Published in the ECHO Journal, January 2009
Maintaining accurate records and internal controls are necessary for an association to ensure that the financial reports precisely reflect the financial condition of the community association. The type of year-end report a CPA performs is primarily driven by the interests and needs of the association, as well as year-end financial reporting requirements mandated by state statute and the association’s governing documents.
The Audit
An annual audit is advantageous in that an independent Certified Public Accountant (CPA) will provide the highest level of accuracy assurance when examining the financial records of an association. An audit will also assist the board of directors with their oversight duties and can help them meet budgetary obligations. Furthermore, an annual audit can give credibility to the current internal controls and offer suggestions to remedy certain issues that may be presented in the CPA’s opinion letter. An annual audit is a solid business tool that examines third party transactions along with the internal accounting procedures of an association. Another advantage of annual audits is that it will defray allegations of financial misappropriations since the opinion will be disclosed in a document that is available for review by members of the board of directors and other association members. While the purpose of the audit is to determine the accuracy of the financial reports, and not to detect fraud or embezzlement regarding the association’s funds, the CPA’s intense scrutiny of the books and records often reveals improprieties.
There are four possible outcomes that may be expressed in an auditor’s opinion letter:
- The auditor issues an unqualified or “clean” opinion that states the auditor finds that the financial records and reports are in order and accurate. This type of statement is the most desired as it confirms that the financial statements conform to Generally Accepted Accounting Principles (GAAP). An unqualified opinion will validate that the current internal procedures that are being followed should continue.
- The auditor issues a qualified opinion that says the statements as a whole are fairly presented. Particular reservations may also be included in this type of outcome and should be noted in a separate paragraph. This may include segregation of duties or accounts and differences in amounts that were reported for areas such as payroll or inventory purchasing, failure to reconcile bank statements monthly, or an inordinate number of miscoding payments and journal entries to incorrect general ledger accounts.
- The auditor refuses or “disclaims” to issue an opinion. This typically occurs when an organization restricts the ability of the auditor to collect sufficient evidence, or it is unable to provide the necessary material and information because the records are not properly maintained. An association that is given this type of opinion may determine the need for an Audit Committee that can help with the preparation of the association’s documents and serve as a primary contact to the auditor in the place of staff.
- The auditor issues an adverse or negative opinion. This is expressed when the financial statements substantially differ from GAAP. An association will need to investigate its current procedures in accounting and reporting in order to conform to accepted principles. Additional staff or experienced accounting personnel must be considered in order to change the current operations.
In addition to the opinion letter, a management letter is usually included to report on any weaknesses found in the accounting system and internal controls. Management should follow up with any issues that may be raised as part of this statement.
An audit provides the highest level of CPA assurance that the financial statements are fairly stated and free of material errors. This assertion is directly attributable to the extensive standards by which CPAs performing audits must abide. The Auditing Standards Board of the American Institute of Certified Public Accountants established generally accepted auditing standards (GAAS) that CPAs must follow in performing audits of public and nonpublic companies. These include broad categories such as CPA training and independence requirements, standards of fieldwork and standards of reporting. All of the GAAS ensure that the client clearly understands the CPA’s opinion on the financial statements.
A main requirement for CPAs to complete an audit is to have an understanding of the association’s internal controls. This will ensure that certain departments are segregated to ensure optimum controls. Within the examination of the financial records, an audit will confirm selected transactions with outside parties such as banks or vendors and perform a physical inspection of records. This includes the tracing of supporting documentation such as purchase orders and payroll time sheets, which should support the existence of internal controls that are performed by the manager or authorized personnel. Additional documents such as the minutes and other legal documents will also be reviewed by the CPA.
The Review
The second type of year-end report is less thorough than an audit and therefore less costly. This examination of the association’s financial activities is a review. [Ed. note: The Davis-Stirling Act requires at least a review for all associations with an annual gross income of $75,000 or more.] Performing a review does not provide a basis for the CPA to express an opinion on the financial statements. The CPA may identify significant matters affecting the financial statements when performing a review, but a review does not provide assurance that the CPA was able to detect all the matters that would be disclosed in an audit. In performing a review, the CPA gathers a limited amount of information through inquiry of management personnel and analytical procedures to determine whether material modifications are needed. The main objective of a review is to ensure that appropriate accounting principles have been applied consistently and adequate procedures exist for recording, classifying and summarizing transactions. The CPA communicates the results of the review in the form of a signed report accompanying the association’s financial statements. This report includes a statement that the CPA is unaware of any significant changes that need to be made to the financial statements in order conform to GAAP or that recording and reporting problems were observed and additional investigation is warranted.
The Compilation
The third type of year-end report performed by a CPA or accountant is a compilation. In contrast to audits and reviews, no analysis of the association’s books and records is performed Instead, the person performing the compilation is responsible for assembling the association’s financial data and formatting it into a properly structured set of year-end reports. Even though the accountant is not providing any form of assurance, he or she needs to understand the nature of the association’s business transactions and the accounting basis on which financial statements are presented. Associations should be aware that the financial statements that are provided upon completion of a compilation are based primarily on the accounting information that is provided from the association.
Before engaging the services of a CPA to perform a year-end financial report, be sure to determine his or her qualifications. Obviously, it is advantageous to retain the services of someone who is already knowledgeable about community association accounting requirements as detailed in the AICPA’s Common Interest Realty Association (“CIRA”) Guidelines. By selecting a qualified, competent CPA to prepare the year-end report, the directors serving on the board can feel assured that they are basing their financial decisions on reports that contain accurate information.
Jeanette Catellier is an assistant vice president at Vanguard Community Management in Plainfield, IL. This article was previously published in Association Times, a publication by Associa.