Expense records arouse suspicions

Question: My homeowners association recently sent out the annual audit two months late. The audit does not match up with the check register I requested and received from the association earlier in the year.

The check register shows expenses to two law firms totaling $39,000. The audit shows legal expenses as $19,000. The budget is $5,000.

Meeting minutes state the auditor’s letter was signed two months before the first draft was presented to the board for review. The auditor’s disclosure states that “the association is considering special assessments for the next three years to make up budget shortfalls.”

We’ve already had two special assessments in two years, and now the board wants three more over the next three years. I’ve tried to review these legal and other expenses, but the board and management company keep telling me they are protected under “attorney-client privilege.”

Other homeowners also have tried to see these items, but we’re either put off or told we can’t see the documents. We pay the bills here, why can’t we see these documents?

Answer: Merely because the auditor’s letter was signed two months before the first draft was presented to the board for review does not automatically point to wrongdoing by your board. Even though the budget is $5,000, the check register shows $39,000 and the audit indicates $19,000, this also does not necessarily indicate wrongdoing.

One factor might be whether your association’s accounting is based on the accrual system or on a cash basis. While the check register shows $39,000 -- a cash accounting figure -- some or all of the $19,000 may have been incurred in a prior fiscal year and paid during the current one.

Or, like some associations, the accounting system may have been changed from accrual to some other method while these billings were generated. A thorough investigation would be necessary before any allegations of wrongdoing could be raised.

As for viewing the books and records, a management company vendor cannot tell a titleholder what they can and cannot see -- vendors can only act at the direction of the board. Only the board can answer for your seeing the books and records.

Although the board says the items are protected by attorney-client privilege, you may be entitled to access. Civil Code section 1365.2 provides that a member may examine the books and records, including money paid to the attorneys. The law provides in part that a board may redact (withhold) information from the accounting books and records but that “the association may not withhold or redact information concerning the compensation paid to employees, vendors, or contractors,” including attorney vendors.

Associations attempting to hide expenditures usually do so by breaking down large items into smaller amounts and dispersing those costs evenly throughout the spreadsheet. This “creative accounting” is used to avoid drawing attention to questionable expenditures.

Sometimes, boards intentionally ask a management company to hold invoices back and vendors to hold off sending in an invoice until the budget is distributed to the membership. Outstanding invoices are not included in fiscal year-end reports, giving the appearance that an association is in better fiscal shape than it is.

There are instances when an attorney vendor may intentionally withhold invoicing the association until a new board is convened, until the director who doggedly questioned the law firm’s billings is removed, or they may even wait until after an annual meeting to send the invoice to the association. If this has occurred in your association, a forensic audit should be conducted immediately, and the association should consider hiring a different attorney.

If your association was trying to hide large expenditures, disclosure would not be the way to do it. Attorneys’ bills are too easy to confirm, and falsification would likely subject the attorney to discipline by the state bar.

The auditor’s disclosure indicating special assessments to make up budget shortfalls could be an indication of an entirely different problem unrelated to the type of accounting system used. Budget shortfalls over a period of time indicate that the board lacks a realistic grasp of day-to-day operating expenses. Special assessments may not be used to cover the deficiency in those expenses, only an increase in the regular assessments may be used for that purpose.

Please send questions to: P.O. Box 11843, Marina del Rey, CA 90295; or e-mail your queries to noexit@mindspring.com.