Picture getting a call from your board president. Your longtime treasurer just resigned abruptly, and when the new treasurer started reviewing the books, she found a mess. Bank accounts weren’t reconciled, financial reports didn’t match bank statements, and worst of all, about $40,000 was unaccounted for. What followed was months of forensic accounting, legal fees, insurance claims, and a complete breakdown of homeowner trust.
The truly frustrating part? Every single problem was preventable. Basic internal controls that any responsible organization should have would have caught the issues immediately or prevented them from happening at all.
If you’re serving on a board in Charlotte, Matthews, Huntersville, Fort Mill, or anywhere in the surrounding region, you need to understand the most common financial mistakes HOAs make, the compliance issues that trip up boards, and most importantly, how to prevent them from happening in your community.
As an HOA board member, you have serious legal obligations regarding your community’s finances. These aren’t suggestions – they’re legal duties that can expose you to personal liability if violated.
Your duty of care requires you to make informed, prudent decisions. You can’t just rubber-stamp a budget you haven’t reviewed or approve expenses you don’t understand. In North Carolina and South Carolina, courts expect you to act with the care an ordinarily prudent person would exercise in similar circumstances.
The duty of loyalty means putting the association’s interests ahead of your personal interests. If you’re a board member and your brother-in-law’s company bids on your landscaping contract, you have a conflict of interest that must be disclosed and managed.
Your duty to act within the law and your governing documents is non-negotiable. If your bylaws require competitive bids for expenses over $5,000 and you approve a $10,000 contract without bids, you’ve violated this duty.
Board members in Charlotte-area communities can be held personally liable for gross negligence or willful misconduct in financial management. Your D&O insurance provides some protection, but it doesn’t cover intentional wrongdoing or gross negligence.
Take your financial responsibilities seriously. Ignorance isn’t a defense.
Let’s walk through the financial mistakes seen most frequently in communities across the Charlotte metro area.
Some boards treat budgeting as a formality, throwing together numbers in November for a January start date. Others use last year’s budget with minor tweaks regardless of changed circumstances.
This creates chaos. You have no roadmap for the year, no basis for evaluating whether expenses are on track, and no meaningful way to make strategic decisions.
The solution: create comprehensive, realistic budgets with proper analysis of historical data, updated vendor quotes, and adequate contingencies. Start the process early, involve the full board, and review monthly to track actual versus budgeted performance.
This is probably the single most damaging mistake. Boards keep assessments artificially low by skimping on reserve contributions, and everything looks great for a few years. Then a roof fails, the parking lot needs replacement, or the pool equipment dies, and suddenly you’re facing a special assessment crisis.
North Carolina and South Carolina don’t legally require reserve funding, making it easy to rationalize underfunding. But the math doesn’t care about legal requirements. Your roofs will still need replacement whether you’ve saved for it or not.
Fund reserves properly from day one. Get a professional reserve study, follow its recommendations, and treat reserve contributions as non-negotiable line items in your budget.
Many boards struggle with this because they don’t want to seem harsh or they have sympathy for neighbors facing financial difficulties. They let one homeowner slide on late payments, then another, and pretty soon half the community thinks assessments are optional.
This creates cash flow issues, fairness concerns, legal complications, and potential personal liability for board members who fail to collect assessments as required.
Develop clear, written collection policies and enforce them consistently with everyone. Your policy should outline grace periods, late fees, when accounts go to collections, and lien procedures. Follow this policy every single time.
This is where fraud and embezzlement happen. A board gives one person complete control over finances – they receive money, make deposits, write checks, reconcile accounts, and produce financial reports. Nobody else reviews anything.
Then that person retires, moves away, or occasionally gets arrested, and the board discovers problems ranging from sloppy record-keeping to outright theft.
Implement basic internal controls: dual signatures on checks over a certain amount (recommended: $1,000), separate duties so one person doesn’t control the entire financial process, regular bank reconciliations reviewed by board members, periodic audits or financial reviews by independent CPAs, and regular board review of detailed financial reports.
Boards make financial decisions in hallway conversations or email exchanges that aren’t formally documented. They approve contracts without written agreements. They don’t keep copies of invoices, checks, or bank statements.
When questions arise later, there’s no record of what was decided or why. This makes audits difficult, creates problems during board transitions, and leaves the association vulnerable in disputes.
Document everything in board meeting minutes, keep organized files of all contracts and financial records, maintain records for required time periods (typically 7 years minimum), and ensure smooth transitions when board members change.
Beyond financial mistakes, there are specific compliance requirements that HOAs must follow.
North Carolina’s Planned Community Act (Chapter 47F) and South Carolina’s Title 27, Chapter 31 govern most HOAs. These statutes aren’t optional – they’re legal requirements.
Key compliance areas include proper notice for board meetings and annual meetings, member voting procedures and quorum requirements, assessment collection procedures including late fees and liens, financial reporting requirements to members, document retention requirements, and records inspection rights for homeowners.
Many board members have never read these statutes. You can’t comply with laws you don’t know exist. Take time to review the applicable statutes for your state, or work with an attorney who can explain your obligations.
Communities in Rock Hill and Fort Mill have faced expensive legal battles because boards didn’t follow statutory notice requirements for meetings where important decisions were made. Courts invalidated those decisions, forcing boards to repeat the process properly while paying legal fees.
Most HOAs must file federal tax returns annually, typically Form 1120 or 1120-H. Failing to file can result in penalties of up to $10,000 for larger associations.
Many small HOAs assume they’re exempt from filing because they’re non-profit. Wrong. Being non-profit doesn’t mean you’re tax-exempt in the eyes of the IRS. Unless you have specific 501(c) exempt status (which most HOAs don’t), you must file returns.
Form 1120-H is simpler than 1120 and can result in tax savings, but it has specific requirements. Work with CPAs who specialize in association tax returns.
Don’t forget state tax obligations. North Carolina and South Carolina have different rules about HOA tax filings.
Your governing documents almost certainly require specific insurance coverage: general liability coverage, property insurance for common areas, and directors and officers (D&O) insurance.
But compliance goes beyond just having insurance. You need adequate coverage limits, proper endorsements and riders, timely premium payments, and annual policy reviews to ensure coverage keeps pace with property values.
Communities in Weddington and Marvin have discovered after major losses that their property insurance was based on outdated property values, leaving them significantly underinsured.
Review insurance policies annually with your agent or broker. Get updated property appraisals every few years to ensure adequate coverage. Make sure your D&O policy limits are sufficient. And pay those premiums on time.
North Carolina and South Carolina laws require HOAs to provide financial information to members. Your governing documents might have additional requirements.
Typically, you must provide annual financial statements to all members, make detailed financial records available for inspection, provide access to current budgets, and share reserve study summaries.
Some communities provide quarterly or monthly financial updates beyond the legal minimum. This transparency builds trust and reduces conflicts.
The key is consistency and accuracy. If you promise monthly financial reports, deliver them monthly. If reports contain errors, correct them promptly and transparently.
Internal controls aren’t about distrust – they’re about creating systems that protect everyone involved.
Never let one person control all aspects of your finances. Separate these functions: receiving and depositing money, writing and signing checks, reconciling bank accounts, and preparing financial reports.
In larger communities with staff, this might mean different employees handle different functions. In smaller volunteer-run associations, it might mean the treasurer prepares reports but the president reviews them, or two board members must sign large checks.
A community in Indian Trail had a property manager handling everything financial with no board oversight. When she left suddenly, the board discovered she’d been overpaying her management company and pocketing kickbacks from vendors. Proper segregation of duties would have prevented this.
Establish clear authorization limits for different types of expenses. Your policy might look like this: expenses under $1,000 require property manager or treasurer approval, expenses $1,000-$5,000 require board president or two officers, expenses $5,000-$25,000 require majority board vote, and expenses over $25,000 require super-majority board vote and membership notice.
Whatever limits you set, follow them consistently. Don’t let urgency excuse bypassing proper approvals.
Require dual signatures on checks over your established threshold. Use positive pay or similar fraud prevention services your bank offers. Receive bank statements electronically at an independent email address reviewed by someone other than the treasurer. Reconcile accounts monthly and have a board member review reconciliations. Set up alerts for unusual transactions.
These controls are simple to implement and dramatically reduce fraud risk.
Annual financial reviews or audits by independent CPAs provide another layer of protection. A review is less comprehensive and expensive than a full audit but still provides verification that your financial records are reasonable.
For larger associations or those with significant assets, consider full audits. Between professional audits, conduct periodic internal audits where board members review randomly selected transactions and verify supporting documentation.
Nobody wants to believe their treasurer or management company would steal from the association, but fraud happens more often than you’d think.
Understanding how fraud typically occurs helps you prevent it. Common schemes include check fraud where someone writes unauthorized checks, payment diversion where vendor payments are redirected to fraudulent accounts, kickback arrangements where vendors overcharge and share the excess, phantom vendors where fake companies receive payments for services never provided, and assessment diversion where collected assessments are pocketed rather than deposited.
Certain warning signs should trigger immediate investigation: financial reports that don’t reconcile with bank statements, missing or altered invoices and receipts, vendor payments to unfamiliar companies, unusual bank account activity, resistance to internal controls or financial reviews, a financial person who won’t take vacation or delegate responsibilities, unexplained budget variances, and homeowner complaints about payment processing.
Don’t ignore red flags because you trust the person involved. Your fiduciary duty requires you to investigate concerns.
If you suspect fraud, act immediately. Secure all financial records and documentation, change bank account access and passwords, stop payment on questionable checks if possible, consult your attorney about legal obligations, contact your insurance carrier about potential claims, conduct or commission a forensic audit, and notify law enforcement if criminal activity is confirmed.
Don’t confront the suspected individual directly before securing records and consulting legal counsel.
You can’t know everything about HOA law, accounting, and financial management. Working with qualified professionals helps ensure compliance and prevents costly mistakes.
Consult an attorney specializing in HOA law for governing document updates, complex compliance questions, collection issues and foreclosures, litigation defense, and contract reviews for significant expenditures.
Don’t use your personal injury attorney uncle for HOA matters. HOA law is specialized. Work with attorneys who do this work regularly and understand North Carolina or South Carolina HOA law specifically.
Professional management companies bring expertise you probably don’t have on your board: knowledge of state laws and compliance requirements, established financial systems and controls, vendor relationships and negotiating power, continuity when board members change, and economies of scale on services.
Not every community needs full-service management, but most benefit from at least financial management services or consulting support.
Beyond preparing tax returns, CPAs can provide financial reviews or audits, assist with budget development, offer advice on reserve funding, help establish internal controls, and provide financial analysis for major decisions.
For Charlotte-area communities, work with CPAs familiar with HOA accounting.
Board members can face personal liability for gross negligence or willful misconduct in financial management, though this is relatively rare. Your D&O insurance typically covers unintentional errors in judgment made in good faith. However, fraud, self-dealing, or intentional violation of governing documents might not be covered. Courts generally protect board members who act in good faith, stay informed, and follow proper procedures. The best protection is taking your duties seriously, documenting decisions carefully, maintaining adequate insurance, and consulting professionals when facing complex issues.
Most communities should have an independent CPA review or audit at least annually. Larger associations with budgets over $500,000 or significant reserves should lean toward full audits. Smaller communities might alternate between reviews and audits. Beyond professional reviews, boards should conduct internal checks quarterly. If your governing documents require specific audit frequency, follow those requirements. After discovering any financial irregularities, conduct an immediate forensic audit.
Even small associations need basic controls: dual signatures on checks over $1,000, bank reconciliations performed monthly by someone other than the person who writes checks, financial reports reviewed by the full board monthly, segregated duties so one person doesn’t control all financial aspects, competitive bids for expenses over $5,000, documented approval for all expenditures in board minutes, and separate bank accounts for operating and reserve funds. These controls require minimal time but provide substantial protection.
First, secure all financial records immediately. Consult your HOA attorney about legal obligations and options. Contact your D&O and crime insurance carriers to report potential claims. Commission a forensic audit to determine the full extent of problems. Change all bank access and passwords. Notify law enforcement if criminal activity is suspected. Consider whether you need to communicate with homeowners. Implement stronger controls to prevent recurrence. Don’t delay action – immediate steps protect the association and limit damage.
North Carolina’s Planned Community Act requires HOAs to provide annual financial statements to members and make detailed records available for inspection upon request. South Carolina has similar requirements. Your specific governing documents might require additional reporting. Beyond legal minimums, best practice is providing at least quarterly financial summaries to all homeowners and making detailed monthly reports available electronically. Transparency builds trust and reduces conflicts.
Frame controls as standard business practices, not personal distrust. Use language like “our fiduciary duty requires proper controls” or “our insurance requires these procedures.” Point to industry standards rather than making it about the individual. Most honest financial managers welcome controls because it protects them from false accusations. If someone resists reasonable controls, that’s actually a red flag.
The IRS can impose significant penalties – up to $10,000 for associations with gross receipts over $1 million, though smaller penalties apply to smaller associations. Interest accrues on unpaid taxes. North Carolina and South Carolina also have penalties for failure to file required state returns. Beyond financial penalties, unfiled returns create problems if you’re trying to obtain financing. If you’ve missed returns, file them immediately even if late.
Absolutely, and verify coverage annually. Most reputable management companies carry both. Require proof of coverage and ensure limits are adequate for your association’s budget and reserves. Your contract should specify minimum coverage amounts. However, the management company’s insurance doesn’t eliminate your need for your own crime coverage and D&O insurance.
North Carolina and South Carolina laws require retention of certain records for specific periods, typically 7 years for financial records. However, your governing documents might require longer retention. Best practice is keeping most financial records for at least 7 years, tax returns and supporting documents permanently, governing documents and major contracts permanently, and audit reports and financial reviews for 10+ years. Use electronic storage to save space and improve accessibility.
Immediately verify that developer turned over adequate reserves per your governing documents and state law requirements, obtain complete financial records for the entire development period, confirm all vendor contracts and their terms, verify all assessment collection and outstanding delinquencies, review insurance coverage for adequacy, ensure all required tax returns were filed, obtain all governing documents including amendments, and verify compliance with municipality or state reporting requirements. Many communities discover during turnover that developers underbudgeted, underfunded reserves, or left other financial problems.
*Cusick Company has been helping Charlotte-area HOAs navigate financial management challenges and compliance requirements for over 25 years. Our experience with North Carolina and South Carolina HOA laws, combined with robust financial systems and controls, helps boards avoid costly mistakes while fulfilling their fiduciary duties. We provide the expertise and support that volunteer boards need to manage their communities’ finances responsibly. Contact us at (704) 544-7779 to discuss how we can help protect your community’s financial health.*
