We previously published an introductory article regarding the record inspection rights belonging to members of South Carolina homeowners associations (HOAs). We hope that broad overview proved helpful to understanding the “big picture” of record inspection rights under South Carolina’s Nonprofit Corporation Act[2] (the “Act”) to include conditional rights to inspect accounting records, as “appropriate accounting records” must be kept pursuant to the Act.[3] Since the Act requires corporations to keep appropriate accounting records, and members have a conditioned right to inspect accounting records, we now want to address a common question: Just what are “appropriate accounting records” as contemplated by the Act? Despite lack of brightline clarification on this matter, this article addresses what the “appropriate accounting records” provisions under the Act may entail for HOAs.
To briefly recap our previous article regarding record inspection rights, the overwhelming majority of HOAs in South Carolina are nonprofit corporations.
Accordingly, this article applies to those South Carolina HOAs that are nonprofit corporations and therefore subject to the Act. The Act provides that a corporation shall keep appropriate accounting records.[4] Pursuant to the Act, a member is entitled to inspect, among other things, the accounting records of the corporation if the member gives the corporation written notice at least five business days before the date on which the member wishes to inspect them and if (1) the member’s demand is made in good faith and for a proper purpose; (2) the member describes with reasonable particularity the purpose and records the member desires to inspect; and (3) the records are directly connected with that purpose.[5] Therefore, it is not uncommon for an HOA to be required to produce accounting records for inspection, and it is worthwhile to contemplate what extent of accounting records the Act requires the Association to keep and produce for inspection.
An Official Comment to the Act provides guidance, which a court may very well find persuasive, on what type of accounting records are “appropriate” to be maintained by the corporation as required by the Act.
The Official Comment, in part, provides that the matter of what accounting records are “appropriate” depends on the nature, size, and other characteristics of the corporation, and that some nonprofits may have a relatively small amount of money and operate with volunteer staffs, in which cases “appropriate accounting records” may just include checkbooks, canceled checks, and receipts. However, the Official Comment goes on to provide that for entities with significant funds, more detailed accounting records are appropriate.[6] In either case, the Official Comment pertinently instructs, “’Appropriate’ records should allow the financial statements to be prepared in a fashion that fairly presents the financial condition and results of operations of the corporation.”[7]
In a 2016 Opinion, the South Carolina Office of the Attorney General cited the above Official Comment in speculating that the legislative intent was for any and all underlying documents or materials used to prepare a nonprofit corporation’s financial statements to be subject to inspection by a member as long as that member provides the requisite written notice, the member’s demand is in good faith and for a proper purpose, the member specifically describes the purpose and the records they want to inspect, and the records are directly connected with that purpose.[8] Having said that, the 2016 Opinion also observed that it is difficult to specifically define “appropriate accounting records,” and the answer would depend based on the corporation. We do have some additional guidance from a 2018 Opinion from the South Carolina Office of the Attorney General, which reiterated the 2016 Opinion’s difficulties in specifically defining “appropriate accounting records” and cautions that the best way to make such a determination would be to bring the matter before a court.[9] However, the 2018 Opinion did, in response to being asked about these specific documents, opine that “corporate documents, service invoices, business receipts, vendor agreements, employee contracts, documents supporting the IRS 990 filing, reimbursements to employees and members, etc. and other documentation associated with the establishment of an annual budget” are “clearly” included within the records which an HOA member is entitled to inspect and copy under the Act.[10] It is important to note that Attorney General Opinions are not law, but can be used as persuasive authority by a court in evaluating a legal question.
In light of the relative uncertainty of “appropriate accounting records” and the guidance discussed above, it is perhaps a best practice to err on the side of caution when uncertain about whether an accounting record must be maintained and/or produced for inspection.
In other words, if there is question as to whether something must be maintained, it is probably best to maintain it rather than be told later by a court that it should have been kept and/or produced for inspection. Also, despite all the provisions of the Act that have been discussed in this article, it remains vital that an HOA board be aware of their HOA’s own bylaws and other governing documents. It is common for HOA governing documents to provide for even broader recordkeeping obligations and inspection rights than the provisions of the Act. Such provisions could also very plausibly factor into an analysis of what accounting records would be appropriate to keep and produce. Of course, it is prudent to consult with the HOA’s legal counsel regarding questions of recordkeeping and inspection as they can advise based on their knowledge of the law and the specific circumstances of your community.
This article is not intended to be an exhaustive discussion of applicable law regarding the keeping or production of HOA accounting records, nor any guarantee of the outcome of any litigation regarding the same. Our attorneys at McCabe, Trotter & Beverly, P.C. are experienced and well-equipped to answer questions you may have regarding this topic. Please contact us at 803–724–5000 for further information.
Valerie Garcia Giovanoli
McCabe, Trotter & Beverly, P.C. blogs and other content are for educational and informational purposes only. This is not legal advice and does not create an attorney/client relationship between McCabe, Trotter & Beverly, P.C. and readers. Readers should consult an attorney to understand how this information relates to their personal situation and circumstances. You should not use McCabe, Trotter & Beverly, P.C. blogs or content as a substitute for legal advice from a licensed attorney.
[1] https://mccabetrotter.com/hoa-record-inspection-a-brief-overview/
[2] S.C. Code Ann. § 33-31-101 et seq.
[3] S.C. Code Ann. § 33-31-1601(b).
[4] Id.
[5] S.C. Code Ann. §§ 33-31-1601(b); -1602(b)-(c).
[6] S.C. Code Ann. § 33-31-1601 Official Comment.
[7] Id.
[8] 2016 WL 963698, at *9 (S.C.A.G. Jan. 26, 2016).
[9] 2018 WL 1895221, at *4 (S.C.A.G. Apr. 3, 2018).
[10] Id (citing S.C. Code Ann. §§ 33-31-1601(e); -1602).