HOMEOWNER ASSOCIATIONS

We specialize in the preparation of:

annual tax returns

reviews and audits

obtaining state exempt status

We have been performing these types of services for over twenty-eight years.
Our firm currently serves over seventy-five homeowner associations.

HOMEOWNER ASSOCIATION BASICS

DAVIS STIRLING ACT

California Homeowner Associations also known as Common Interest Realty Associations (CIRA) are regulated by the State of California by means of the Davis-Stirling Act. This legislation requires homeowners associations to adhere to a wide variety of polices and procedures. As a result, board members have a fiduciary responsibility to study, understand, and implement the requirements of the act. A few of those requirements are:

• An annual budget must be prepared and distributed to unit owners.
• A reserve study of the long-term replacement costs must be prepared every three years.
• A statement describing the association's policy regarding the collection of overdue assessments must be provided annually to unit owners.
• A summary of the association's insurance must be provided annually to unit owners.

FUND ACCOUNTING

Homeowner associations use fund accounting to prepare their financial statements. Under the Davis-Stirling Act, associations must separate their operating fund, the fund that pays for the day to day expenses such as insurance, utilities, and normal repairs from the reserve fund which provides for the large long-term expenses such as roof replacement, asphalt replacement, pool repairs, etc.

TAX RETURNS

The "gross receipts" of a homeowner association are:

• Operating Assessments
• Reserve Assessments
• Special Assessments
• Interest Income
• Laundry Income
• Miscellaneous such as parking, lien fees, etc.

The "disbursements" of a homeowner association are such items as:

• Accounting and Legal
• Insurance
• Management Fees
• Utilities
• Office Expense
• Reserve Expenses

In general, a homeowner association is taxed on its "net non-function income". This is basically the interest income minus tax preparation fees minus a percentage of management fees. The federal tax rate varies based on the the "type" of tax return filed. The choices are:

Form 1120
tax rate is 15%

Form 1120H
tax rate is 30%

The California state tax rate is 8.84% and a form 100 is filed. In addition the State of California requires an information form 199, with a fee of $10 if gross receipts exceed $25,000.

REVIEWS AND AUDITS OF HOMEOWNER ASSOCIATIONS

REQUIREMENTS OF DAVIS STIRLING ACT

The Davis-Stirling Act requries the following:

" A review of the financial statement of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the California Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement shall be distributed within 120 days after the close of each fiscal year." A review of the association's books and records can only be done by a Certified Public Accountant.

What is a review?

The completion of a review engagement by a CPA is prescribed by a set of procedures called "Statements on Standards for Review and Accounting Services". Some of the requirements of these standards are:

Performing analytical procedures such as comparing current year financial information to prior year financial information and to budgets.

Making inquires of management regarding such items as litigation and collectability of assessments.

Inspecting supporting documentation such as bank statements, disbursement invoices, board of directors minutes, etc.

A higher level of financial statement engagement is an audit. Audit procedures are regulated by a set of standards called Generally Accepted Auditing Standards. The reasons for having an audit done instead of a review are:

• The association's CC&R's require an audit.
• Fraud or embezzlement is suspected.
• A change in management companies has occurred and the board is not confident in the previous management company's accounting.

What is an audit?

One of the major differences between an audit and a review is the study of internal control and the consideration of risk factors specific to the association. An audit requires studying and documenting the processes, policies, procedures, and management attitudes which the association has adopted to ensure the safe keeping of association assets and the accurate and complete reporting of transactions.

MANAGEMENT RESPONSIBILITY FOR THE COMPLETE AND ACCRUATE PREPARATION OF ASSOCIATION FINANCIAL STATEMENTS

In 2002 a piece of legislation called Sarbanes-Oxley was passed by Congress in response to the melt down of Enron. One provision of the act requires management to take responsibility for their financial statements. This includes board of directors of homeowner associations. The provision is as follows:

"Summary of Section 302 Periodic statutory financial reports are to include certifications that: • The signing officers have reviewed the report • The report does not contain any material untrue statements or material omission or be considered misleading • The financial statements and related information fairly present the financial condition and the results in all material respects • The signing officers are responsible for internal controls and have evaluated these internal controls within the previous ninety days and have reported on their findings • A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities • Any significant changes in internal controls or related factors that could have a negative impact on the internal controls"

You will find much of the above language in the engagement letter you will sign with the Certified Public Accountant. What this means is that the board of directors is stating that they have reviewed the financial statements, have evaluated the internal controls of the association, and are taking responsibility for their completion and accuracy.

DOCUMENTS YOU WILL BE ASKED TO SIGN

REVIEW

Engagement letter. This is the contract between the association and the CPA

Management Representation Letter. This is a letter from the association to the CPA which makes certain statements related to the information provided and also makes certain statements regarding the assumption of other responsibilities of the association.

AUDIT

In addition to the above, you will be asked to sign:

Bank confirmations and legal confirmations.

Treasurer questionnaire This is sent to the treasurer asking questions regarding processes and internal controls of the association.

Predecessor Auditor Request Form. If this is the first year that the CPA will be doing the audit, the CPA is required to contact the previous auditor regarding any information they may have regarding the association.

We have prepared a power point presentation which can be presented to the board of directors or to the property management company which explains various documents, tax law, and the audited or reviewed financial statement. This presentation is offered at no cost.

MORE INFORMATION

Need more information?

• A great web site is www.Davis-Stirling.com
• Google the Davis-Stirling Act
• Feel free to give me a call