Auditing Homeowners Associations, Pros and Cons

Before I went into corporate accounting, I was a recognized authority on homeowners associations, or "CIRAs," otherwise known as Common Interest Realty Associations.  I audited HOAs for twenty years and became very knowledgeable of the accounting and tax rules for these entities, their peculiarities and hot issues.

The favorable part of having a homeowners association practice is that there are a lot of HOAs to service.  There are literally tens of thousands of them here in California.  California law requires most HOAs to have an annual review by a CPA, though some opt for an audit instead (since it exceeds a review, it is acceptable to the state).  HOAs also require annual corporate tax returns and sometimes an exempt organization return (Form 199 in California).  Lots of potential business there for a CPA.

The key to getting a lot of HOA clients is to become known to the property management firms who manage them.  HOAs are ruled by a board of directors made up of the homeowners, and they generally hire a property management firm to manage daily operations and accounting, including billing the members for HOA dues, collecting the dues, paying the monthly expenses, reconciling the bank account and maintaining the books.  They also send nastygrams to owners who are in violation of the rules -- those whose stereo is too loud or whose dog is peeing on the neighbor's petunias.

Many if not most boards of directors rely on the management company to present potential vendors (including CPAs) to the board for hiring decisions.  They expect the property manager to vette the potential vendors by sending requests for proposals (RFPs).  If the property manager knows you, they may include you in the pool of candidates for consideration.  Some property managers may really like you, and recommend you over the others, even when your bid for the work is higher.

The Board changes members frequently as new directors are usually elected annually.  New board members don't know you and have no loyalty to you as their accountant.  They rely on the opinion of the property manager as to whom to hire as auditor.  Vendors in the HOA business learn early on an important truth:  the property manager is usually the most powerful and influential agent of the HOA's board of directors.  He or she can provide you with a lot of business or effectively exclude you from consideration.  In HOA practice, it becomes clear early on that you must not alienate the property manager if you want to keep working.

This is potentially a large conflict of interests:  since it is the property manager's work that you are auditing (they keep the books), any critical management letter comments can get you fired.  To make matters worse, there are no legal or licensing standards for property management of homeowners associations.  Some property managers are competent and ethical; others are unprofessional, incompetent and sometimes downright crooked, e.g., soliciting kickbacks from vendors for recommending them, recommending vendors who are related parties (without disclosure) or in some cases, embezzling the funds of the associations.  HOA property management is lousy with the potential for bad work, conflicts of interest and downright fraud.

Okay, this article is getting a bit long, so let me summarize some points:

Favorable aspects of auditing/reviewing homeowners associations:

• There is a lot of potential business for CPAs;
• Most work can be done after the CPA's busy season;
• HOA's can provide the CPA with cashflow during the slow season.

Challenging aspects of auditing/reviewing homeowners associations:

• Homeowners associations have their own accounting and tax procedures and practices and specialized knowledge is required;
• Boards of directors change frequently and client loyalty is difficult to maintain;
• Due to the bid process and competition, CPA fees tend to be lower than for other types of business;
• Over reliance by board of directors on property management firms can potentially create conflicts of interest -- do you owe your duty to the board of directors of to the property management firm?
• Property management firms often do a poor job of accounting, meaning a lot of your fixed fee must be used in cleaning up the records and undertaking additional analysis and adjustment;
• Boards tend to turn over their CPA frequently, for frivolous reasons, and this can be frustrating, demoralizing and unprofitable.

Getting Along With the Boss: Micro-managers and Control Freaks

I left a job late last week because my working style just didn't mesh with the firm's owner.  She was a control freak on steroids, a micromanager and she made the mistake of talking down to me.  So here I am, now looking for new work (and who isn't in this economy?).

I did some soul-searching after this unsuccessful venture.  Do I get along with people well enough?  Human relations are very important to success in work and in life in general.  Am I too outspoken sometimes?  Probably.  I went back and looked at prior work situations and analyzed why they were or were not successful. I noticed that in some cases, my employer liked me very much and has stayed in touch since the employment.  In other cases, there was no love lost and I have had not subsequent contact.

A couple that were unsuccessful are these:
1.  A supervisor fired a talented, hard-working employee for being five minutes late.  I told the supervisor that she was a micro-manager, but she was more than that, one of those people who get off on power, i.e., having control over others, with the power to punish.

2.  The business owner above, who suddenly began treating me as a subordinate instead of as a colleague or associate.  Sure, it was her business, but my experience greatly exceeded her own, AND I was getting paid based on chargeable time, not on a guaranteed salary.

A couple that were successful:
1.  My supervisor was a mentor, a collaborator in creative enterprise.
2.  My supervisor treated me as a partner or associate and did not have ego or power issues; they just wanted to get the job done.

Having and exercising power over others is necessary and acceptable, IF it is necessary to get the job done, to train the staff, to prioritize the work, etc.  It is not acceptable if used merely to satisfy the manager's ego or control-freak compulsions.  Further, even when it is acceptable, the exercise of power in a work situation should include tact and respect.  No one wants to work for a Marine Corps Drill Sergeant.

When looking for a job, it's just as important for you to interview your potential manager as it is for him to interview you.  Find out what their management style is; ask to talk to other employees in private.  Assess whether or not your working style will mesh in this new environment before you accept the job.

The Economy From Hell: Are You Surviving?

It's been a while since I've posted -- almost two years!  That's a fine way to run a blog, he said.

Hope you are surviving in this economy.  Many are not.  I have noticed a lot of people have been harmed by this economy in more ways than one.   Here's a common scenario:

1.  People are laid off from their jobs and can't find another;

2.  Laid-off people go into business or become self-employed to survive, but due to poor cash flow, do not make estimated payements of income tax (including the onerous 15.3% Social Security and Medicare tax); 

3.  These folks then try to save their house or other property, which are now under water, meaning, they are worth less than the mortgage.  They can't refinance, so they take distributions from their pension plans to save the property, thus incurring not only additional taxable income, but a 10% penalty on the pension funds withdrawn;

4.  When filing their tax returns, these folks owe huge amounts of tax, income tax, Social Security tax, and penalties for early withdrawal of their pension plans.

Some of these people choose to either cheat on their tax returns by not reporting all income, or simply choose not to file a return at all.  I would never recommend either.

So the Recession from Hell, which the government caused (no, it wasn't Wall Street), now comes back to bite you in new and nasty ways, by making you a tax outlaw.

What can you do about it?  Call me and let's discuss, (408) 427-2849