I gather that the Management company was paying Association expenses and not their own (the management company's) operating expenses. In either case, it would seem time to visit an attorney. The minutes should provide documentation of discussions at Board meetings and votes by the Board on financial decisions. If there's nothing in the minutes, then apparently the Board didn't approve it. But, an attorney should be consulted to sort this out.

Get lawyer on this case.

Agreed, get a lawyer! Monies cannot not be use for any other purpose than for what they were intended to be set aside for (roofing, painting, paving,,,) those long term high dollar expenses. If the MEMBERSHIP did not have a meeting and legally vote to reallocate funds from the Reserves to the Operating side of the budget, then there is very high suspicion of wrongful use of those funds and your HOA may be entitled to recoup those funds. However, if the membership DID vote to reallocate the funds, they just let the fox into the hen house. Why wasn't the Board watching your money? They have that fiduciary duty. It take a long time to deplete funds of that side without it being very noticeable.

Skip the attorney (how will you pay his fee if you are out of money) and conduct your own audit if you have an owner who is experienced in these matters. You need to gather and document all relevant facts so that an attorney can give you the best advice possible. Here is a brief checklist: 
 
Read your HOA documents to determine who is empowered to disburse funds from the reserve account.  
 
Verify that all transfers from reserves (whether authorized or not) were deposited into your HOA's operating account.  
 
Obtain copies of all bank statements for at least the previous three years. Review the bank reconciliations supposedly performed by the management company. Look for items posted to the bank statement that are not posted in your general ledger. Investigate each such item for propriety and proper authorization.  
 
Take immediate control of all bank accounts from the management company. That is, submit new signature cards to the bank which will remove the management company employees from signing. Seize all blank checks and inspect them for any missing numbers.  
 
Have all recurring bills sent directly to a homeowner instead of the management company.  
 
There is more, but this will get you started.

Even the most hands-off board has a fiduciary duty to require/read monthly financial statements. There are likely three sides to this story - but if the owners are going after anyone it should be the board.

The Washington State Condominium Act "An association may withdraw funds from its reserve account to pay for unforeseen or unbudgeted costs. The board of directors shall record any such withdrawal in the minute books of the association, cause notice of any such withdrawal to be hand delivered or sent prepaid by first-class United States mail to the mailing address of each unit or to any other mailing address designated in writing by the unit owner, and adopt a repayment schedule not to exceed twenty-four months unless it determines that repayment within twenty-four months would impose an unreasonable burden on the unit owners." What your state and your governing documents allow and require may be different. An easy way to find out is to use the key worlds " ---- (your state name) condominium act reserve accounts".  
 
Good luck!

What I should have said in the above post was to do an internet search using the key words, "---- (your state name) condominium act reserve accounts".  
 
Whenever a Board takes a "hands off" attitude they place an Association at risk. Board members need to keep in mind that managing agents are their employees and need to be managed as such.  
 
If indeed the managing agent did violate state law and / or your bylaws, then it may be time for a new managing agent AND for your Board to wake up and do its job in managing the managing agent. Attorneys are expensive and I do not know what they could accomplish. If your management company is like ours it has a contract with the association that makes the association (not the management company) responsible for their attorney fees plus any expenses on their part related to a law suit filed against them.

There was $100,000 in your Association's reserve account and the board and owners were hands off for many years? This was a crime waiting to happen. It sounds as if the Property Management company emptied your Association's bank accounts. Yet another story about corrupt Property Management companies and yet another reason to self-manage . . .

I agree with Larry Davis. Your HOA needs an audit and you guys have to immerse yourselves in the accounting procedures and practices of the HOA, the bank statements - 3 years sounds good - analyze the revenue and expense stream streams. You may well have a criminal matter on your plate. The Manager may have written checks from Association accounts for bogus or inflated expenses that he cashed or his confederates cashed. Or he may have skimmed deposits somehow so that funds never made it into Association accounts in the first place. Get those documents for an initial review and analysis by one or more comptetent persons to figure out what happened yourselves first, if you can. Do as much as you can yourselves in the initial review and analysis! You guys need to plug into the mess and to know the facts like the backs of your hands - and, like Mr. Davis says, know what your own own docs say about reserve accounts and anything else about accounting/spending/etc that's applicable. 
 
If you cannot get some or all the records, then go to an atty right away. The atty can figure out the best way to get them. What a mess. Keep us posted!

Amen to self management, Donna! If you are responsible enough to own a home, you can, in most instances, manage the finances of your HOA. Stop letting others decide how to spend your money and manage it yourself. I've read numerous horror stories about financial mismanagement, but never one that began "Thank goodness we had our money managed by our PM. S/he saved us....."

Thank you all for the responses. In no particular order: We can't "self-manage..in our by laws...Audits were done, with the exception of last year, but most of money was spent by then...no one is thinking the money was skimmed or stolen, just not used for any "capital reserves" expenditures...We are in MD, and still looking for clarification there...property manager keeps insisting it was b/c expenses exceeded revenue...NO former Board member authorized this according to them..NO resident approved/voted for anything like this..even if we got financials going back, I am sure the checks written will match with expenses...community is still holding onto the question of "How this could have LEGALLY happened?"

I like that you are asking intelligent questions and seeking answers rather rather than jumping to unsubstantiated emotionally driven reactions.  
 
While your Association cannot self-manage (ours cannot either unless we amend our Declaration, which takes 75% of the owners), your Association, though the Board, can and should be managing the managing agent. The treasurer is the one who is legally responsible for the finances of the Association. Your secretary is responsible for Association records and should be noting the treasurer's report (which should be given at all Board meetings) in the minutes. Homeowners should be keeping their eyes on the Board to whom they delegate the responsibility of running the Association to make certain that it is doing its job. None of this appears to have been done.  
 
Your story points out the danger of a "hands-off attitude".  
 
An attorney may be necessary, but before you go to one you need to know what the problem is, and from what you have said no-one knows. I would suggest that before anything else you look at your Association's financials and see what checks were written out for what and from what account money was drawn to write out those checks. The law determines the number of years records need to be kept for tax and other purposes. If there are no records you need to find out why.  
 
At the moment you can begin with the three most recent years and then, if necessary, go back further. You may find that the reserves were indeed used to pay expenses. If this is the case why did the Board propose an inadequate budget and owners not do anything about it? 
 
While there are many unanswered questions, there is one that needs be be seriously looked at and it is this -- How can your Association prevent this from ever happening again? Please read your governing documents and state law with eyes to answer that question.  
 
I wish you and your Association well.  

How could this happen? How many years, and how many Boards went without seeing finacial reports at meetings? If I were on the Board I would sue the management company and then expect the homeowners to sue the Board!

Thank you again for the replies. Some of t his might be repetetive. I have been in t his community about 5 years, and just now have realized the depth of the problem. There is plenty of blame to go around and that can't be changed. I agree with trying to learn from the mistakes and start taking a more active role in the communities dealings. As more residents are becoming aware of the issues, several are offering assistance in any way they can. Most residents are just clamoring for information AND communication, which is one of my biggest goals to provide. As I write this, I am also fully aware we will not be able to move on as a community w/o addressing t his outstanding issue with regard to the capital reserves spending. I am still trying to find out if this was done illegally or done legally but stupidly b/c of inept Boards of the past. I have read our by laws as well as the MD Condo Act until my eyes hurt and still can't confirm anything.

We are a forensic accounting firm that handles forensic audits effectively for HOA fraud. One of the big issue is by the time we come in to investigate all the evidence has been destroyed. Anyone have an idea how we can go about doing seminars at association to bring awareness to a common problem HOA financial abuse.

This thread was disappointing. Larry R - your tale of woe simply goes around and around. You say you have looked at This and you have looked at That, and you still can't figure anything out as to whether illegal activity or just stupid activity has occurred.  
 
Well, I have a simple question: how in hell is anyone out here in cyberspace supposed to help you and what can anyone who has no access to the records say to you to help? There have been some very thoughtful comments, but none seem to have generated any ideas for you.  
 
You continue to maintain you're screwed. So be it, I guess.

Thanks George! Yes, ideas have been suggested, and I have posted my thanks and appreciation. But I have yet to find the illegal vs stupid answer. But I appreciate your thoughtful and useful addition to my continued search!!

In response to your inquiry: 
 
1. In Maryland, a fidelity bond placed by the board is required by the MD Condo Act (HOAs also).  
 
2. CAI (Community Associations Institute) has long stated that only a board is to have signature on Reserve Accounts. There are no legislative mandates that say reserve funds can't be borrowed against to pay legally owed bills by vendors. The key word here is "borrowed." It should always be done by a board resolution - similar to Washington's required language - stating how much. how it will be repaid, and when. 
 
3. In Maryland, many associations are underwater due to one of the highest delinquency rates in the country. This has resulted in situations such as yours. 
 
4. If the board does not have signature on the accounts, no bank can remove the management company signature from the bank account. This is Federal banking regulations. In fact, without cooperation by the mgmt co, the board cannot obtain information from the bank, including bank statement, etc.  
Over the past 25 years in business as a consultant in MD, this has been a reoccurring problem. Our clients came to us having learned that the bank could not even confirm that there was an account there. This is in part due to Board Members taking the easy way out of doing a terrible, time consuming job not appreciated by any other member. However, the board always has the obligation and is held accountable for any mistakes UNLESS it is fraud or criminal activity. 
Several MD area mgmt cos refuse to agree to good business practices and boards agree rather than continue to search for good mgmt. It's the members funds, the mgmt is just the agent, not the business entitled to exclusive control of the funds.  
 
5. If the mgmt co shows that the problem is delinquent accounts, then this is the primary problem to be addressed. HOWEVER, the owners should speak up and insist that the board take responsibility for the financial accounts, including signature on all accounts - operating, reserves, savings, etc. This includes all accounts even those handled by the mgmt co.  
Contact the CPA for assistance in understanding the financial condition of the condo.  
Volunteer to put in time and effort to understand the problems, to better serve all owners, to protect your financial investment. 
 
6. MD law requires that draft budgets be sent to all owners 30 days prior to the board's adoption of the budget for next year. The board must permit members to speak at the board meeting (usually held in Nov or early Dec) prior to approval of the assessment rate for next year. This is one place to raise the issue of restoring the reserve funds.  
 
Contact either the Chesapeake CAI or the Washington region CAI, office in VA. Begin immediately to move to clarify the actual problem and determine what actions can be undertaken. With the new mortgage guidelines, until this is corrected, the owners will have difficulty refinancing or selling units.  
 
Nancy Jacobsen 
 

Thank you Nancy! Our delinquiencies are actually quite low; % wise and $ wise. The reason reserved were used/borrowed was b/c expenses exceeded revenues, and not to sound rude, but our Board was comprised of older residents. I believe this had an influence on NOT increasing monthly dues over their tenure, given our community is a bit older residents-wise. Combine that with a Board who had no idea what they were doing, were the only volunteers, and got on the Board for their own personal agendas while staying hands-off and abdicating everything to the property management company had contributed to the mess. There has NEVER been a vote on approving of any transfers of ither the residents or the former Board, and certainly never an explanation at a meeting of what was going on, what was b eing "borrowed", what the pay back plan/schedule was etc. I have examined all the expenses/revenues in trying to have some input into our next budget to make sure no structural deficits exist.

To all who have made comments -  
 
The answer seems to begin with the marketing of condo living as carefree - the ads show happy couples playing golf or traveling with no worry about their "house," not responsible for anything except enjoying the retirement years. 
It appears that ALL owners bought into this picture without understanding the reality of this lifestyle. Someone has to oversee the running of the business and it is a business. The mgmt co may handle the daily operations; however the owners are responsible for leading this business and must think of themselves as stockholders in the company. When a company hits financial walls, it is the owners who determine the correction.  
 
By electing board members and staying uninvolved, the owners have delivered the message "don't bother me with details." Owners must know what they are purchasing before buying a condo and then:  
- understand how condos are financed, governed, and managed, 
- read the documents and referring to them periodically, 
- attend board meetings,  
- read the financial reports throughout the year (almost all states are clear in saying that the books and records are available to the owners for review),  
- ask board members during the open portion of the meeting about information in those reports,  
- understand both the budget and the audit process, 
- must take election of directors as a serious political obligation and elect directors who are capable of making good business decisions.  
 
It appears that the message to any management company was "don't bother us with details, find the funds to pay the bills the condo incurs, keep our building repaired and functioning, don't propose an increase in assessments, and don't suggest reduction in the services we expect." The owners of this condo abdicated and left the management company to solve the condo problems with few choices. While $100K in reserves sounded adequate, it too may not have been sufficient to cover long-term maintenance expenses.  
 
Residential management service in Maryland and throughout most of the country is a business and not a profession with minimal educational standards and no advanced degree programs. Virginia recently set standards for both the owners of the company and the community managers and requires continuing education. This is a step in the right direction. However until owners of condos accept the responsibility of ownership and the financial obligations involved, mistakes like this will continue.  
 
All owners can join Community Associations Institute individually, can avail themselves of educational programs, and must become knowledgeable participants in the process.  
 
Larry, there is help if you and other owners are willing to request it.  

"Our condo HOA has been EXTREMELY hands off for many years, but we did have a Reserve account with approximately 100k in it" 
 
Oh. That's nice.