This engagement is anonymized to protect client confidentiality. Clarity Tax & CPAs is a PCAOB-registered, peer-reviewed firm.
Client Snapshot
- Industry
- Community association / homeowners association
- Size
- 312 units; roughly $980K annual assessment revenue
- Location
- Southeast U.S. (anonymized)
- Engagement type
- GAAS financial statement audit, cash basis with supplementary schedules
The Challenge
The HOA board had relied on annual compiled financial statements prepared by a bookkeeping firm that also managed the association's day-to-day accounting. When a group of homeowners raised concerns at the annual meeting about a significant unexplained drop in reserve fund balances over a two-year period, the board voted to commission an independent audit, the first in the association's eleven-year history.
The bookkeeping firm was resistant to providing documentation and initially supplied incomplete records. The board had also been using reserve funds for operating shortfalls, a practice that was not disclosed anywhere in the prior-year financial statements, and several capital expenditure invoices could not be located.
What We Did
- Issued a document request directly to the prior bookkeeper and, when records remained incomplete, obtained bank statements and payment records independently through the board's access to association accounts.
- Reconstructed two years of reserve fund activity from bank records, identifying $74,200 in transfers from the reserve fund to the operating account that had never been disclosed or board-authorized under the association's governing documents.
- Obtained and reviewed all available capital project invoices and noted in the audit report that certain invoices totaling $18,500 could not be located, reported as an internal control finding.
- Issued an unmodified audit opinion on the current-year financial statements (cash basis) with an emphasis-of-matter paragraph disclosing the reserve fund transfer activity and its inconsistency with the governing documents.
- Prepared a separate findings memo for the board outlining the control deficiencies, governance recommendations, and a suggested reserve fund replenishment schedule.
The Outcome
The audit findings gave the board the documentation it needed to hold prior management accountable. The board presented the findings at a special homeowner meeting, passed a new reserve fund transfer policy, and began a structured replenishment plan. The property management company was replaced. The association has since engaged Clarity for annual audits, and homeowner satisfaction scores tracked in the annual survey improved materially in the two years following the engagement.
Learn more about our HOA audit services, or see how boards choose between an audit, review, and compilation.