If you read our articles, you may remember some of these financial horror stories:
- Board member skims thousands of dollars from dues payments.
- Vendor double-bills pool maintenance expenses.
- Property manager steals $300,000 by fabricating financial statements.
- Developer empties the reserve fund to cover operating expenses.
Even the most active, cautious board can suffer financial mishaps. How can you be certain your books are clean and avoid one of these disasters? One way is to review the financial reporting package each month. Another way is to have a neutral third-party expert conduct a formal financial procedure to confirm your community association’s financial health. Keep reading to learn more about audits and audit alternatives.
What Is an audit?
An audit, always performed by a CPA, is the most comprehensive examination of a community association’s accounts and other items that support the financial statements. During an audit, we’ll normally dive into the annual budget, bank accounts, vendor contracts, reserve accounts, and other transactional records, such as petty cash and accounts receivable. The goal is to identify risks (actual or potential) and provide assurance that the financial statements are accurate.
Consider these audit alternatives
Audits can be expensive, and must only cover one fiscal year. Many community associations that are not required to have an audit will forgo this important financial procedure. There are a number of alternatives that may accomplish some of the goals associated with an audit:
- Review. This limited look at the financial statements confirms they were compiled using Generally Accepted Accounting Principles (GAAP).
- Compilation. Financial statements are presented without any assurances, but the CPA will often include advice and journal entries to correct any account inaccuracies.
- Agreed-upon procedures engagement. This is basically a “mini audit” with specific areas of focus, such as cash receipts and disbursements, reserves, and contracts.
When is an audit required?
Some states (like Florida) have statutory requirements for audits or other financial procedures, while others (like Georgia) leave it up to community associations and their covenants. If your community association has a loan or other financing arrangement, the lender may also require an audit.
In Florida, annual gross revenue determines the type of required procedure:
- $500,000 or more. Audited financial statements.
- $300,000 to $499,999. Reviewed financial statements.
- $150,000 to $299,999. Compilation with footnotes.
- Less than $150,000. Statement of cash receipts and disbursements.
The statutes are more detailed and nuanced, but this gives you a good starting point. Note that in some situations the association membership can vote to waive these requirements. Don’t do it!
It’s your fiduciary duty!
Board members and property managers have a fiduciary duty to look out for the financial health of their community associations. Even without a law or covenant requiring an audit, these types of procedures are the best way to confirm that your community association is fiscally well-managed and financially healthy. They will also uncover issues, from minor reporting mistakes through major theft and fraud.
Are you ready to schedule your community association audit? Please contact us today.