Transitioning from Declarant Control & Annual Audits

Often new clients come to us with problems that are actually financial issues. Boards distrust the Declarant (that is, the company that created the condominium and is passing control of the Association on to the Board). Boards may also question how funds were spent by prior boards or management companies. One of the questions we ask is if they had an audit done by a CPA. I am no longer surprised when the answer is NO. But I should be.

State law requires that when an association transitions from Declarant control to a board elected by the owners, that a CPA audit be completed, UNLESS two thirds of the owners (excluding the Declarant) vote to waive the audit (RCW 64.34.312). The Condominium Act, RCW 64.34.372(1) says:

“At least annually, the association shall prepare … a financial statement of the association in accordance with generally accepted accounting principles. The financial statements of condominiums consisting of fifty or more units shall be audited at least annually by a certified public accountant. In the case of a condominium consisting of fewer than fifty units, an annual audit is also required but may be waived annually by unit owners other than the declarant of units to which sixty percent of the votes are allocated, excluding the votes allocated to units owned by the declarant.”[1]

So if every condo association has to have an audit at transition, and at least annually after that, how can there be so few associations with accurate financials? I don’t have an answer to that question. What I can offer is that many associations cannot get a quorum for their annual meetings, so they could not have obtained a 60% vote to waive the required audit. What’s more, if your condo has 50 or more units, you cannot waive it the requirement with any vote.

If you have the audit completed annually, the cost and time to prepare it drop substantially. Waiting just adds cost and makes people suspicious. If you are under 50 units, and you want to avoid the cost, make sure that you actually get an affirmative vote of the owners to waive the audit. If you don’t, you risk violating your fiduciary duties as a board member, because in exercising reasonable and ordinary care in the fulfillment of your board duties, you MUST have an audit completed without that vote. (To us that means having paper ballots, signed by owners indicating their unit numbers, with enough votes to total 60% of the voting power excluding all units still owned by the Declarant. That means the Declarant cannot vote to achieve the 60% threshold.)

With properly completed and audited financial records, you can answer a lot of the questions that come up about where the money went.

If you have any questions we can answer, please feel free to leave a comment or contact us directly. We look forward to continuing this conversation with you in our future posts!

[1] This section of the Condominium Act applies automatically to all condominiums in Washington State.