A HOA Detective™ reflection on forensic accounting, and shell game aka HOA accounting.
HOA Detective™ | May 15, 2026: Every once in a while, an author writes a book that quietly changes an industry. Not because they become fashionable after being named book of the week by Opry’s book club, or repeatedly quoted by the corporate cheerleaders on LinkedIn. Rather because they permanently alter the way an audience of readers looks at the world.
Thornton L. O’Glove’s Quality of Earnings ¹ was one of those books.
In an era when too many HOA financial statements are often used to satisfy and soothe the reader rather than inform, Thornton L. O’Glove’s ² work remains one of the clearest reminders that numbers can be manipulated just as easily through omission as through fraud.
Originally published in 1987, the book became something of an underground classic among forensic-minded investors, analysts, and accountants who understood a simple but uncomfortable truth:
Financial statements can, and often are engineered to provide emotional comfort rather than analytical clarity.
The principles set forth by O’Glove almost 40 years ago focused on what careful readers now commonly describe as red-flag analysis: the subtle deviations, inconsistencies, accounting maneuvers, and narrative distortions that frequently appear before financial deterioration becomes obvious to the public.
For those of us working in the homeowner association (HOA) world, the relevance is most unsettling. Because if there is one ecosystem where financial opacity has become normalized, it is the field of HOA financial reporting.
If Thornton O’Glove were to spend spent six months reviewing condominium financial statements, reserve studies, audits and reviews he would probably trade in his mug of strong coffee for a bottle of whiskey spiked Maalox®.
The Great HOA Illusion:One of O’Glove’s central observations was that investors should never assume financial statements automatically reflect economic reality. The appearance of professionalism can mask deeply problematic conditions.
This observation applies perfectly to buyers contemplating the purchasing of a home located within a particular HOA, and common interest developments in general. It also applies to existing HOA stakeholders, including homeowners, lenders and insurance underwriters.
Across the country, owners routinely receive financial reports (YTD and year-end) that technically qualify as financial statements while revealing almost nothing useful about the actual fiscal condition of the association.
The modern HOA reporting ecosystem frequently suffers from cash-basis reporting that obscures future liabilities, weak reserve disclosures, minimal debt narrative, opaque interfund transfers, missing variance analysis, artificially optimistic, unvalidated reserve projections, deferred maintenance hidden through timing strategies, excessive reliance on bank loans to finance capital spending obligations, understated infrastructure deterioration, and selective disclosure practices.
If that sounds like a mouthful, it is, which is exactly why the principles outlined by Thornton L. O’Glove’s Quality of Earnings, are increasingly important. Especially as HOAs continue to age, and take on more and more long-term debt.
A Culture of Benign Neglect: In many cases, the financial reports are not outright false. They are simply structured to avoid provoking difficult questions. What often passes for HOA financial disclosure is less deliberate fraud than a culture of benign neglect – a system of low-bar reporting standards tolerated by boards, managers, accountants, and even homeowners themselves. Unfortunately, the same owners who forgive these omissions today are often the ones who ultimately bear the financial consequences tomorrow.
O’Glove understood this decades ago when examining public companies. The danger is not always fabricated numbers. Often, the danger lies in the strategic arrangement of partial truths. The HOA industry has largely perfected this form of “financial reporting” into a fine art.
Cash-Basis Accounting – the HOA Comfort Blanket:One of the most persistent problems within association governance is the continued reliance on cash-basis accounting for organizations carrying multi-million-dollar infrastructure obligations.Under cash accounting, unpaid liabilities often disappear from operational visibility until money physically leaves the bank account. This creates an extraordinary illusion of stability.
Roof replacement obligations may be looming. Elevator modernization may be unavoidable. Litigation exposure may be mounting. Mechanical systems may be deteriorating, but if the invoice has not yet been paid, the financial statements can still appear deceptively stable. The result is a financial culture built around delayed recognition.
Modified Cash Accounting – the HOA Fog Machine: Modified cash accounting can be even more misleading because it borrows the appearance of accrual accounting without fully accepting its discipline. Under pure cash accounting, the limitation is at least obvious: the report shows cash in and cash out. Modified cash accounting is murkier. It may recognize selected receivables, selected payables, or selected year-end adjustments, while leaving other material obligations outside the frame.
That selective recognition creates a dangerous illusion of sophistication. The financial statements look more refined than a checkbook summary, but they may still fail to present the Association’s true economic condition. In the HOA context, this is especially problematic because boards can appear to acknowledge obligations while still excluding the liabilities that matter most: deferred maintenance, unfunded reserve exposure, interfund borrowing, future debt service, and major repair costs already embedded in the physical condition of the property.
Cash accounting hides liabilities by omission. Modified cash accounting can hide them behind a costume of professionalism.
O’Glove repeatedly warns readers to focus on economic substance rather than accounting presentation. In the HOA world, that warning is especially important because associations are not ordinary businesses. They are infrastructure preservation organizations pretending to be bookkeeping clubs.The distinction becomes catastrophic once major components begin aging simultaneously.
“Due To / Due From” – Internal Borrowing, David Copperfield Style: Few accounting entries better capture the HOA industry’s smoke & mirrors culture of normalization than the infamous “Due To / Due From” relationship between operating and reserve accounts.In theory, these entries are temporary timing adjustments.
In practice, they often function as an internal financing mechanism used to patch operating deficits, defer difficult decisions, present balance sheets that “balance” when accounts don’t, or maintain artificially low assessments.
The language itself sounds harmless: “Due From Operating.” “Due To Reserves.”
Translated into plain English, the meaning is frequently: “We borrowed money from the reserves because the operating budget is in arrears, but we don’t know when the money will be paid back.”
This is precisely the kind of subtle financial deviation O’Glove spent his career teaching readers to identify. Not because every occurrence signal corruption. But because recurring dependence on internal transfers usually indicates structural financial stress somewhere else in the system.
In many associations, these balances quietly persist year after year while boards insist everything is under control.
The Mythology of Reserve-Interest Income: Another favorite HOA accounting tradition involves the increasingly desperate use of reserve-interest income as a pseudo-funding strategy.Ina high-interest economic environment nobody questions a reserve funding strategy that assumes the annual ROI of the reserve fund will be 3-5% per annum.
All of a sudden, the HOA’s $3M reserve fund is expected to earn $100k-150K/year EVERY year for the next 30 years. Like magic, $2M appears in the reserve fund, and is added to the long-term funding stream, whether the fund earns 3-5% a year or not.
This phenomenon is currently on view in reserve studies prepared in the last 2-3 years. In the capital planning discipline interest income is not a replacement for actual reserve contributions. It is supplemental revenue and should not be considered until such time the money is actually earned, and safely sequestered in a dedicated replacement reserve fund; not “borrowed” by the operating fund, not anticipated earnings based on the false assumption the Association will out perform the market in a safe (FDIC-equivalent) investment environment for 30- straight years.
Relying on temporary rate environments to solve structural funding deficiencies is equivalent to balancing a leaking roof repair budget on favorable weather forecasts. O’Glove’s broader message is simple:
Whenever management highlights peripheral positives while avoiding core balance-sheet realities, caution is warranted. That principle applies perfectly to reserve planning.
The HOA Industry’s Low-Bar Reporting Culture: Perhaps the most important insight O’Glove offered was psychological rather than technical.Most financial users stop reading once the documents appear official.That tendency is everywhere in HOA governance.
- Boards often assume owners will not read footnotes.
- Managers assume buyers will not compare reserve assumptions.
- Vendors assume nobody will cross-reference disclosures.
- Reserve preparers assume projections will not face forensic review.
Unfortunately, they are often correct. The HOA management industry has evolved around extraordinarily low expectations for financial transparency. Many associations still do not provide:
- Meaningful long-term cash-flow modeling.
- Debt-service stress analysis.
- Component-level reserve funding benchmarking.
- Inflation sensitivity financial models.
- Assessment escalation scenarios.
- Infrastructure risk prioritization.
- Fully integrated reserve-operating interaction analysis.
Instead, owners are frequently handed sanitized PDFs accompanied by vague reassurances about “professional management.” The simple act of preparing properly anointed financial statements, and operating budgets has escaped the industry’s definition of standard reporting procedures.
This environment persists because the reporting threshold remains painfully low. As long as the statements look organized, many boards consider disclosure obligations fulfilled. But organized formatting is not the same thing as analytical honesty. O’Glove understood that distinction better than most.
Why O’Glove Still Matters: Thornton O’Glove’s work remains remarkably relevant because human nature has not changed. Most people and a surprising number HOAs still prefer optimistic narratives. Managers still minimize uncomfortable realities. Financial statements are still curated documents rather than neutral truth machines.
The HOA sector amplifies these tendencies because many homeowners lack the accounting background, reserve expertise, or forensic skepticism required to interpret what they are seeing. This informational imbalance creates fertile ground for governance drift. Which is why O’Glove’s philosophy remains so valuable. The HOA due diligence bullet list prepared by Thornton O’Glove might look something like:
- Read carefully.
- Question framing.
- Pay attention to deviations.
- Compare narratives against cash realities.
- Watch for timing games.
- Pay attention to what is omitted.
- Most importantly: never confuse professional formatting with financial stability.
The lessons embodied by Quality of Earnings are just as relevant as when they first appeared nearly four decades ago. Especially in the HOA world.
Sources
- Thornton L. O’Glove, Quality of Earnings: The Investor’s Guide to How Much Money a Company Is Really Making (New York: Free Press, 1987). https://www.simonandschuster.com/books/Quality-of-Earnings/Thornton-L-Oglove/9780684863757
- Thornton O’Glove official biography, thorntonoglove.com – accessed May 14, 2026. –http://www.thorntonoglove.com/
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