PICTURE THIS: you’re sitting at a table in the middle of a meeting. But not just any meeting… This is the turnover meeting for the brand new association in which you just purchased a shiny new home. Tonight is the first “official” meeting, where the previous board of directors – composed of members of the developer’s team – turn over the responsibility of the association to a board made up entirely of homeowners.

Your neighbors thought nominating you to serve on the association’s board of directors would be a good idea. “Finally!” they said, “this place will be run by people who actually live here and care about our community, not a group of people looking to maximize their profits.” You prepared yourself by having a conversation or two with the property manager, doing some research on the CAI Illinois website, and reading the latest issue of Common Interest.

You’re excited to begin serving the association in which you live. You have some “Great Expectations” about serving on the board and you already have a few suggestions including a social committee to get people involved, and a flowers and landscaping project to beautify some of the common areas and improve curb appeal. But then, the manager passes over a stack of bills for some repairs and leak investigation work... Huh? Isn’t this a brand-new, just-built- from-scratch association? Why does the association have so many structural repair bills this early into its existence? Suddenly, you feel exactly like Pip in Great Expectations when he is reminded that “life is made of ever so many partings welded together.”

As you and the other newly elected board members peruse the latest financial statements, you look across the table at each other in surprise. Judging by the expressions on your fellow board members’ faces, it appears your concerns about the association’s finances are mirrored on their faces as well. Was this all of the money the Association had? The reserves were much less than you thought… and judging by the expressions on your fellow board members’ faces, the same worry was echoing in their minds as well. Your attorney had explained that based on how the association’s declarations were written, the developer was responsible for paying assessments. However, you can’t easily determine from the financial reports you were given whether they were charged for all of the assessments, or whether they were paying them. Seeing all of the expenses the association has paid this year so far, they seem a bit excessive and higher than anticipated… and definitely over budget so far this year. Is that normal for a newer association? Help!

The attorney recommended that the association should consider having an audit done. An audit involves using an independent third-party CPA or CPA firm to test the balances and transactions reported in the financial statements. This testing is done by examining source documents such as bank statements, invoices, contracts and information from third-parties to judge whether transactions and balances are fairly stated. Auditors will also recalculate the balances of certain items in the financial statements to determine whether the amounts reported are in line with the information the auditor has already gathered. It also involves an evaluation of accounting policies and procedures to express an opinion as to whether the financial statements follow the same accounting principles used uniformly in this industry.

A typical audit from inception (the date the first home in the association is sold from the developer to a purchaser) through turnover (when the board turns over from being developer-controlled to homeowner-controlled) may accomplish many functions, including the following:

        should have been charged to the homeowners and developer, if spelled out as such in the declarations

 developer, if applicable

 that should have been paid by the initial homeowners upon purchase and deposited into the reserve, working capital, or other equity funds

       that should have been transferred into the association’s reserves from inception forward, based on the annual budgets

        operating and reserve bank accounts

       compare to expectations based upon number of homes recorded through the period

An audit from inception through turnover can take some time, especially if the amount of time between inception and turnover spans a few years and involves homes added to the association in various phases or amendments. The auditor may ask for what seems to be a never-ending amount of information. Keep in mind that an auditor on a turnover audit engagement has to evaluate and test the association’s activities and transactions for a period of time that normally is longer than one year. When an association is not fully developed or fully closed upon turnover, there are additional procedures and work that the auditors needs to complete. In order to expedite the turnover audit process, the board should work with the auditor and management to provide the data needed for the audit.

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