Journal_09_01

January 2009

A Journal for California Community Association Leaders

echo-ca.org

Pay As You Go?

ALSO INSIDE THIS ISSUE:

• Right to Jury Trial • Avoiding Fraud • Audits, Reviews and Compilations

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The ECHO Journal is published monthly by the Executive Council of Homeowners. The views of authors expressed in the articles herein do not necessarily reflect the views of ECHO. We assume no responsibility for the statements and opinions advanced by the contributors to the magazine. It is released with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent person should be sought.

Contents Audits, Reviews and Compilations page 30

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Pay As You Go? Some repairs, such as reroofing, require major funding. But a lot of the work can often be done by a qualified individual or a small contractor. One association found that the right individual can do many necessary repairs and save the association money in the process.

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Right to Jury in Disputes with Developers The right to have disputes decided by a jury is fundamental. Nevertheless, developers have attempted to circumvent this right by including provisions in the governing documents that eliminate that right to have a jury decide a dispute with its developer. Learn more in this article by attorney Jan Kopczynski.

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Avoiding Fraud in Your Association Fraud takes motivation and opportunity. If both are not present, fraud cannot occur. A board cannot control the motivation but it can control the opportunity.

The article discusses what to do if you suspect fraud from management or a fellow board member.

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Audits, Reviews and Compilations Maintaining accurate records and internal controls are necessary for an association to ensure that financial reports precisely reflect the financial condition of the community association. Manager Jeanette Catellier describes the three types of financial evaluations that accountants perform.

Departments 28 Directory Updates 33 News from ECHO 34 ECHO Bookstore

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36 Calendar of Events 38 ECHO Volunteers 38 About ECHO 41 ECHO Marketplace 41 Advertiser Index

Acceptance of advertising does not constitute any endorsement or recommendation, expressed or implied, of the advertiser or any goods or services offered. We reserve the right to reject any advertising copy.

Copyright 2009 Executive Council of Homeowners, Inc. All rights reserved.

Reproduction, except by written permission of ECHO, is prohibited.

The ECHO membership list is never released to any outside individual or organization.

Executive Council of Homeowners, Inc. 1602 The Alameda, Suite 101 San Jose, CA 95126 408-297-3246 Fax: 408-297-3517 www.echo-ca.org info@echo-ca.org Office Hours: Monday–Friday 9:00 a.m. to 5:00 p.m.

Board of Directors and Officers President David Hughes Vice President Karl Lofthouse Treasurer David Levy Secretary Dorothy Kopczynski Directors Paul Atkins John Garvic Diane Rossi Richard Tippett Steven Weil

Jerry L. Bowles Robert Rosenberg Kurtis Shenefiel Wanden Treanor

Executive Director Oliver Burford Communications Coordinator Tyler Coffin Legislative Consultant Government Strategies, Inc. Design and Production George O’Hanlon ECHO Mission Statement

On the Cover Pay as You Go? Page 6 4

January 2009 | ECHO Journal

The mission of ECHO is to advance the concept, interests and needs of homeowner associations through education and related services to board members, homeowner members, government officials and the professionals in the industry.

New election rules: $500 In today’s economic crisis, there may be some items that associations can cut to reduce costs. ECHO membership is not one. Let’s face it, educated board members are better fiduciaries, which helps them to avoid costly law suits and possibly personal liability.

ECHO is the premier resource in California for board member education. ECHO offers new articles each month with practical and easy to understand advice about current California requirements, and what may be on the horizon. ECHO staff is available by phone or E-mail to answer members’ questions about association problems or to recommend competent professional services when necessary.

And with discounted member rates at more than a dozen educational events throughout the year, ECHO is simply the best educational resource for California homeowners.

Avoid Litigation Each year, as a member benefit, ECHO sends every board member a copy of the updated Community Association Statute book. Every issue of the ECHO Journal and every seminar examine one or more aspects of compliance with association law, because one of the major causes of expensive litigation is ignorance of the law.

Mailing ballots: $200 Make Better Financial Choices Many associations struggle to understand reserve funding requirements and strategies, the benefits and disadvantages of using special assessments, proper collections practices, and even how to determine what components the association is required to maintain.

At a time when wise financial planning is essential, ECHO members have access to a wealth of articles about reserve funding, budgeting, insurance, collections, and much more.

Fight Costly Regulation Every year, Sacramento legislators introduce more legislation that confuses the job of California board members and increases the costs of compliance. ECHO is committed to fighting unnecessary regulation in California and promoting the interests and welfare of common interest developments.

Hire Competent Professionals ECHO offers a variety of articles and publications to help members evaluate their service providers, including questions to ask prospective management firms and contractors. All ECHO Journal articles are available to members at no cost, and publications are sold to members at a discount.

Avoiding a lawsuit: Priceless.

Spend a Little, Get a Lot The cost of ECHO membership is minimal. In a worsening economy, associations are looking to cut big expenses from their budgets. Yet, ECHO membership is as little as 25¢ per unit each month. For that small cost, here’s what every board member receives as part of being a member of ECHO: • A subscription to the ECHO Journal • An annual copy of the current Community Association Statute book • Unlimited access to ECHO’s library of past articles • Telephone consultations with ECHO staff about their problems • Reduced fees for ECHO events • Discounted prices on publications • And much more…

In These Tough Economic Times, ECHO Membership is a Necessity As the only California organization devoted exclusively to board member and homeowner education, ECHO is a one-of-a-kind resource that your association can’t afford to lose.

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January 2009 | ECHO Journal

By Tyler P. Berding, Esq., with Alfred D. McKelvy

Pay As You Go? Can a Program of Periodic Maintenance Reduce the Number of Major Repair Projects?

T

here are some repairs at homeowner associations that require a large specialty or general contractor, a project-wide bid and major funding. Examples are: wholesale reroofing; a complete repainting project; or reconstruction of a major portion of a building—especially where engineering or architectural expertise is required. But a lot of the work required in keeping an association looking and working well can often be done by a qualified individual or a small

contractor and, in at least one case, by an employee of the association.

An association in Pebble Beach has found that the right individual can do many necessary repairs and save the association money in the process. We have written about the need for an association to maintain proper reserves for longterm repairs.1 Most of the templates for a reserve 1 Berding, “The Board’s Dilemma,” 2008.

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program operate on the assumption that the work will generally be project-wide and bid as a single large project. This is certainly true with most major reroofing projects, for example, or periodic painting projects. Large-scale dry-rot repair also falls into this category, especially where structures such as staircases or carports will have to be removed and replaced. The sheer size and complexity of such jobs require a large specialized crew, with architectural or engineering support and supervision.

Smaller, less complex jobs can be done on an as-needed basis.

454 So. Airport Blvd.

South San Francisco CA 94080 But there are smaller, less complex jobs that can be done on an as-needed basis.

Examples of such work are wood trim replacement around doors and windows and partial repainting where weather exposure on some elevations has weathered the paint far more than on more protected exposures.

Certain door or window replacements can also fall into this category. Removal and replacement of a few weathered siding panels or boards prior to painting, where wholesale siding replacement is unnecessary, is another example. Some otherwise big jobs can often be accomplished as a lot of small jobs strung together, over time. These are examples of the kind of work a well-trained, experienced handyman or small contractor can do; and if your association is lucky enough to find such a person at a point where the deterioration of building components is not yet widespread, the economic benefits can be substantial.

Ocean Pines Several years ago, the Ocean Pines Condominium homeowners association in Pebble Beach, California, hired just such an individual. His background was in general construction and he came to the association with solid credentials. He soon began to demonstrate how having a construction generalist on the payroll can keep the association ahead of most maintenance. Here are some 8

January 2009 | ECHO Journal

of the projects he has undertaken on behalf of Ocean Pines that have helped to obviate the need for a single, larger project in the future: • Sand, prime and paint weathered (rusted) surfaces.

• Spot paint hallways, entryways, some exterior.

• Small flooring replacement (carpeting, linoleum).

• Paint/varnish exterior unit doors.

• Repair/replace irrigation pipes and fittings as needed or in response to a failure.

• Replace water valves as needed.

• Repair and replace walkway railings.

• Identify and repair or replace small dry rot areas.

• Paint, waterproof and maintain cinderblock garage walls.

• Small roofing repairs (temporary or permanent).

• Small driveway and walkway patching.

• Fence installation and maintenance.

• Identify exposed or worn electrical wiring.

• Maintain common area doors, hinges and sweeps.

A Concierge?

But this employee also serves a second purpose—that of an owners’ representative or concierge who can assist not only the association itself, but also the individual owners who are remodeling or who have repairs being done. Here are some examples of the tasks he performs in that capacity, which assist in recognizing and resolving problems at an early stage: • Consult with elevator professionals, roofing and painting contractors to identify ways to increase service life and focus interim repairs on what is needed.

• Consult with satellite television providers to install a master satellite dish.

• Meet with owners to resolve unit damage due to common area plumbing failure.

• Consult with reserve study professionals to identify additional reserve components and help determine service life.

• Educate owners and management on the requirements for maintaining the project.

• Translate the interests of the board of directors into instructions for contractors.

• Provide written reports to the board of directors on repairs and maintenance undertaken and recommended.

• Coordinate and schedule contractors.

Having the skills and the experience to tackle jobs as diverse as those above requires a multi-faceted individual; but that, coupled ECHO Journal | January 2009

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with the public relations advantage such an individual brings to management and the board of directors, argues favorably for such a position if the right person can be located.

When contractors come to bid a project, the construction generalist can identify exactly what the board wants done and can also provide secure access to units when necessary. He directs the contractors to the areas to be repaired, as well as to water valves and electrical panels. He assists in identifying the best way to repair a problem and generally has the latitude to make immediate decisions. He also makes suggestions to the board for various improvements that he believes are necessary. Having access to individual units has proven helpful. If there is a pipe leak, for example, he can immediately get to the source and stop the leak. Also, when the response to a leak is fast, the consequential damage is reduced significantly. This also results in fewer and more modest insurance claims. If there are common area repairs that require unit access, it can be provided to the contractor. He can also direct fire services and law enforcement when necessary.

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January 2009 | ECHO Journal

What to Watch Out For At this point, we must raise the caution flag. How much work can be accomplished by any one individual obviously depends on the competence of that person and the complexity of the project. Also, the association must have management that is willing to supervise the employee’s work, not always a role that management companies will accept.

They are rightfully concerned about the appropriate insurance, credentials and licenses, not to mention the necessary construction expertise. Further, the employee must be very clear with the association about the limits of his expertise. There can be nothing worse than having an unqualified worker attempt something that makes what would otherwise be a small problem worse, or a big problem a disaster!

Also, it is important that the board not substitute obtaining the services of a construction generalist for maintaining a proper reserve budget. Eventually there will be projects that are well beyond the scope of any individual and must be adequately funded for that inevitable big job.

But within the areas of his proven expertise, an employee/contractor can do many small jobs on a continuous basis as an alternative to full-scale, one-time renovations. For example, if an association has wood siding and trim that has now reached a point in its

service life where it will need to be replaced within 30 years, it must be included in the reserve budget.2 Normally, the cost of that job would be estimated and the remaining useful life calculated, so that at the end of the siding’s service life the reserve fund should have enough cash to re-side the entire project. However, as an alternative, an annual operating expense of “miscellaneous carpentry” could be calculated and budgeted so that a percentage of the trim and siding could be replaced each year in lieu of wholesale replacement in the future. Certain elevations can be upgraded and painted each year so that some siding and trim replacement is done in conjunction with repainting, as an example.

Operating Expense vs.

Long-Term Reserves If this could be accomplished using an inhouse employee or a small contractor, it could obviate the need for a long-term reserve fund for those specific components that can be replaced or repaired gradually.

Placing this in the operating budget could also result in a more predictable expense because it could be easily adjusted as conditions and quantities were revealed. However, and here’s that caution flag again, the association’s expectations have to be realistic. If the decision is made to tackle a project on the “pay as you go” basis described here, and it turns out later that the project is too big for an employee to handle in that manner, the association would have delayed collection of sufficient reserve funds during the period of that failed experiment. For this reason it is recommended that any major components3 that are being maintained in this way should also be inspected as part of the association’s three-year reserve study.

While large or technically complex jobs will always need the services of general or specialty contractors, gradual repairs or replacements could be accomplished with an in-house employee or small contractor, most likely at a substantial savings. Again, supervision and proper insurance are very important, as is an architect or engineer to provide specifications and standards and occasional inspection. These design professionals can also determine whether the rate of deteriora2 California Civil Code Section 1365.5 3 By “major components” we mean anything that has a service life of less than 30 years that would otherwise be included in the association’s reserve budget.

ECHO Journal | January 2009

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tion of the component justifies continuing the “repair as you go” approach or whether it would be more efficient to move the job to a larger contractor sooner and do it all at once.

With these options available, many associations should be able to place the repair and maintenance of its buildings in the right hands. Remember, the most important thing is to investigate actively and address problems immediately, not wait until the deterioration has exceeded anyone’s capability or financial ability to control it. The California Civil Code requires that all “visible and accessible” areas of the buildings be investigated as part of the association’s reserve study. That’s not enough in older buildings—most conversions or any common interest development that is twenty or more years old or approaching that age. Without some intrusive investigation, an association is likely to miss such things as dry rot in structural components or plumbing suffering from corrosion—both very expensive repairs when necessary.

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More extensive investigations and the ability to address some component repairs on a gradual, as-needed basis can assure greater accuracy in funding predictions and more control over the condition of the project.

Tyler Berding is a founding partner of Berding & Weil, LLC, a community association law firm located in Alamo, CA. He has taught real estate and community association law at California State University East Bay and is the immediate past president of ECHO. Alfred (Tod) McKelvy is the Executive Director of Berding & Weil and is a member of the board of directors of his homeowners association.

Questions or comments can be directed to Dr. Berding at www.berding-weil.com or www.condoissues.com.

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By Jan A. Kopczynski, Esq.

The Right to a Jury Trial in Disputes with Developers A

person’s right to have his or her dispute decided by a jury is fundamental, and our state Supreme Court has said so on many occasions. [See, e.g., Grafton Partners v.

Superior Court, 36 Cal. 4th 944 (2005).]

Indeed, the right to a jury trial is enshrined in our state Constitution as Article I, section 16, which provides that a jury trial is “an inviolate right.” In fact, in the Grafton decision, the California Supreme Court stated that the right to a trial by jury is so important that it must be “‘zealously guarded’ in the face of a claimed waiver.” [Grafton at page 956.]

Nevertheless, it has become increasingly common over the last ten years for developers of community associations (which are considered to be persons under the law) to circumvent this fundamental right by including provisions in the governing documents that eliminate the association’s right to have a jury decide a dispute between the association and its developer. Fortunately, however, this tactic has largely been rejected by the courts, including a recent decision from the Fourth District Court of Appeal in San Diego, Treo @ Kettner Homeowners Assn. v. Superior Court (Intergulf Construction Corp.), 166 Cal. App. 4th 1055 (Sept. 2008) (“Treo”).

State of the Law Prior to Treo A court decision from 2000, Villa Milano Homeowners Assn. v. Il Davorge, 84 Cal. App. 4th 819 (2000), set the stage for this area of 14

January 2009 | ECHO Journal

law. In that case, the Court of Appeal, in what it called a “case of first impression,” held that a developer of a condominium project could not use a binding arbitration clause that the developer included in the CC&Rs in order to preclude the homeowner association from pursuing a lawsuit for construction defects in court. The developer’s intent was to use the arbitration clause to preclude the association from having the court decide the lawsuit; the clause compelled the parties to use a private arbitrator instead.

But the Court of Appeal in Villa Milano found that the arbitration clause was unconscionable and therefore could not be enforced. The appellate justices emphasized that their finding of unconscionability was strongly supported by the fact that the arbitration clause was presented as a non-negotiable term because the developer drafted and recorded the CC&Rs without any association involvement. In other words, the arbitration provision was unilaterally imposed on the association by the developer, and, as such, the association had no opportunity to negotiate the issue. As it turns out, these themes of fairness and due process would come to light eight years later in the Treo case, which involved another type of developer-drafted provision that was inserted in an

association’s governing documents—a judicial reference clause.

The Issue: A Jury Trial or a Judicial Referee?

In the Treo case, a homeowner association of a condominium project in downtown San Diego sued its developer in 2007 for damages that were caused by construction defects in the common areas. In our state, as we know, these types of lawsuits are not uncommon and for good reason; the law provides a remedy to community associations and home buyers who purchase defectively-constructed housing.

But what made this case unique is that the developer included a provision in the association’s CC&Rs that required all disputes between the parties to be decided by a judicial referee instead of a jury. In a judicial reference, the parties to a lawsuit mutually agree that the case can be heard and decided by an outside lawyer instead of a judge or jury. In such a proceeding, the referee is empowered to “hear and determine any or all of the issues in an action or proceeding, whether of fact or of law” and to make a binding decision that “must stand as the decision of the court.” In other words, the referee becomes both the judge and jury and, as such, has the power to decide the lawsuit.

After a hearing is conducted, the referee submits a statement of decision to the court, and

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the court accepts the referee’s rulings as binding. Thus, the effect of a judicial reference is to eliminate the parties’ constitutional right to have their case decided by a jury.

A critical aspect of a judicial reference is that both parties must come together and actually agree to use a referee to decide their case instead of a judge or jury. In fact, section 638 of the Code of Civil Procedure prescribes the method by which the parties can submit their dispute to a judicial referee: “A referee may be appointed upon the agreement of the parties filed with the clerk, or judge, or entered in the minutes, or upon the motion of a party to a written contract or lease that provides that any controversy arising therefrom shall be heard by a referee if the court finds a reference agreement exists between the parties...” (Italics added.) Note the italicized language; in order to waive a party’s right to a jury trial there must be an agreement between the parties—a contract— where both parties agree to submit the lawsuit to a judicial referee.

But in Treo, the developer drafted and recorded the CC&Rs in 2001, well before any of the purchase agreements were signed and before the homeowners assumed control of the association’s board of directors. As such, there was no “meeting of the minds” between the developer and the association to submit the association’s lawsuit to an outside referee.

To the contrary, the developer unilaterally decided to eliminate the association’s right to a jury trial by including a judicial-reference provision in the CC&Rs and then recording the document (which was 86 pages in length) prior to selling the condominium units. By doing so, the board of homeowners never had the opportunity to see the provision, much less agree to it.

Despite the absence of a true agreement between the parties to waive a jury trial, the developer in Treo filed a motion with the trial court requesting that the court order the parties to resolve their dispute by judicial reference instead of by a jury. The association opposed the motion and argued that the judicial-reference provision in the CC&Rs was not a legitimate contractual waiver of its constitutional right to a jury trial as contemplated by section 638. But unfortunately for the association, the trial court rejected the association’s arguments and granted the developer’s motion. Accordingly, the association was prevented from having its lawsuit decided by a jury; instead, it had no alternative but to submit the dispute to an outside

referee. Faced with this reality, the association petitioned the Court of Appeal for relief from the trial court’s order.

The Right to a Jury Trial is More than a Matter of Contract The Court of Appeal was not impressed with the trial court’s order extinguishing the association’s right to a jury trial. After acknowledging that CC&Rs are similar to contracts and that they “shall be enforceable equitable servitudes, unless unreasonable, and shall… bind all owners of separate interests in the development,” the Court of Appeal cited to the Supreme Court’s Grafton opinion and found that the developer’s attempt to waive the association’s right to a jury was improper.

The issue to be decided was succinctly stated by the Court of Appeal: “The question here, as it was in Grafton, is to ascertain the intention of the Legislature with regard to prelitigation contractual waiver of the right to trial by jury. When the Legislature stated in section 638 that the right could be waived by written contract, did it mean the term ‘contract’ to include equitable servitudes cre-

ated by the CC&Rs of common interest communities? We do not believe that it did.”

A close reading of the Treo opinion reveals that the Court of Appeal had difficulty with the manner in which the purported contract between the developer and the association came about. The problem is that the contract—the CC&Rs—was drafted entirely by the developer and without any input from the association or its members. As we know, this is how developers typically impose CC&Rs on community associations. But because of this dynamic, “later purchasers and their successors, who will make up almost all association members, effectively have no choice but to accept the CC&Rs prepared by the developer, including in this case the waiver of the right to trial by jury.” [See Grafton at p. 1067.]

Faced with this reality, the Court of Appeal concluded that, although CC&Rs are to be considered contracts in certain situations (e.g., for deciding disputes regarding assessments between the association and homeowner members), they are not the type of contract that would allow parties to waive the “inviolate” constitutional right to trial by

jury—especially when, as in this case, the contract is drafted entirely by the developer and is then imposed on the association that the developer creates. As noted by the Court of Appeal: “Treating CC&Rs as a contract such that they are sufficient to waive the right to trial by jury does not comport with the importance of the right waived. CC&Rs are notoriously lengthy, are adhesive in nature, are written by developers perhaps years before many owners buy, and often, as here with regard to the waiver of trial by jury, cannot be modified by the association. Further, the document is not signed by the parties.”

With that, the Court of Appeal reversed the lower trial court and ordered that the association’s right to jury trial was reinstated; there was no waiver, and the developer’s attempt to eliminate the association’s right to jury trial in the CC&Rs was improper. It is also interesting to note that, unlike in Villa Milano, the Treo court never reached the issue of whether the developer’s judicial-reference clause was “unconscionable” and therefore should not be enforced on that basis; there was no need, given the Court of ECHO Journal | January 2009

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Appeal’s holding that such a CC&R provision violates the association’s constitutional right to jury trial as a matter of law.

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Constitutional Balance is Restored Treo is clearly a favorable decision for homeowner associations involved in disputes with their developers. But the question arises: Why would the developer want to include a judicial-reference provision in the association’s CC&Rs in the first place (or, as in Villa Milano, a contractual arbitration provision)?

After all, such clauses have the effect of eliminating a jury trial for the developer as well as for the association. Wouldn’t a developer want its day in court, too? Although the Court of Appeal in Treo did not discuss the developer’s reasoning, the implication is clear: From the developer’s point of view, the absence of a right to a jury trial in a construction defects case substantially decreases the likelihood of a large, unfavorable jury verdict against the developer. Developers in California are well aware that juries, which are typically comprised of homeowners, do not look favorably on developers who build and sell defective housing to unsuspecting home buyers. Thus, by eliminating an association’s right to a jury trial in the CC&Rs, the developer is essentially betting that a judicial referee or arbitrator will be more favorable to the developer than a jury of homeowners would otherwise be.

In essence, then, including such a judicialreference provision (or a binding arbitration clause) in the association’s governing documents affords the developer a perceived strategic advantage over a community association in a construction defects lawsuit. It is for this reason that the association and developer in the Villa Milano and Treo cases fought so hard over the enforceability of these types of CC&R provisions that have the effect of denying the association a jury trial. But now that the Court of Appeal has issued a clear directive that such developer-drafted waivers are improper, homeowner associations can have renewed confidence that, when faced with a legal dispute involving their developer, such cases will be heard by an impartial jury, not by an arbitrator or referee who was imposed by the developer without the association’s consent.

Jan Kopczynski is a litigation partner at the law firm of Berding & Weil LLP in Alamo, California, and he specializes in handling complex construction defect cases, business disputes and real estate litigation.

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January 2009 | ECHO Journal

By Joelyn K. Carr-Fingerle, CPA

Avoiding Fraud in Your Association takes motivation and opportunity. If both are not present, fraud canFraud not occur. The board of directors cannot control the motivation; that comes from the fraudster. The association board can, however, control the opportunity. In the tight economic conditions that now exist with foreclosures, tight credit and job layoffs, every board needs to be diligent in watching and guarding association moneys.

Most of the typical fraud types and characteristics discussed by the fraud experts do not apply to common interest developments because their revenue stream is very predictable and the volume of expenses is small. This is the main reason that the annual CPA review engagement is usually sufficient for associations and an audit is not necessary. The board on a monthly/quarterly basis can compare the revenues and expenses to budget and to ECHO Journal | January 2009

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the prior year and get a pretty good feel whether the financial reports are reasonably correct.

Profile of a Defrauder Typically a defrauder, or a person planning to perpetrate a fraud, is a trusted longterm employee, not someone newly hired or a flashy, slick operator. The defrauder is someone who knows the association and its systems well and knows how to get around the controls that are in place. However, what sets him or her apart from the ideal employee is the change in circumstances that makes him or her look to the association as a target for theft. This could be sudden money problems stemming from a spouse’s loss of job, new extravagant life style, sudden medical bills, stock market reversals, gambling debts, and/or alcohol or drug abuse. Often they think of what they do as a temporary borrowing or loan from the association. They will rationalize it by thinking they deserve the “extra” funds because they are underpaid or under-appreciated. Or they may seek to take revenge on a board that has thwarted them in some way.

Internal Control: The Key to Success A system of internal controls, the checks and balances, is what either keeps the fraud from taking place or allows it to happen. By setting up and using a system where no one individual alone is completely responsible for the intake or dispersal of money, the association will be protected from most significant fraud. There may still be the disappearance of office supplies, small tools, the unauthorized use of the association telephone for personal long distance phone calls; but the significance of these pale against the theft of association cash and cash equivalents.

Generally the safeguards over association cash receipts are good because little cash is received by most associations. Usually assessments are paid by checks, and many payments go directly to a bank lockbox; there is no opportunity for someone to misappropriate the money coming in. However the board needs to discuss with the bank their procedures to ensure that the checks are properly applied to the association’s bank account.

If the cash does not go directly to the bank but rather to the treasurer or manager, more oversight procedures need to be installed.

First, the person receiving the cash cannot be the one signing checks and reconciling the Continued on page 24 22

January 2009 | ECHO Journal

ECHO Seminars They’re lifesavers for your association.

Each ECHO seminar provides vital information for the health of your association. Don’t miss this educational opportunity to keep informed on how today’s laws and economic situation affect you and your association

Yes, reserve ___ spaces for the North Counties Seminar.

Amount enclosed: $__________ (attach additional names) Name: ______________________________________________________ HOA or Firm: ________________________________________________

North Counties Seminar

Address: ____________________________________________________

Saturday, March 21, 2009 8:00 a.m. to 1:00 p.m.

City: __________________________ State: _____ Zip: ____________ Phone: ______________________________________________________

Rohnert Park Community Center 5401 Snyder Ln., Rohnert Park

Visa/Mastercard No. _____________________ Exp. Date: ________

Registration Feet: $40 Non-Members: $50

Orders will not be processed without payment in full. Fees for cancelled registrations will not be refunded. Return with payment to: ECHO, 1602 The Alameda, STE 101, San Jose, CA 95126

Signature: ___________________________________________________

Avoiding Fraud

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Continued from page 22

bank account. There needs to be a verification trail showing that all the cash received was deposited and that it was also credited to the proper owner or another account, such as the monthly laundry receipts. This is also made easier when an association has a policy that all monies coming in must be in the form of checks or money orders, not cash.

If receipts of cash are significant, procedures to safeguard the cash must be set up.

These procedures should include cash counts, some sort of register and frequent bank deposits. If your association has significant cash receipts, then work with your association CPA to set up and maintain a good system of internal control over the cash.

Generally cash coming in is not significant in associations when compared to the money coming in by check or automatic payment so that it does not become an issue in a review or an audit of the financial statements.

Cash going out, or cash disbursements, is the other area of exposure. The most common and logical method for covering cash embezzlement is the false debit. The trusted employee (let’s call him Sam, an authorized check signer) makes out a check for, say $500, to himself or his own phony company but indicates in the books that the check is voided. Then when Sam records the check for perhaps the gardener or someone else, he records that invoice at $500 more so the checkbook will balance. Lastly, Sam has to prepare the bank reconciliation so that he can destroy the check to himself and mark the gardener’s, or whoever’s, check as properly cleared since the amounts net out. If Sam could not sign the check himself, he could not perpetrate the fraud.

Sam may need to have Jerry, the president, also sign the checks because the checks require two signatures. But if Jerry signs blank checks or never really looks at what he is signing, the control is thwarted. The bank cannot be relied upon to check the signatures because the volume of checks they process is so great. Every check signer has an obligation to review the documentation supporting the disbursement. In addition each signer should note his or her review on the documents in the form of a signoff of some kind (initialing, signing or something else Continued on page 26

Avoiding Fraud Continued from page 24

and making sure that the check number, date, and account coding are noted somewhere on the payment package) that signifies approval of the payment. If multiple invoices are paid at one time, the amount paid is also good to note. In the above example there would be two chances for Jerry to catch Sam’s fraud. The first check would have no support and the second one would not match the invoice. Even if false invoices were presented to Jerry, one would hope that he would remember that the usual payment to Carson Landscaping Inc. was a lesser amount and/or that the monthly payment had already been paid.

26

January 2009 | ECHO Journal

California Civil Code calls for the board to review the bank statements at least quarterly so that such items can be readily caught. But that means that the reconciliation and bank statement must be closely reviewed. The treasurer or someone other than the bookkeeper could periodically, without warning and on an irregular basis, prepare the bank reconciliation. That way “Sam” would not be able to cover his tracks. However, if the board chooses not to prepare the bank reconciliation, a board member should at least inspect the cancelled checks or the copies sent by the bank with the statement. It is very hard to eliminate one of the returned checks when they are one of many micro-sized on a bank statement. Check out who the payees are— why is there a check to Carson Landscaping

Inc. and another for the same amount to CLI? The board can even call Carson Landscaping Inc. to see if they are getting checks from you made out to CLI. If the board members are doing their job, this sort of embezzlement should be caught in the first quarter it is started.

Another form of control would be to have the bank statement mailed directly to a board member who would open and examine it before giving it to the bookkeeper or treasurer for reconciliation. This would not eliminate the need to review the reconciliation on a quarterly basis, but it would ensure that the statement could not be altered without notice and cancelled checks could not be removed.

The Civil Code-mandated budget-to-actual comparison should also show a budget discrepancy as the embezzlement unfolds. The defrauder has to make the cash balance; therefore the money has to be expensed somewhere. Association budgets are tight.

Small differences can be noted and addressed. This comparison needs to be done quarterly so that any problems are promptly addressed and corrected. If the defrauder knows that the procedures are done frequently and thoroughly, there is much less temptation since they will know that they will be caught quickly.

With proper vigilance a board can catch most frauds in short order— if they are performing their duties.

Timely Reports The board should be getting the association financial statements and bank reconciliations within the month following the month end. If this is not happening, and it is a regular occurrence, the board needs to consider changing its financial arrangements so that they, the board members, can perform their fiduciary duties. “Within the following month” is not a hard and fast rule, but the reason for the delay needs to be very good— like a change in management, a natural disaster or the like. Sometimes at year-end it takes longer, but preliminary statements should be ready on the regular monthly schedule. In short, with proper vigilance the board can catch most frauds in short order if they are performing their duties. And by the board members performing their duties, most persons will not be tempted to defraud the association because they do not want to get caught—and certainly not quickly!

The board must review bank reconciliations for all accounts. This means the investments, certificates of deposit, treasury bills, savings accounts and so on in addition to the checking account(s). You need to see that

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2009 2:35:17 27 ECHO Journal | January 4/23/08 PM

Directory

UPDATES Updates for listings in the 2008 ECHO Directory of Businesses and Professionals.

Additions to Member Listings A. C. Enterprises 20 South Linden Ave., Unit 2A South San Francisco, CA 94080 Contact: Helen Troosh Tel: 650-588-1001 Fax: 650-588-4004 www.acenterprises.biz Email: ltroosh@acenterprises.biz

General contractor specializing in post-litigation reconstruction and repair. Areas of expertise include stucco, siding, window and door replacement, dry rot repairs, balcony and deck work, waterproofing, and interior/exterior water damage repairs.

Micro Methods Automation Services, Inc. 640 Chesley Ave. Mountain View, CA 94040 Contact: James P. Ducey Tel: 650-969-4590 Fax: 650-694-4658 Email: jimducey@aol.com Reserve Study software and Reserve Studies Pro-Craft Builders, Inc. 761 Mabury Rd., Ste. 120 San Jose, CA 95133 Contact: Bill Fedor-Thurman Tel: 408-441-1301 Fax: 408-441-1304 www.pro-craftbuilders.com Email: info@pro-craftbuilders.com

Pro-Craft Builders specializes in interior and exterior multi-unit repairs including deck rebuilding/repair, wood or urethane, siding and trim repair and Hardi plank re-siding projects.

28

January 2009 | ECHO Journal

Xteria, Inc. 2830 Briarwood Dr. San Jose, CA 95125 Contact: Phil Ullio Tel: 408-723-7663 Fax: 408-723-7664 www.xteriainc.com Email: phil@xteriainc.com

A full service exterior remodeling firm specializing in roofing, siding and painting, with B, C-39 and C-33 licenses. We hold an R.R.O. with the roof consultants’ institute. We also offer project management and specifications.

Changes to Member Listings Associations Communications, Inc. 3732 Mt. Diablo Blvd., Ste. 395 Lafayette, CA 94549 Tel: 925-283-4900 Fax: 925-283-4907 Butner Homeowner Association Services Attn: John M. Tomasch, CPA P.O. Box 1999 Mammoth Lakes, CA 93546 Tel & Fax remain the same

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ECHO Journal | January 2009

29

accurate records and Maintaining internal controls are necessary for an association to ensure that financial reports precisely reflect the financial condition of their association. The type of year-end evaluation a CPA performs is primarily driven by the interests and needs of the association, as well as year-end financial reporting requirements mandat30

January 2009 | ECHO Journal

ed by state statute and an associationâ&#x20AC;&#x2122;s governing documents.

The Audit An annual audit is advantageous in that an independent Certified Public Accountant (CPA) will provide the highest level of accuracy assurance when examining the financial records of an association.

An audit will also assist the board of directors with their oversight duties and can help them meet budgetary obligations. Furthermore, an annual audit can give credibility to the current internal controls and offer suggestions to remedy certain issues that may be presented in the CPAâ&#x20AC;&#x2122;s opinion letter. An annual audit is a solid business tool that examines third

By Jeanette Catellier, CMCA, AMS, PCAM

Audits, Reviews and Compilations—Oh My!

party transactions along with the internal accounting procedures of an association. Another advantage of an annual audit is that it will defray allegations of financial misappropriations since the opinion will be disclosed in a document that is available for review by members of the board of directors and other association members. While the purpose of

the audit is to determine the accuracy of the financial reports, and not to detect fraud or embezzlement regarding the association’s funds, the CPA’s intense scrutiny of the books and records often reveals improprieties.

Four possible outcomes may be expressed in an auditor’s opinion letter:

• The auditor issues an unqualified or “clean” opinion that states the auditor finds that the financial records and reports are in order and accurate. This type of statement is the most desired as it confirms that the financial statements conform to Generally Accepted Continued on page 39 ECHO Journal | January 2009

31

Learn how recently passed laws affect your homeowner association Don’t leave your association to fate. Learn how today’s laws affect you and your association by attending the Marin County Seminar.

Seminar Agenda 8:00 a.m. Registration and Breakfast 8:45 a.m. Welcome 9:00 a.m. Legislative and Case Law Update David Feingold, Esq. What you don’t know can hurt you. Learn all about the new legislation and case law that affect your association.

9:45 a.m. Solar: It’s Hot! Wanden Treanor, Esq. 2009 is the year of the sun. Slather on the sunscreen and join us as we jump into this red hot topic.

10:30 a.m. Break 10:50 a.m. Controlling Association Finances in 2009 Linnea Juarez, CCAM, PCAM 11:30 a.m. Board Hearings: A Valuable Tool Glenn Youngling, Esq. From discipline to collections, from community building to dispute resolution, the Board Hearing can be a valuable tool.

The “Marin County Players” will reenact common scenarios and you will learn valuable and useful tricks to take back to your community.

12:20 a.m. Questions and Answers 12:50 p.m. Drawings for Door Prizes 1:00 p.m. Adjourn

2009 Marin County Seminar Saturday, January 31, 2009 8:00 a.m. to 12:30 p.m.

Embassy Suites, 101 McGinnis Ave., San Rafael Registration Fee: $40 ($50 Non-Members)

Yes, reserve _____ spaces for the Marin County Seminar.

Amount enclosed: $__________ (attach additional names) Name: ______________________________________________________ HOA or Firm: ________________________________________________ Address: ____________________________________________________ City: __________________________ State: _____ Zip: ____________ Phone: ______________________________________________________ Visa/Mastercard No. _____________________ Exp. Date: ________ Signature: ___________________________________________________ Orders will not be processed without payment in full. Fees for cancelled registrations will not be refunded. Return with payment to: ECHO, 1602 The Alameda, STE 101, San Jose, CA 95126 Telephone: 408-297-3246; Fax: 408-297-3517

News from ECHO

Avoiding Fraud in Your Association Fraud takes motivation and opportunity. The board of directors cannot control the motivation; that comes from the fraudster. But it can control the opportunity. In the tight economic conditions that now exist with foreclosures, tight credit and job layoffs, every board needs to be diligent in watching and guarding association monies.

Typically a person planning to perpetrate a fraud is a trusted long-term employee, not a new hire or a slick operator. The defrauder is someone who knows the association and its systems well and knows how to get around the controls that are in place. However, he or she has had a change in circumstances— sudden medical expenses or other money problems, a job loss, an extravagant life style, stock market reversals, gambling debts, or alcohol and drug abuse—that makes him or her look to the association as a target for theft. Often they justify what they do as a temporary borrowing or loan from the association.

A good system of internal controls—the checks and balances— is what either keeps the fraud from taking place or allows it to happen. By setting up and using a system where no one individual alone is completely responsible for the intake or dispersal of money, the association will be protected from most significant fraud.

Your CPA will look at your system of internal control during preparation of your annual review and, if you have an audit, will test those controls as well.

But the CPA only comes in once a year and a lot of fraud can happen between visits. The board is required to review the statements at least quarterly. If you suspect fraud from management or a fellow board member, call your CPA in early to check things.

The Right to a Jury Trial A person’s right to have his or her dispute decided by a jury is fundamental, and our state Supreme Court has said so on many occasions. Indeed, the right to a jury trial is enshrined in our state Constitution, which provides that a jury trial is “an inviolate right.”

Nevertheless, it has become increasingly common over the last ten years for developers of community associations to circumvent this fundamental right by including provisions in the governing documents that eliminate the association’s right to have a jury decide a dispute between the association and its developer. Fortunately, however, this tactic has largely been rejected by the courts, including a recent decision from the Fourth District Court of Appeal in San Diego, Treo @ Kettner Homeowners Assn. v. Superior Court.

From some developers’ point of view, the absence of a right to a jury trial in a construction defects case substantially decreases the likelihood of a large, unfavorable jury verdict against the developer. Developers in California are well aware that juries, which are typically comprised of homeowners, do not look favorably on developers who build and sell defective housing to unsuspecting home buyers.

Therefore, by eliminating an association’s right to a jury trial in the CC&Rs, the developer is essentially betting that a judicial referee or arbitrator will be more favorable to the developer than a jury of homeowners would otherwise be.

Thus a binding arbitration clause in an association’s governing documents affords the developer a perceived strategic advantage over a community association in a construction defects lawsuit. But now that the Court of Appeal has issued a clear directive that developerdrafted waivers are improper, homeowner associations can

have renewed confidence that, when faced with a legal dispute involving their developer, such cases will be heard by an impartial jury, not by an arbitrator or referee imposed without the association’s consent.

Important Upcoming Events Thursday, January 15 San Francisco Luncheon 11:45 a.m.

St. Francis Yacht Club, San Francisco Saturday, January 31 Marin County Seminar 7:30 a.m. to 1:30 p.m.

Embassy Suites Hotel, San Rafael Saturday, February 21 Central Coast Winter Seminar 7:30 a.m. to 1:30 p.m.

Best Western Seacliff Inn, Aptos Saturday, March 21 North Counties Seminar 8:00 a.m. to 1:00 p.m.

Community Center, Rohnert Park Thursday, March 26 San Francisco Luncheon 11:45 a.m. to 2:00 p.m.

St. Francis Yacht Club, San Francisco ECHO Journal | January 2009

33

2008 ECHO Business & Professional Directory $20.00 Non-Member Price: $25.00

Condominium Bluebook 2009 Edition $18.00 Non-Member Price: $25.00

Homeowners Association and You $13.00 Non-Member Price: $20.00

Community Association Statute Book—2009 Ed. $15.00 Non-Member Price: $25.00

This directory lists all business and professional members of ECHO as of December 2007. Current addresses, telephone and fax numbers, email addresses, and a short description are included. This directory is an invaluable tool for locating service providers that work with homeowner associations.

This well-known compact guide for operation of common interest developments in California now includes a comprehensive index of the book and a chapter containing more than 200 frequently-asked questions about associations, along with succinct answers.

A practical problem solving guide to all aspects of community association living. Written by two long-time association residents, it provides an insightful overview of community living from the viewpoint of experienced owners in readable language.

Recently revised and expanded.

Contains the 2009 version of the Davis-Stirling Common Interest Development Act, the Civil Code sections that apply to common interest developments and selected provisions from the Civil, Corporations, Government and Vehicle Codes important to associations.

Robert’s Rules of Order $7.50 Non-Member Price: $12.50

The Board’s Dilemma $10.00 Non-Member Price: $15.00

A step-by-step guide to the rules for meetings of your association, the current and official manual adopted by most organizations to govern their meetings. This guide will provide many meeting procedures not covered by the association bylaws or other governing documents.

In this essay, attorney Tyler Berding confronts the growing financial problems for community associations. Mr. Berding addresses board members who are struggling to balance their duty to protect both individual owners and the corporation, and gives answers to associations trying to avoid a funding crisis.

California Building Guidelines for Residential Construction $52.50 Non-Member Price: $60.00

Homeowners Associations— How-to Guide for Leadership $35.00 Non-Member Price: $45.00 This well-known guide and reference is written for officers and directors of homeowner associations who want to learn how to manage and operate the affairs of their associations effectively.

Reserve Fund Essentials Questions & Answers About Community Associations $18.00 Non-Member Price: $25.00 For 12 years, Jan Hickenbottom answered homeowners’ questions in her Los Angeles Times column on community associations. Now collected in one volume, readers can find answers to almost any question about CIDs.

$18.00 Non-Member Price: $25.00 This book is an easy to read, musthave guide for anyone who wants a clear, thorough explanation of reserve studies and their indispensable role in effective HOA planning.

The author gives tips to help board members mold their reserve study into a useful financial tool.

The Condo Owner’s $15.00 Answer Book Non-Member Price: $20.00 An excellent guide to understanding the rights and responsibilities of condo ownership and operation of homeowner associations. The question-and-answer format responds to more than 125 commonly-asked questions in an easy to understand style. A great resource for newcomers and veteran owners.

This easy-to-read manual is an excellent tool to understand a new home.

It contains chapters covering more than 300 conditions that have been sources of disputes between homeowners and builders, offers homeowner maintenance tips, and defines the standards to which a residence should be built.

CID Leadership Two-Disc DVD set $30.00 Non-Member Price: $40.00 Board—An orientation for new board members and a refresher for current members. Meetings—How to conduct effective meetings that stay focused and achieve results.

Reserves—How adequately-funded reserves prevent problems in associations. Insurance—Considers insurance to protect multi-million dollar community assets.

Dispute Resolution in Homeowner Associations $20.00 Non-Member Price: $25.00 This publication has been completely revised to reflect new requirements resulting from passage of SB 137.

Publications to answer your questions about common interest developments Now Order Online at echo-ca.org

Board Memberâ&#x20AC;&#x2122;s Guide for Contractor Interviews $20.00 Non-Member Price: $25.00 This report is a guide for directors and managers to use for interviews with prospective service contractors.

Questions to find out capabilities and willingness of contractors to provide the services being sought are included for most of the contractor skills that associations use.

Bookstore Order Form Executive Council of Homeowners 1602 The Alameda, Suite 101, San Jose, CA 95126 Phone: 408-297-3246 Fax: 408-297-3517 TITLE

QUANTITY

SUBTOTAL CALIFORNIA SALES TAX (Add 8.25%) TOTAL AMOUNT

Yes! Place my order for the items above.

Board Memberâ&#x20AC;&#x2122;s Guide for Management Interviews $20.00 Non-Member Price: $25.00 This guide for use by boards for conducting complete and effective interviews with prospective managers takes the guesswork out of the interview process. Over 80 questions covering every management duty and includes answer sheets matched to the questions.

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Calendar of Events

Note these dates!

Friday, January 9 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1900 N. California Blvd.

Suite 950, Walnut Creek

Wednesday, February 4 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101 San Jose

Thursday, March 5 North Bay Resource Panel 9:30 a.m.

Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael

Monday, January 12 Accountants Resource Panel 6:00 p.m.

Francesco’s Restaurant Oakland

Wednesday, February 11 South Bay Resource Panel 12:00 Noon Il Fornaio 302 Market St., San Jose

Monday, March 9 Accountants Resource Panel 6:00 p.m.

Francesco’s Restaurant, Oakland

Tuesday, January 13 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz

Friday, February 13 East Bay Resource Panel 9:30 a.m.

Christison Company 3090 Independence Dr., #100, Livermore

Tuesday, March 10 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz

Thursday, January 15 San Francisco Luncheon 11:45 a.m.

St. Francis Yacht Club San Francisco

Friday, March 13 East Bay Resource Panel Wednesday, February 18 9:30 a.m.

Wine Country Resource Panel Angius & Terry 11:45 a.m.

1900 N. California Blvd., Eugene Burger Mgmt Co. Suite 950, Walnut Creek Wednesday, January 21 6600 Hunter Dr., Rohnert Park Wine Country Resource Panel Wednesday, March 18 11:45 a.m.

Saturday, February 21 Wine Country Resource Panel Eugene Burger Mgmt. Co. Central Coast Winter 11:45 a.m.

6600 Hunter Dr., Rohnert Park Seminar Eugene Burger Mgmt. Co. 7:30 a.m. to 1:30 p.m.

6600 Hunter Dr., Rohnert Park Saturday, January 31 Best Western Seacliff Inn Marin County Seminar Thursday, March 19 7500 Old Dominion Ct., Aptos 7:30 a.m. to 1:30 p.m.

San Francisco Luncheon Embassy Suites Hotel 11:45 a.m.

101 McInnis Parkway St. Francis Yacht Club San Rafael San Francisco

Saturday, March 21 North Counties Seminar 8:00 a.m. to 1:00 p.m.

Rohnert Park Community Center 5401 Snyder Ln., Rohnert Park Thursday, March 26 San Francisco Luncheon 11:45 a.m. to 2:00 p.m.

St. Francis Yacht Club San Francisco Wednesday, April 1 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101 San Jose Saturday, April 4 San Francisco Spring Seminar 7:30 a.m. to 1:00 p.m.

Fort Mason Center, The Firehouse, San Francisco Friday, April 10 East Bay Resource Panel 9:30 a.m.

Christison Company 3090 Independence Dr., #100, Livermore

Regularly Scheduled Resource Panel Meetings Resource Panel Maintenance North Bay East Bay East Bay Accountants Central Coast South Bay Wine Country Legal 36

January 2009 | ECHO Journal

Meeting

Location

First Wednesday, Even Months First Thursday, Odd Months Second Friday, Odd Months

ECHO Office, San Jose Contempo Marin Clubhouse, San Rafael Angius & Terry, Walnut Creek

Second Friday, Even Months Second Monday, Odd Months Second Tuesday, Odd Months Second Wednesday, Even Months Third Wednesday, Monthly Quarterly

Christison Company, Livermore Francesco’s Restaurant, Oakland Pasatiempo Inn, Santa Cruz Il Fornaio Restaurant, San Jose Eugene Burger Management Co., Rohnert Park Varies

Avoiding Fraud Continued from page 27

statements are sent at least quarterly, although U.S. Treasury statements are only sent when there is activityâ&#x20AC;&#x201D;a purchase, maturity or renewal. These are your largest cash accounts and as such must be reviewed quarterly. The Legislature recognized this fact when they mandated a quarterly review and required that at least two board members or an officer and board member must authorize reserve fund withdrawals. Some professionals believe this includes a transfer from one account to another even within the overall category of reserve funds, which is a good, conservative, cautious stance. Review the statements for the dollar amount (and the financial statement carrying value is the purchase cost plus investment/interest earnings, not the market value) and for the account title. The accounts should always be in the name of the association, not the manager or an owner or anyone else. If the account is not in the associationâ&#x20AC;&#x2122;s name, then the association does not own it and someone else has control of it and can take it.

Working with Your CPA Your CPA will look at your system of internal control during preparation of your annual review and, if you have an audit, will test those controls as well. But the CPA only comes in once a year. The board is required to review the statements at least quarterly. A lot of fraud can happen between CPA visits.

If you suspect fraud from management or a fellow board member, call a CPA in to look at things early. Association CPAs want to be of service to their clients and dislike seeing anyone get away with fraud. But what a CPA cannot do is question the propriety of your management decisions. If you picked a bad contractor, and continued to pay the change orders for work not properly done but properly approved for payment, internal control is not the issue; the real issue is proper oversight. And that subject is beyond the scope of this article.

Joelyn Carr-Fingerle is an accountant in Fremont, CA, with a large CID practice. She is a member of the Accountants and East Bay Resource Panels, and a former member of the ECHO Board of Directors.

Find the Answers to your Questions on Condo Ownership

An excellent guide to understanding the rights and responsibilities of condo ownership and homeowner associations operation. The question-and-answer format responds to more than 125 commonly-asked questions in an easy to understand style. A great resource for newcomers and veteran owners.

Order today from ECHO! Call 408-297-3246 Fax 408-297-3517 Email: info@echo-ca.org

ECHO Journal | January 2009

37

Honor Roll

About

ECHO Honors Volunteers Mike Muilenburg 2008 Volunteer of the Year ECHO Resource Panels Accountant Panel Richard Schnieder, CPA 707-576-7070 Central Coast Panel Jim Harmon 831-425-3622 East Bay Panel Scott Burke, 408-536-0420 Legal Panel Mark Wleklinski, Esq. 925-691-1191 Maintenance Panel Brian Siefert, 408-536-0420 North Bay Panel Diane Kay, CCAM, 415-846-7579 Stephany Charles, CCAM 415-458-3537 San Francisco Panel Jeff Saarman, 415-749-2700 South Bay Panel Geri Kennedy, CCAM 650-348-2691 ext. 1006 Kimberly Payne, 408-200-8470 Wine Country Panel Maria Birch, 707-584-5123

Legislative Committee Paul Atkins Jeffrey Barnett, Esq. Sandra Bonato, Esq. Jerry L. Bowles Joelyn Carr-Fingerle, CPA John Garvic, Esq., Chair Geri Kennedy, CCAM Wanden Treanor, Esq.

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January 2009 | ECHO Journal

2008 Annual Seminar Speakers Jeffrey Barnett, Esq. Sandra Bonato, Esq. Lori Burger, PCAM, CCAM Doug Christison, PCAM, CCAM Rolf Crocker, CCAM Jeffrey Draeger James Ernst, CPA Lisa Esposito, CCAM John Garvic, Esq. John Gill, Esq. Sandra Gottlieb, Esq. Walt Grady, CPA Beth Grimm, Esq. Robert Hall, Esq. Linnea Juarez, PCAM, CCAM Geri Kennedy, CCAM David Kuivanen, AIA Karl Lofthouse Kerry Mazzoni Ann Rankin, Esq. Rob Rosenberg, CCAM Kurtis Shenefield, PCAM, CCAM Dennis Socher Paul Terry, Esq. Wanden Treanor, Esq. Stephen Weil, Esq. Glenn Youngling, Esq.

SF Luncheon Speakers John Allanson Tyler P. Berding, Esq. Ronald Block, PhD. Doug Christison, PCAM, CCAM Karen Conlon, CCAM Rolf Crocker, CCAM Ross Feinberg, Esq. David Feingold, Esq. Tom Fier, Esq. Kevin Frederick, Esq. John Garvic, Esq.

Beth Grimm, Esq. Brian Hebert, Esq. Roy Helsing Julia Lave Johnston Garth Leone Nico March Kerry Mazzoni Larry Russell, Esq. Steve Saarman Nathaniel Sterling, Esq. Debra Warren, PCAM, CCAM Steven Weil, Esq. Mark Wleklinski, Esq. Glenn Youngling, Esq.

Recent ECHO Journal Contributing Authors October 2008 Tyler P. Berding, Esq. Paul Collins, PCAM, CCAM John Paul Hanna, Esq. Jan A. Kopczynski, Esq. Larry J. Pothast, PCAM, CCAM David Van Atta, Esq. November 2008 Derek Eckert Tom Fier, Esq. Kerrington Fier Mike Muilenburg Andrea L. O’Toole, Esq. Steven S. Weil, Esq. December 2008 Tyler P. Berding, Esq. David West Paul W. Windust, Esq.

ECHO

What is ECHO? ECHO (Executive Council of Homeowners) is a California non-profit corporation dedicated to assisting community associations. ECHO is an owners’ organization. Founded in San Jose in 1972 with a nucleus of five owner associations, ECHO membership is now 1,525 association members representing over 150,000 homes and 325 business and professional members.

Who Should Join ECHO? If your association manages condominiums or a planned development, it can become a member of ECHO and receive all of the benefits designated for homeowner associations.

If your company wants to reach decision makers at over 1,525 homeowner associations, you can become an associate member and join 325 other firms serving this important membership.

What are the Benefits of ECHO Membership?

• Subscription to monthly magazine for every board member • Yearly copy of the Association Statute Book for every board member • Frequent educational seminars • Special prices for CID publications • Legislative advocacy in Sacramento

ECHO Membership Dues HOA Size 2 to 25 units 26 to 50 units 51 to 100 units 101 to 150 units 151 to 200 units 201 or more units Business/Professional

Rate $120 $165 $240 $315 $390 $495 $425

ECHO Journal Subscription Rates Members $50 Non-members/Homeowners $75 $125 Businesses & Professionals

How Do You Join ECHO? Over 1,800 members benefit each year from their membership in ECHO. Find out what they’ve known for years by joining ECHO today. To apply for membership, call ECHO at 408-297-3246 or visit the ECHO web site (echo-ca.org) to obtain an application form and for more information.

Audits, Reviews and Compilations Continued from page 31

Accounting Principles (GAAP). An unqualified opinion will validate that the current internal procedures that are being followed should continue.

• The auditor issues a qualified opinion that says the statements as a whole are fairly presented. Particular reservations may also be included in this type of outcome and should be noted in a separate paragraph.

This may include segregation of duties or accounts and differences in amounts that were reported for areas such as payroll or inventory purchasing, failure to reconcile bank statements monthly, or an inordinate number of miscoding payments and journal entries to incorrect general ledger accounts.

• The auditor refuses or “disclaims” to issue an opinion. This typically occurs when an organization restricts the ability of the auditor to collect sufficient evidence, or it is unable to provide the necessary material and information because the records are not properly maintained. An association that is given this type of opinion may determine the need for an Audit Committee that can help with the preparation of the association’s documents and serve as a primary contact to the auditor in the place of staff.

• The auditor issues an adverse or negative opinion. This is expressed when the financial statements substantially differ from GAAP. An association will need to investigate its current procedures in accounting and reporting in order to conform to accepted principles. Additional staff or experienced accounting personnel must be considered in order to change the current operations.

In addition to the opinion letter, a management letter is usually included to report on any weaknesses found in the accounting system and internal controls. Management should follow up with any issues that may be raised as part of this statement.

An audit provides the highest level of CPA assurance that the financial statements are fairly stated and free of material errors. This assertion is directly attributable to the extensive standards by which CPAs performing audits must abide. The Auditing Standards Board of the American Institute of Certified Public Accountants established generally accepted auditing standards (GAAS) that

CPAs must follow in performing audits of public and nonpublic companies. These include broad categories such as CPA training and independence requirements, standards of fieldwork and standards of reporting. All of the GAAS ensure that the client clearly understands the CPA’s opinion on the financial statements.

A main requirement for CPAs to complete an audit is to have an understanding of the association’s internal controls.

A main requirement for CPAs to complete an audit is to have an understanding of the association’s internal controls. This will ensure that certain departments are segregated to ensure optimum controls. Within the examination of the financial records, an audit will confirm selected transactions with outside parties such as banks or vendors and perform a physical inspection of records.

This includes the tracing of supporting documentation such as purchase orders and payroll time sheets, which should support the existence of internal controls that are performed by the manager or authorized personnel. Additional documents such as the minutes and other legal documents will also be reviewed by the CPA. The Review The second type of year-end report is less thorough than an audit and therefore less costly. This examination of the association’s financial activities is a review. [Editor’s Note: The Davis-Stirling Act requires at least a review for all associations with an annual gross income of $75,000 or more.] Performing a review does not provide a basis for the CPA to express an opinion on the financial statements. The CPA may identify significant matters affecting the financial statements when performing a review, but a review does not provide assurance that the CPA was able to detect all the matters that would be disclosed in an audit.

In performing a review, the CPA gathers a

limited amount of information through inquiry of management personnel and analytical procedures to determine whether material modifications are needed.

The main objective of a review is to ensure that appropriate accounting principles have been applied consistently and adequate procedures exist for recording, classifying and summarizing transactions. The CPA communicates the results of the review in the form of a signed report accompanying the association’s financial statements. This report includes a statement that the CPA is unaware of any significant changes that need to be made to the financial statements in order conform to GAAP or that recording and reporting problems were observed and additional investigation is warranted.

The Compilation The third type of year-end report performed by a CPA or accountant is a compilation. In contrast to audits and reviews, no analysis of the association’s books and records is performed. Instead, the person performing the compilation is responsible for assembling the association’s financial data and formatting it into a properly structured set of year-end reports. Even though the accountant is not providing any form of assurance, he or she needs to understand the nature of the association’s business transactions and the accounting basis on which financial statements are presented. Associations should be aware that the financial statements that are provided upon completion of a compilation are based primarily on the accounting information that is provided from the association.

Before engaging the services of a CPA to perform a year-end financial report, be sure to determine his or her qualifications.

Obviously, it is advantageous to retain the services of someone who is already knowledgeable about community association accounting requirements as detailed in the AICPA’s Common Interest Realty Association (“CIRA”) Guidelines. By selecting a qualified, competent CPA to prepare the year-end report, the directors serving on the board can feel assured that they are basing their financial decisions on reports that contain accurate information.

Jeanette Catellier is an assistant vice president at Vanguard Community Management in Plainfield, IL. This article was previously published in Association Times, a publication by Associa.

ECHO Journal | January 2009

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Save this date for the Central Coast Winter Seminar Donâ&#x20AC;&#x2122;t miss this educational opportunity to keep informed on how todayâ&#x20AC;&#x2122;s laws and economic situation affect you and your association

Yes, reserve ___ spaces for the Central Coast Seminar.

Amount enclosed: $__________ (attach additional names) Name: ______________________________________________________

Central Coast Winter Seminar Saturday, February 21, 2009 7:30 a.m. to 1:30 p.m.

HOA or Firm: ________________________________________________ Address: ____________________________________________________ City: __________________________ State: _____ Zip: ____________

Best Western Seacliff Inn 7500 Old Dominion Ct., Aptos

Phone: ______________________________________________________

Registration Feet: $40 Non-Members: $50

Signature: ___________________________________________________

Visa/Mastercard No. _____________________ Exp. Date: ________

Orders will not be processed without payment in full. Fees for cancelled registrations will not be refunded. Return with payment to: ECHO, 1602 The Alameda, STE 101, San Jose, CA 95126

ECHO Marketplace

Advertiser Index

The place to find business and professionals for your association Affirmative Management . . . . . . . . . .24 Alpha Restoration & Waterproofing . . .8 American Asphalt . . . . . . . . . . . . . . .18 American Management Services . . . .10 Angius & Terry . . . . . . . . . . . . . . . . . . .3 Applied Reserve Analysis . . . . . . . . . .29 AquaTek Plumbing . . . . . . . . . . . . . .24 A.S.A.P. Collection Services . . . . . . . . .9

Advertise your business to thousands of association directors in California in the ECHO Journal.

Your Ad Seen Here You read this, didn’t you? Thousands of officers and directors of homeowner association boards also read the ads each month in the ECHO Marketplace.

Association Reserves . . . . . . . . . . . . .18 Bayridge Group . . . . . . . . . . . . . . . . .16 Berding & Weil . . . . . . . . . . . . . . . . . .44 Collins Management . . . . . . . . . . . . .29 Community Management Services . . .22 Compass Management . . . . . . . . . . .29 Cool Pool Service . . . . . . . . . . . . . . . .16 Cornerstone Community Mgmnt . . . . .8 County Bank . . . . . . . . . . . . . . . . . . . .2 Draeger . . . . . . . . . . . . . . . . . . . . . . .11 Ekim Painting . . . . . . . . . . . . . . . . . . .26 Ertech . . . . . . . . . . . . . . . . . . . . . . . .26 First Bank Association Bank Services . .28 Flores Painting . . . . . . . . . . . . . . . . . .27 Helsing Group . . . . . . . . . . . . . . . . . .16 Hill & Company. . . . . . . . . . . . . . . . . .43 Kasdan Simonds et al . . . . . . . . . . . . .25 Louis & Riparetti . . . . . . . . . . . . . . . . .19 M&C Association Services . . . . . . . . .27 M. L. Nielsen Construction . . . . . . . . .28 Massingham and Associates . . . . . . .13 Pelican Management Group . . . . . . .18 PML Management Corp. . . . . . . . . . .11 Pollard Unlimited . . . . . . . . . . . . . . . .12 R. E. Broocker Co. . . . . . . . . . . . . . . .12 Rebello’s Towing Service . . . . . . . . . .13 REMI Company . . . . . . . . . . . . . . . . .22 Saarman Construction . . . . . . . . . . . . .9 Statcomm . . . . . . . . . . . . . . . . . . . . .12 Steve Tingley Painting . . . . . . . . . . . .17 Steve’s Painting Services . . . . . . . . . . .10

ECHO Journal | January 2009

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January 31

Marin County Seminar Embassy Suites, San Rafael

February 21

Central Coast Winter Seminar Best Western Seacliff Inn, Aptos

March 21

North Counties Seminar Rohnert Park Community Center, Rohnert Park

April 4

San Francisco Spring Seminar The Firehouse, San Francisco

April 25

South Bay Spring Seminar Campbell Community Center, Campbell

June 12&13

ECHO Annual Seminar Santa Clara Convention Center, Santa Clara

September 19 Central Coast Fall Seminar Best Western Seacliff Inn, Aptos

Condominium Conversions Did You Get What You Paid For?

Condo conversions are not new condominiums. They are older rental apartments that were converted to condos.

So, what’s wrong with that?

Nothing, if the financial plan that came with your condo is up to the task of maintaining a building with 20-30 years of deferred maintenance.

How do you know? You probably don’t unless someone

has taken a close look at the homeowner association’s budget and compared it to the actual condition of the buildings. The fact is, very few condominium conversions were sold with repair budgets that are adequate to meet the needs of the project.

What does this mean to you?

If the budget is inadequate, it will mean either increased homeowner assessments or a gradually deterio-

rating condominium project. Or both. In either case, you didn’t get what you paid for.

If you’d like to know the truth now about what you bought, call us. If you want to wait and see what happens, ok, but either way, we’ll be here when you need us.

Berding | Weil, LLP 3240 Stone Valley Road West Alamo, California 94507 925-838-2090 www.berding-weil.com