Real Estate & Property Law

What is an Audit and Who Needs It?

Below are a bunch of questions about HOA audits that I think will resonate with readers. (Thanks to a loyal blog reader...)

First Comment/Question: "Our current Restated CC&Rs spell out that we are required to have a yearly audit of our financials. Our old Bylaws stated that a review is required (the current Restated Bylaws are silent on financials).I have brought this up each year for 2 years. Now our condo lawyer says that ??audit?? is just a general term and all that is necessary is a review. I just don?t buy that."

Answer: I think what the lawyer was getting at is that in contract terms, if there is a general provision on a subject and a more specific and definitive provision on the same subject, and the two provisions conflict, the more specific provision controls. In this case, saying the requirement for a 'Review" is the more specific requirement is disjointed as the two items (audit and review) are each very specific procedures defined in accounting terms. An Audit is more comprehensive than a Review. The point is that the documents conflict and this should be resolved by proposing an amendment to one section or the other. Otherwise, there remains the possibility of a legal dispute that may cost the association money to resolve. The minimum standard required by California law is a "Review" if the gross income from assessments is $75,000 or more, but that is not a lot of help (except perhaps via an analogy argument that the Review is more consistent with existing law). One should check and see if there is a clause iin either the bylaws or CC&Rs that settles the question of which document controls when there is a conflict. There often is such a defining clause, and if there is one it usually sets the CC&Rs as control ling over the bylaws if there is a conflict. In this case, since the new bylaws do not address the requirement of an audit or review, there is no longer a conflict and so it appears that unless the board proposes an amendment to the CC&Rs and it passes, an audit is required.

Second Question: "We have a line item in our operating account for an independent audit. Doesn?t the board have to follow our CC&Rs?"

Answer: Boards are supposed to follow the law. A line item in a budget is not necessarily binding, but this budget allocation along with a requirement in the CC&Rs for an audit indicates an obligation that should be satisfied.

Question: "Can homeowners demand that an audit be done?"

Answer: Owners would have a right to "demand" if there is a documentary obligation. They have a right to "ask" in any event. It is not that uncommon for owners or a board to ask for an audit when HOAs change management - especially when one company has been in place a long time. If a board says "no", there is not a lot of recourse other than to seek a court order for an audit (not cheap).

Question: "I have obtained general, ballpark figures from 2 CPAs specializing in HOAs, the CEO of a large Management Company, and the guidelines from California DRE, 2007 edition. Prices from these sources ranged from $3000 to $4500. for an audit. Our new president states that a certified audit will cost $30,000 to $40,000. The President says that our association is a big business and this is not out of line. What do you think?

Answer: I don't know enough to make any kind of "educated" guess. The range from the lowest estimates to those presented by the President is extreme. Any reader want to take a shot at this question? I am sure the real estimate depends on the size of the budget and nature of any complications in it. I do not know what other factors matter since I do not perform audits.

Full post as published by California Condo & HOA Law on April 28, 2010 (boomark / email).