Homeowners associations use CPAs to conduct audits of the HOA's financial statements. Audit procedures have changed dramatically as a result of many highly publicized accounting scandals in the past few years. Although the types of fraud seen in those well-known cases typically do not occur in HOAs, the changes in audit procedures apply to all businesses, large and small.

The biggest changes result from the American Institute of Certified Public Accountants' (AICPA) Statement on Auditing Standards No. 99. SAS 99 became effective on December 15, 2002. Its purpose is to improve audit quality and the ability of auditors to respond effectively to the potential for fraud. SAS 99 covers such new topics as:

• Characteristics of fraud
• Exercising professional skepticis
• Assessing and responding to fraud
• Examining journal entries for fraud
• Evaluating significant unusual transactions
• Communicating fraud to the client

The effect of SAS 99 is that the auditor will perform procedures to determine unusual relationships between accounts and increase inquiries of management. The auditor will also assess the risks associated with management override of internal controls and journal entries. The auditor will inquire of the board of directors, bookkeepers, property managers, and others to determine if any has knowledge of fraud or suspected fraud. The auditor will also examine programs and controls in place at the HOA or the management company to prevent, detect, and deter fraud. At the conclusion of the audit, the Board, manager and bookkeeper will be asked to sign a letter of representations which vouches for the correctness of the financial statements.

HOAs are corporate entities which should maintain professional and honest books. SAS 99 will help auditors ferret out those that have ill motives.

Published: March 24, 2004

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .