QUESTION: Our CPA wants me (as president) to sign a management representations letter for his review of our annual financial statement. It contains statements about our accounting policies and procedures but I have no knowledge about these–our management company handles it all. Both the CPA and our manager tell me to sign it because it is “just a form letter” and says “to the best of my knowledge & belief.” Do I really have to sign this?

ANSWER: If you agree with the representations in the letter, you should sign it. If you’re uncertain, you should investigate them until you are satisfied.

Financial Statements. Associations with a gross income exceeding $75,000 must annually have a CPA prepare a written report of the financial condition of the association. The CPA’s examination of the “financial statement” must be completed and distributed to the membership within 120 days of the end of the association’s fiscal year. Civ. Code §1365(c). Finances are either audited or reviewed, depending on the level called for in the association’s governing documents. If your documents are silent, the Davis-Stirling Act calls for a review.

Representations Required. As part of the review process, CPAs require a signed representations letter describing the management practices of the association. “Management” includes board members. The letter is one of the steps CPAs must follow to satisfy the review and auditing standards issued by the American Institute of CPAs. (See sample representation letter recommended by Thomson Reuters in their CPA’s Guide to Homeowners Associations.)

Signatures. Typically, the signatures of two board members (usually the president and treasurer) and the manager are required. The representations are to the best of the knowledge and belief of the signers. Even though the financial statement is the association’s, the manager signs because he/she is the primary source of information in the statement. If directors refuse to sign, the CPA issues a draft report instead of a final signed statement.

RECOMMENDATION: Boards should be familiar with the representations in the letter. When associations are defrauded, it is usually because boards delegate too much financial authority to one person (a director or the management company). It’s always the “trusted” person who has the opportunity to embezzle funds.

For their assistance with this question, thanks goes to Ronald Stone, PhD, CPA who teaches at the College of Business and Economics at Cal. State Northridge, and Creighton Tevlin, CPA who specializes in HOAs.

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP