Q: I am a member a local golf community and have concerns regarding the decisions our current homeowners association board members have made. In the past 12 months we have had a high turnover of board members as well as losing management. The cause of this is related to much politics and residents filing lawsuits against the board and community with the stipulation that certain board members step down and management terminated. They would then dismiss their lawsuits. Well, they got what they wanted.
My letter to you is in regards to the actions of the current board members. In July there was a vote approving a request for three bids to be obtained for a forensic audit. In August they rescinded the decision to obtain the bids, which prevented the consideration of moving forward to have the forensic audit performed. Reason presented was because they had a basic audit completed and the cost was $9,500 to $9,800 and they did not feel it was necessary to move forward with the forensic audit. They said they are doing their due diligence. Although they have no idea what the additional expense would be, the reason to not move forward with obtaining three bids, was the cost.
But there is $1. 6 million that was moved from the reserve to the operating account, and the board has no idea where it went or what it was spent on. They are unable to provide any answers to the residents of the community, and now they have raised our dues. I need your help in understanding why new board members, who are aware there is money that is missing from the reserve and there is nothing to show what expenditures it was applied to would sit back and not be interested in having a forensic audit.
This is a lot of money, and although a forensic audit might be costly, why wouldn’t they move forward so that our community may possibly get some answers regarding where these funds went? If the forensic audit determines there is mishandling of funds, someone needs to be held accountable. If the forensic audit determines it was a mistake then it is a costly mistake. But in the end, we will have answers. I would like to mention this is the same community that borrowed from our reserve, transferring funds to the general fund account so that we could pay our bills and then the board had voted not to pay back the reserve. However, after a letter was presented to you and published, it was determined by the board that the reserve would be paid back.
Thank you for your time and review, I am hoping that you will see this question fit to be published along with your response.
A: It appears that this association is required to have an annual audit per state law. If this is the case, the audit needs to be performed. If the association board has not authorized an audit for any period of time during the instability of the board of directors and management companies, you can contact the Nevada Real Estate Division and the Ombudsman Office and file a formal complaint as the lack of the audit would be in violation of Nevada Revised Statutes 116.31144.
Please note that an audit is not the same as a forensic audit. A forensic audit is an examination and evaluation of an association’s financial information, generally conducted to prosecute a party for fraud, embezzlement or other financial claims, such as a conflict of interest, bribery and extortion or the misstatements of the financial reports. It may be conducted to determine negligence. The objectives of a forensic audit is to identify if fraud has been committed, how long it has been going on, the parties involved, quantifying the financial loss and providing fraud prevention measures.
A financial audit is conducted to provide an opinion, usually from a certified public accountant, as to whether the association’s financial statements are stated in accordance with specified criteria, which are usually the international accounting statements.
It is a third-party examination to provide the homeowners with reasonable assurance that the financial statements are accurate and complete. There are a number of steps:
■ Reviewing the systems put in place to transmit financial information to the accounting department. The CPA obtains financial documentation such as deposits, invoices and bank statements, as well as reviewing the flow of the financial information that deposits and the payment of invoices and the reconciliation of bank accounts are transacted in a timely manner.
■ The second step is for the CPA to review the record-keeping policies and check to ensure that records are properly stored.
■ The third step is to identify and to review each element of the association’s accounting systems, which involves reviewing journal entries, the general ledger and financial statements. Are the accounts being posted to the general ledger in a timely manner?
■ The fourth step is the checking of the association’s internal controls to gauge the level of protection they provide from theft and fraud. Internal control policies include the separation of accounting duties between different employees, so that the employees who deposit checks are not the same employees reconciling the association’s bank accounts.
■ The fifth step is to compare the internal records of the cash accounts and income and expenses against external records. The CPA firm will arbitrarily select homeowners and send them verification letters to confirm what they paid to the association; as well as select vendors and send them verification letters to confirm what money they received from the association in payment of their services. The association signs authorization letters to allow the CPA to obtain first hand bank statements.
■ Finally, the sixth step is to analyze the association’s internal tax records and official tax returns.
As you can see, a financial audit does provide a thorough accounting of an association’s financials. The primary difference is the purpose of the financial audit versus a forensic audit, as the forensic audit will include much of the same steps.
The cost for a financial audit is significantly less than a forensic audit. The CPA conducting the financial audit should be able to inform the board that a forensic audit would be needed based upon the preliminary findings.
Q: We have rules in our community about rules about leases. They are not being applied to the Airbnb rentals, which are all unlicensed. If they were it, would raise the Airbnb transaction cost considerably.
Instead the association manager is treating them as approved guests of the owner. Mostly, the owner/host/landlord never meets the tenants. Many are out of town. They instruct the Airbnb guests to go to concierge, who then gives access via the elevator (fob needed) to the floor of the unit. The “guests” then admit themselves by digital keypad and gain fobs to the building.
The board says it has legal advice that it must admit these Airbnb tenants as guests or else it could be sued, as the owner has instructed them to do so. We understand that exclusion of commercial activity doesn’t apply to short-term rentals but wonder if our rules would give the association some powers over these unlicensed Airbnb operators.
There have been a number of incidents, including an eviction, robbery, vandalism and other unruly behavior that pose safety and security hazards. Owner-residents are also very concerned about the insurance implications of unlicensed rentals in the building.
A: You were kind enough to send me a copy of your rules. Unfortunately, there are no term restrictions within the covenants nor any restrictions to the Airbnb rentals. As to being licensed or not licensed with the city of Las Vegas or Clark County, this would be a city code violation and not an association violation
Barbara Holland is a certified property manager, broker and supervisory certified association manager. Questions may be sent to firstname.lastname@example.org.