By Kelly K. McQueeney, Esq., Altitude Community Law
The Colorado Common Interest Ownership Act (“CCIOA”) establishes a turnover process for most new common interest communities whereby control of the community transitions from the declarant to the owners. CCIOA’s transition process occurs over a period of time during which the owners gradually become more involved in the governance of the community, which includes transferring control of the board of directors to the owners, the financial operation of the community association, and common properties originally maintained and owned by the declarant. Nevertheless, CCIOA also establishes a specific time at which declarant control terminates, unless a community’s declaration provides for an earlier termination date.
This article focuses on a particular part of the transition process, the Turnover Audit. For common interest communities established on or after July 1, 1992, C.R.S. § 38-33.3-303(9) of CCIOA requires that within 60 days after the end of declarant control, the declarant turn over certain documents, records and an audit of the association’s financial statements. A list of the documents, records, and other items to be turned over can be found in Section 303(9) of CCIOA and includes, ”an accounting for association funds and financial statements, from the date the association received funds and ending on the date the period of declarant control ends.”
These accounting and financial statements must be audited by an independent certified public accountant (“Turnover Audit”). The CPA’s audit must be accompanied by a letter from the CPA expressing the CPA’s opinion that the association’s financial statements either present fairly the financial position of the association in conformity with generally accepted accounting principles, or a disclaimer of the CPA’s ability to attest to the fairness of the financial information presented. If such disclaimer is provided, the CPA must explain its reasons why it cannot assert an opinion as to the fairness of the financial statements.
CCIOA states that the expense of the Turnover Audit shall not be paid for or charged to the association. Depending upon the length of the time it takes the community to transition from declarant control, the Turnover Audit could be an expensive process. For larger communities or communities where it may take more than two years to transition, the declarant may want to perform annual audits while still under declarant control; however, this is not required as part of the Turnover Audit.
Once the owner-controlled board receives a copy of the Turnover Audit, the board can consider having its own accountant for the association review the Turnover Audit and all other financial information provided by the declarant. The association’s accountant may then assess whether the Turnover Audit fairly reflects the status of the Association’s finances, but also whether there are any outstanding obligations, such as payments for and collection of assessments and other amounts (e.g., working capital) that arose during the declarant control period. The board or its accountant should also review the Turnover Audit and financial statements provided by the declarant to identify any irregularities and whether the financial records are complete.
If the CPA performing the Turnover Audit cannot attest as to the fairness of the financial information presented and/or the association discovers any discrepancies, missing documents, or failure to pay or collect amounts owed during the declarant control period, the association should consult with its legal counsel and address these issues as soon as possible with the declarant.
While CCIOA imposes a duty on the declarant to provide the Turnover Audit at its expense, the owner-controlled board has a fiduciary duty to the association to review the audit and address any issues raised in a timely manner. The longer an association waits, the harder it may become to get the information and remedy the association needs to reconcile its accounts and financial standing after transition.