or HOA, run by the board or an employee, we are an even better fit.  We can seamlessly integrate into your operation and give you an independent but dedicated accounting and finance team which will offer all of the above so that you can get the best information available at the lowest possible costs.

This is a unique opportunity for you to also reconsider possibilities.  Let’s have a conversation about what it means to you, and the boards and owners who rely upon accurate accounting and finance activity, in having a firm dedicated to supporting their accounting and finance needs.  Call or email us today.  Or you can visit our Acclarit site for more information.  We want to help bring association accounting into the 21st century and think a strong partnership with you could be the best way to make this happen.

The Opportunity for Associations Under ASC 606

Doug and I have had some interesting conversations about implementing ASC 606 for HOA’s and condo associations.  One of our more intriguing is using the budget to define the performance obligations and the transaction price.

Wait, here me out.

Our logic is that the board approaches the owners with their detailed plan for the operations of the association and how much they want to add to the reserve for future issues;

That the owners either don’t disagree or agree (depending on the voting requirement to adopt the budget) with that plan;

The entire budget is treated as deferred revenue at this point since no performance obligations have been completed;

As those performance obligations are completed, the money is transferred from unearned revenue to revenue, essentially keeping the association at break-even;

At the end of the fiscal year, the association would have up to three potential results for each performance obligation:

  1. For items which went over-budget a receivable from the unit-owners to make up the over spending;
  2. For items which exactly hit budget, the revenue would match the expense;
  3. For items which were under-budget, the unearned revenue would remain as a deferred revenue item until used in a subsequent fiscal period.

Consider, when the budget is prepared, most often the board looks at what was budgeted but not spent during the current year.  Take legal as an example.  Let’s say that the board last year budgeted $3,500 for legal expenses but have spent nothing year-to-date and do not intend on spending any money before the end of the year.  The board elects not to budget for legal since they already collected it from the owners.

In this scenario, they have taken money from the owners with the intent of spending it.  It wasn’t spend and is now being carried-forward.  Or, it was treated as deferred revenue and will continue as deferred revenue until it is used at some future point.

ASC 606 provides an opportunity to more closely align board actions with financial consequences.  Board’s assess against unit-owners for a purpose; and unspent money doesn’t magically create a fund balance, which is the accounting process we currently have.  An honest board will diligently try to anticipate expenses for the upcoming year but some expenses will simply not be incurred – but the board is anticipating it will at some point in time in the future.  Or some expenses will exceed their budget and the board will need to make up that deficit by asking owners for more money in next budget cycle.

This is true even if they use another budget line-item.  Lets say that landscaping went over-budget by $3,500 and the board elected to use the $3,500 assessed for legal expenses.  So, on a cash flow basis, the association broke even, but for accounting, doesn’t it seem logical that the $3,500 is still owed from the owners for going over-budget since that legal expense now has to be re-assessed?

This is an extreme example and both of us agree that not every line item in the budget would create a definitive performance obligation; but, we do believe that ASC 606 provides an opportunity to look again at the process of budgeting and revenue recognition and understand how the two work together to produce results for your association.  So, while it may look complicated, an effective management and accounting system can easily handle such activity with minimal additional cost and effort.

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.

More on Management Representations

We appreciate that it seems our role as auditors is cloaked in secrecy.  We have rules and expectations about how not only we work but how others, who are not in our little clique, do their jobs.  We don’t have a secret handshake though!

The rules for generally accepted auditing standards (GAAS) are published by the AICPA and, while dull and boring, they could help you understand what the auditor is doing, why it is being done, and its impact on your organization.  And this includes the management representation letter and its importance to our work as auditors.

If you would like to follow along, you can search for AU-C 333 in your favorite web browser.

You need to understand that, whether you are management (employee or independent company) or governance (board of directors) you make what are known as assertions, or statements of fact, about information gathered during your audit.  For instance, we inquire about the correctness of cash, to with management responds with a copy of the bank reconciliation and bank statement.  That is management’s assertion that they have done the work correctly. Add in all the other documents and questions asked, both written and oral, and you can see that both management and the board make lots of assertions.

We gather all the information provided by everyone which supports those assertions.  This is our audit documentation.  We perform our procedures on those documents and these procedures form the basis for our opinion.  And now we get the end game.  We expect everyone to state in the affirmative that they understand their roles in the audit documentation process.

AU-C §333.02 states our professional expectation of management’s part in the audit.  Management’s representations are part of our overall audit evidence because, after all, everything we have done is based upon what management wants us to know.  Before you get your knickers in a knot, understand that this is a basic truth.  We neither believe that management is dishonest nor do we assume management is completely honest and projectile vomits information we didn’t ask for but which would explain unusual transactions.  Management, like all of us, fit on the integrity spectrum and while we would like to believe they are more towards the honest end, we cannot every really be certain.

First, what is management representing?  Well, first, management must understand and state that they are responsible for the fair presentation of the financial statements in according to the appropriate accounting framework.

“But wait,” I hear you saying, “You as our auditor prepare the financial statement, don’t you?”

Yes in most instances the auditor does prepare the financial statement.  The auditor does so mostly because it is the only way it is going to get prepared.  But think about it, who controls the accounting records on which the financial statements are built?  Who controls the general ledger, the source documents, the approval process, etc.?  That’s right – management.

Next, management represents that they have provided us all information, including any correspondence from governmental agencies about non-compliance.

Management then represents they believe that any adjustments we have reviewed with them and which have not been posted would not cause a reader to scream in bloody terror.  Honestly, as your auditor we probably never meet an owner within an association, except for those who serve on the board.  Management knows (or should know) what the owner will accept.  And if management believes that the owners won’t accept any level of possible deviation, it is on management to say so and ensure there are no adjustments to the financial statement – either during the year or at year-end.

Management acknowledges its responsibility for the design and implementation of programs and controls to prevent and detect fraud.  Surprisingly, (or not depending upon where you sit in the conversation) this is one where we receive the greatest pushback and where we will stop as the rest is pretty straight forward.

We would honestly think that management would not want to take responsibility for the presentation of financial statements in accordance with the association’s accounting framework.  After all, the actual preparation of the financial statement includes understanding how GAAP treats certain transactions and includes the identification of both required disclosure as well as disclosures which assists the reader in understanding the financial statements.  But we get far more resistance to the concept that management is responsible for the effective operation of an internal control system designed to present and detect fraud.

Why?

Ignore the audit for the moment.  Whether your association is being audited or not, isn’t there some fundamental belief by owners that someone in the chain of authority over association money has created a system to ensure that money isn’t simply evaporating?  As an owner of a unit within the association, and even as a board member, when you put your trust in an organization to manage your money, isn’t there some expectation that management will try extremely hard to ensure your money is fully accounted for and that it is not being given to fake vendors or paid to employees who are lying on their timesheets?

This puzzles us.  You see, we go out and read the marketing materials that management companies create and put on their webpage.  They love tossing out the terms trust, partnership, looking out for you and more pithy slogans designed to make you feel warm and fuzzy.

And yet, when the rubber meets the road, at the moment of absolute clarity where they can state their positive control over your money and that they have taken the appropriate steps to protect it, they refuse to acknowledge that responsibility.  Fascinating.  And literally incomprehensible.

Back to being an auditor.  We think boards should be completely dismayed whenever management attempts to weasel out of their responsibilities.  And signing the representation letter is one of those moments where management must take responsibility.  Failure by management to take responsibility means that you, as a board must take responsibility.  You are going to state, in management’s stead, that you understand and approve of management’s control system – a system over which you have zero input and zero ability to verify its integrity.  This should not sit well with you as a board.

It certainly doesn’t sit well with us as your auditor.

For the financial statements to be meaningful, someone is responsible for ensuring that all appropriate and necessary transactions are recorded or disclosed.  Someone has to create the underlying system of controls which ensure that all necessary transactions are recorded and disclosed and can detect and prevent fraudulent transactions from entering the system.  And that someone has to be management.

C.O.R.E. Services, LLC is here to help boards understand and rely upon their financial statements and management reports.  We bring professional skepticism and a highly tuned focus on accounting and auditing for homeowner and condominium owner associations.  If you would like more information or to request a quote to audit (or review) your Washington or Oregon financial statements, go to our webpage to learn more and to request a proposal.

 

Management and the representation letter

An interesting situation popped up on an audit of a condominium association.  As we were in the final stages of finishing, the management company decided they could not sign the representation letter.  Their particular concern was the representation that, “We (management) acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.”

There are two levels of management, the oversight provided by the board of directors and operational management.  We realize that strong oversight can be part of the programs and controls, but lets be realistic here; management companies establish company-wide control systems which impact all their clients so a particular board will not be able to influence the operational levels of controls which need to exist in order to ensure the financial statements are free of material defects – intentional or otherwise.

Signing the management representation letter is not an option.  Without one, we cannot issue an audit opinion or review conclusion.  So, if management won’t sign the representation letter as presented, then it falls to the board to take responsibility for the representation.  And this can create quite a dilemma for a board.

Remember, for associations which outsource their operational management to a community management company, the board is simply a part of the control system.  The board has to rely upon management’s controls to ensure the information they are receiving is timely, accurate and complete.  While they can, and often do, request certain changes to how things work, the management company doesn’t always comply as they hate changing their process for a single client and, lets be honest, unless the majority of clients complain, there will not be any change to the control system.

Now that management has refused to sign, it is up to the board.  And it is highly unlikely that the board understands exactly how the management’s company has designed the internal control system.  So, we end up in some twilight-zone process of horse trading where the board says they can’t sign it unless certain changes are made and management won’t sign it unless certain changes are made.  And yet, we can’t change it since SOMEONE in the process is responsible for designing and implementing the system of internal controls!

And this is where things turned comedic.  We sent the management representation letter to management and management refused to sign it without changing that particular representation.  We explained that we could not allow them to change it but they could elect to refuse to sign and we would request signature by a board officer.  So that is what happened.

The board met and agreed to sign the representation letter.  Crisis averted.

Not so fast.  The very next day one of the board officers wrote and said they had a concern.  He had some guests over for Thanksgiving and they used one of the accommodation rooms in the condo.  It is now March and he still hadn’t seen the billing for those 4 days.  He is worried that something “nefarious” is happening.

Comedy at its finest.

Nothing nefarious is happening.  This is a breakdown in the system of internal controls, which by the way he, as part of the board, signed off on as saying they were responsible for, that obviously isn’t working!  Transactions are not being recorded in the period in which the transaction occurs.  Oh, management will eventually get around to it, about six months after-the-fact, but in the meantime, a series of transactions were not recorded in the correct period.  And the board admitted it was responsible for this.

Alright, fine, you might not see the humor in that the way we do, but the point is, someone has designed a system of controls around accounting and money-handling, even if it is a faith-based system.  Someone is responsible for making sure it works right and it is not your financial statement auditor.  We are engaged by the Association to audit the financial statements, not how well the internal control system is working.  We are required to get a basic understanding of how management operates but, unless we intend on relying upon that control system, we automatically assume it doesn’t work.  By assuming that controls don’t work, we look to source documents which, sadly, end up adding time to an engagement.

Or, in all honesty, it actually saves us time.  If we tested the internal controls and tried to rely upon them and THEN discovered they don’t work, well we ended up doubling the work for the same result.  It is simply less time-consuming to ignore the control system and audit the old-fashioned way – by looking at source documents.

So, management and the board are part of the internal control system.  For self-managed associations, the board will be the primary party of responsibility.  For manager-managed associations, the management company should be the primary party.  At the end of the day though, if the board wants to allow their management to say they have no responsibility that is their choice.  We simply think it is a mistake unless your board was an integral part of designing that control system.

C.O.R.E. Services is here to help association’s understand and rely upon the numbers that are presented by management.  To help the association, we perform attest (audit and review) services primarily for homeowner and condominium associations in Oregon and Washington.  If you would like more information on C.O.R.E., you can read more about us on our website.