Over the last few years there has been an alarming number of HOAs that have lost money as a direct result of fraud, overcharging, mismanagement of funds and in some cases actual embezzlement by their management company.
As a Board member you should be aware that the Board can authorize someone to act on their behalf, but you can never give away the responsibility for that action. This is to say when you hire a vendor whether it is a landscaper, an attorney, a management company; you are ultimately responsible to provide oversight. All homeowners have a right and a duty to understand what is happening within their HOA, especially from a financial standpoint, the Board on the other hand, has a fiduciary obligation.
All HOAs should have professionally compiled financial statements prepared and available each month, additionally it is a good practice to have at least a compilation or review by a third party CPA once every year (some states require) with a full audit every 3 to 5 years. Your management company should bring this to you attention and inform you if state law requires. If this has not been done and made available to the Board and homeowners, this may be “the first warning sign”.
Warning Signs; Behavior
Frequent Reports of Unprofessional Behavior. Everyone that lives in the HOA is a client and should be treated with respect. The Board leads and directs the corporation, if you’re not getting treated with respect, why would you trust your financial well-being to that company.
Request for Financial Reports or Supporting documents slow or unanswered. Keeping and providing timely, accurate financial statements is one of the basic essentials of professional management, if this is not consistent; it’s time to look closely and/or look elsewhere.
Frequent Manager Changes. Even though the HOA management business historically has high turnover, too often this can be a sign of internal management problem or lack of a strong management vision.
Failure to disclose direct vender relationships, such as ownership in a company servicing the HOA. There is nothing wrong with taking advantage of combined services provided by management companies. Not knowing you are doing so, however and whether the pricing is competitive is not acceptable.
Warning Signs; Financial
Special Assessments passed or insurance claims paid, but no project has begun. Generally both these items should be banked separately from the operating and/or reserve funds. Part of the monthly financial should be a detailed accounting of any outstanding payments due and any expenditures.
Frequent voided checks or excessive GL changes after the fact. This should be self-explanatory if financials are frequently being changed after the month has closed and/or GL entries are always needed to make adjustments, SOMETHING IS WRONG.
Management extra charges excessive or differ from contract amounts. Know what the management company’s contract says, monitor the extras, and if the amounts change have them credited. And please, please do not make the mistake we have heard many times, “Don’t we have insurance for that?” well the answer is maybe, it is possible your lack of oversight may be considered negligent, most policies do not in fact pay damages and even those that do, have limits.
Of course these are just examples and do not necessarily mean your management company is dishonest. I personally have known and worked for several management companies who I would consider top of the field and provide an excellent service for a reasonable price. Sometimes is could simply be an honest mistake, we all make them and that’s ok, how a mistake is handled could tell you much about the integrity of the company in which you entrust your homeowners money. A good rule of thumb, if you feel uncomfortable, investigate, if you still feel uncomfortable, seek professional advice and if you find it is time to make a change, there are many, many professional management companies, doing an excellent job on behalf of the 300,000 HOAs nationwide, an excellent resource for finding a qualified companies is your local trade organizations. As a additional resource, talk to other HOA’s see who manages them and if they are satisfied with the service.