Transaction Approval

Typically, anything I write that deals with HOA’s and Condo audits are written on C.O.R.E. Beliefs.  But, I already wrote a nice little article about reserve funds there and also today’s issue, while stemming from a condo audit, is applicable to every type of business entity out there.

We are currently struggling with a condo audit.  The association has been around for about 20 years and every 5 years or so the board decides to spend money on an audit.  Like all good auditors, we are performing some tests of transactions in the non-audited years to ensure that the money has been accounted for correctly.  Specifically, our concern is the reserve fund.

The first thing we noticed was board meetings did not often have quorum.  Quorum is a fancy Latin term for “who decides”.  It is the minimum number of selected representatives who have to participate in meetings in order for votes to have affect.  So, why is this a concern?

In many associations – and non-profits need to be concerned here too, quorum is typically defined as a “majority of the board members”.  In this particular case, there were 5 board members so a quorum would be 50% plus 1.  Three in this case.  At several meetings only two board members were in attendance.

The board then conducted business.  It discussed contracts for reserve fund expenditures and approved them.  Bad form.  And bad business.

The whole point of quorum is to ensure that the meetings are adequately represented.  You want to make sure that there is robust debate where called for and a full airing of the concerns when necessary to ensure that funds are spent wisely.  When debate doesn’t happen you get decisions that can be challenged.  Which is where we are today.

The problem for us is that we are auditing the records.  They approved a siding project, which was funded from reserves, and did not document how much it was approved for.  There was no indication that there were three (3) competitive bids submitted or even requested.

The initial invoice, prepared on a percentage of completion basis, indicated that the base contract was $98,000.  The total paid to the contractor was $129,000.  We can’t find any reference that the change orders were request or approved by the board.  And it happened when there were 5 different board members.  The five current members were not even involved in that particular project.

Getting proper approvals is an important aspect of taking care of business.  It could be that you, the owner of your company, wants to approve every transaction at time of payment by signing a check.  Or it could be you are the executive director of a non-profit which has a policy that commitments over $5,000 must be reviewed and approved by the finance committee.  Regardless of the process, it is the fact that there is a check and balance that makes it work and when someone overrides that part, you get all sorts of troubles.

Ideally, the board minutes would have documented the issue – siding replacement – and the names and amounts of the competitive bids submitted.  There would be debate about the relative merits of the quotes and then a final approval of the winning bid.  All completed at a properly called board meeting with quorum.  Ideally, there would be another meeting where changes to the scope of the original work order were discussed and approved.  We don’t have that.

We are struggling with a way to remain in the audit and issue an opinion.  We think the owners deserve to know what is going on and a properly worded Disclaimer of Opinion could help them understand and maybe even want to participate as board members.  But, our options are rather limited and we may be forced to withdraw, which doesn’t really help anyone.

What can you do if you are either a board director or are thinking of becoming one?  Make sure that you follow your by-laws and/or state law when it comes to how meetings are carried out.  Know the number required for quorum and make sure you have sufficient notes in the minutes that someone can follow the work and see how the decision was made.  You will save yourself a lot of grief, and an expensive “non-opinion” audit report.

Have a great day and if you are looking for a proposal for audit or review services for the upcoming year, please consider C.O.R.E. Services.  You can find out more about us on our website.  We look forward to the opportunity to be of service to you.

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