HOA Detective™ | October 14, 2025: If Thornton O’Glove – author of the 1987 classic Quality of Earnings – ever wandered into the strange little world of homeowners’ associations (HOAs), he’d probably need a stiff drink by page three of the standardized HOA audit report. Here was a man obsessed with earnings quality – those subtle manipulations that turn financial statements into polite fiction. O’Glove’s obsession was legendary, so much so that his book has earned a spot on Warren Buffett’s top-ten books on business ever written.
If O’Glove thought Wall Street was inventive in the art of illusion, imagine his reaction to the HOA audit – an entire ecosystem where illusion is the product.
The HOA audit, circa 2024, has evolved into a hall-of-mirrors exercise in procedural compliance. You can almost hear the paper rustle: five pages of boilerplate prose, two pages of numbers, zero pages of insight. The auditor assures us that the financial statements “present fairly, in all material respects,” a phrase that sounds comfortingly objective until you realize nobody bothers to define “material” in the context of an HOA auditor or review. It’s a phrase that could cover everything from a missing zero to a missing million.
The Mirage of Assurance: A quality audit – one worthy of O’Glove’s attention – would be couched in professional skepticism. It would kick the tires, open the books, and ask awkward questions about those mysterious transfers between reserve and operating funds. Instead, the modern HOA audit functions more like a dental cleaning: scheduled annually, superficially thorough, and mostly for appearances.
No field verification, no analytical testing, no third-party confirmations – just a mechanical checkmark beside “completed.” Take, for example, a recent audit of a mid-sized Portland, OR condominium association with assets north of $4 million. The report, produced by the same firm that also prepared the Association’s reserve study in the early years of its existence, contained no disclosure of that dual relationship.
One could argue that was 10 years ago, but the same conflicted juxtaposition of RS and auditor roles is found at many HOA audit reports generated by the same firm. This is not intended to single out a specific auditor or the HOA; this is a criticism of an industry that turns a blind eye to such a questionable practice. For those keeping score at home, such a situation would likely be deemed a violation of the AICPA’s independence standard for attest and non-attest clients, if anyone cared enough to pay attention.
O’Glove would have circled that in red ink and written “self-review threat = game over.” The real marvel is how such a report passes for an “independent audit,” in the murky world of HOA accounting. It’s the kind of “assurance” that reassures nobody – least of all, those who understand what independence means, and take the audit process seriously.
Smoke, Mirrors, and the HOA Manco Carousel: The HOA ecosystem thrives on plausible deniability. Management companies, board volunteers, and auditors form a tidy triangle of mutual accommodation. The manager feeds the auditor sanitized data; the auditor prints the audit; the board signs the representation letter and goes back to approving landscape contracts. Everyone’s happy – until something breaks.
Symbiotic Self-Interest: O’Glove warned of what he called symbiotic self-interest – the unspoken agreement between corporate insiders and their auditors to preserve the status quo. The HOA world has refined that concept into an art form.
In the HOA ecosystem, the incentives are microscopic, but the pattern is familiar: keep the numbers simple, avoid controversy, and never question the legitimacy of the “estimate the remaining useful lives and the replacement costs of the components of common property,” which is a key component of the audit process, that appears regularly in the HOA audit Supplementary Information section.
The Manco benefits handsomely. So long as the audit is perfunctory, no one questions whether reserve funds are properly sequestered or whether insurance reimbursements were booked to the correct fiscal year. A thorough, unbiased audit would expose systemic misclassification, delayed recognition of revenues received, or noncompliant fiscal practices – issues that might complicate the Manco’s job and interfere with the renewal of the Manco’s contract. A polite, compliant audit that doesn’t rock the boat keeps the carousel turning.
Lenders Don’t Care: And then there’s the lending sector – the banks and commercial lenders who cheerfully approve seven-figure loans to HOAs with the same due diligence they use when approving a hot-dog cart operator’s application for a credit card. Theoretically, these lenders are supposed to examine audited financials. Practically, they just want a cover page with a CPA’s letterhead. Whether that audit was conducted by the same firm that conducted the reserve study, prepared the tax return, and has been providing such services for the last twenty years seems to be immaterial to most lenders.
In any rational credit environment, the absence of a bona fide audit opinion –
complete with third-party verification and internal-control review – would halt the lending process in its tracks. But HOA lending is a volume game. Banks know that the Association’s collateral is its power to assess owners, not its cash flow or governance. Why ask for quality when quantity suffices?
O’Glove, who spent a career exposing Wall Street’s creative reporting, would have recognized the pattern instantly. When lenders stop caring about the integrity of the underlying numbers reported on the financial statement, it is not because they trust the system – it’s because the system has insulated them from the consequences of trusting and potentially unreliable data when it comes to lending decisions.
The Accounting Profession: Willing Accomplice: It would be comforting to believe that the accounting profession itself – the CPAs, the partners, the peer reviewers – stand together as a bulwark against this erosion of standards. Unfortunately, comfort is all it is. The modern HOA audit firm has learned the secret of survival: standardization. Create one template, fill in the blanks, and repeat for two hundred associations a year. Efficiency trumps diligence. The revenues generated from a handful of reserve study engagements each year would seem to be a trivial annoyance, but that is a story for another blog.
Peer Reviews – a Trained Eye (?): Not much is reported about the peer review process as it pertains to HOA audits. Is the reviewer looking hard with a critical eye? Who really knows? The AICPA’s self-regulatory framework depends on the same incestuous network it’s supposed to police. The result is a marketplace of low-expectation compliance-driven service providers.
If an audit omits disclosures about investment risk, fair-value hierarchy, related-party transactions, apparent and actual conflicts, who’s going to notice? Not the HOA Board of Directors. Not the lender. And not even the peer reviewer from a different firm, who is running an audit assembly line in his own office.
It is tempting to blame this moral hazard on today’s automated society and professional burnout, but it would be wrong to do so. The current HOA audit standards are structurally flawed and suffer from some of the same inadequacies first mentioned by O’Glove in 1987.
Who Pays the Auditor’s Fee? One of O’Glove’s major complaints about the audit profession was the question of whether an auditor could, and should be considered “independent,” if the auditor’s client is the same entity that pays the auditor’s fee?
In other words, if the auditor is auditing the financial statement of an HOA that is expected to pay the auditor’s professional fee, can the auditor be expected to render a 100%, unbiased opinion – especially when the findings of the audit are unflattering to the client?
Of even more significance, if the findings of the audit investigation are detrimental to the Manco operation that routinely directs a steady stream of HOA clients to the auditor’s firm, can the auditor be expected to render a truly unbiased, unjudgmental opinion? O’Glove would have called this situation institutionalized myopia.
The Cost of Complacency: The tragedy is that the HOA audit ecosystem perpetuates the illusion of exacting, professional oversight. Volunteer Board members use the audit to prop up their claims of sound fiscal stewardship. Management firms use them as liability shields. Lenders file them under the “documentation complete” file, AKA, the “round file.”
Meanwhile, the actual risks – underfunded reserves, undisclosed liabilities, self-dealing contracts – continue unchecked. O’Glove believed that the true measure of earnings quality was transparency – the willingness to let the numbers speak the unvarnished truth. By that standard, the average HOA audit ranks somewhere between a magic act and a bedtime story. The numbers may not lie, but they certainly omit.
Quality Of HOA Audits & Assurance: If O’Glove were writing today, he might expand his thesis from Quality of Earnings to Quality of Assurance. He might urge readers to look past the seal of the CPA and ask, “Who benefits from this version of the truth?”
In the HOA universe, the answer is rarely the homeowner. It’s the ecosystem itself – the management company, the auditor, the lender – all orbiting the same sun of complacency. Until that changes, the HOA audit will remain a triumph of form over substance – a polite fiction packaged in professional language. And if Thornton O’Glove could see it, he’d likely close the report, sigh, and remind us of his enduring principle: The numbers only matter when the truth behind them does.
FOOTNOTE: Though not explicitly named in the AICPA Code of Professional Conduct (see ET § 1.295.040 and ET § 1.210.010 (.17), reserve studies are non-attest consulting or valuation-type services that produce data and forward-looking cost estimates directly used in financial statements and audit disclosures.
Under the Code, when the same CPA or firm provides a non-attest service, such as a reserve study, and subsequently audits the HOA client’s financial statements, it raises the following questions regarding apparent and actual conflict:
- The auditor is reviewing and rendering an opinion about the reasonableness of assumptions, estimates, and line items in the reserve study that the firm itself produced.
- This creates an unmitigated self-review threat under ET § 1.295.040 and ET § 1.210.010 (.17).
- Unless the auditor can demonstrate objective independence (which is practically impossible when its own work product forms part of the evidence base), independence is impaired.
- Under these circumstances, the appearance of conflict is sufficient to justify the argument that a conflict exists, whether an actual conflict occurs.
Because You’re Buying More Than a Home!
