We appreciate that you are not entirely negative about the requirement of an audit in Washington. Yes, we hear your concerns about all the potential additional work an audit might make you perform. We understand that your community managers and bookkeeping staff have a lot to do at year end, especially when you have several associations coming due at the same time, like 12/31. There are 1099's to issue, possibly payroll reports and maybe even last minute bills to pay.
But an audit is a reality for the vast majority of condominium properties in Washington. And the financial statements are required to be prepared in accordance with accounting principles generally accepted in the United States of America. Since GAAP is a requirement, you could be money ahead, not to mention likely ahead of your competitors, by adopting it as your policy for your clients year-round.
Below we offer some ideas on accounting choices you make and how these choices impact the cost and complexity of the condominium audit. By taking the time to understand what the auditor is looking for, the financial statement can be prepared and issued timely, making boards and owners very happy with all their professional service providers.
Year end can be challenging enough without the added requirement of "GAAP" adjustments to take the condo association's books to "full accrual". We understand that the challenges and frustrations you face as managers trying to adjust the books to full accrual so perhaps it would be more effective to implement GAAP on an ongoing basis.
It is likely the biggest challenge is typically going to be recording the vendor invoices which are received after the year end. The good news is you probably have several years of records which show you the bills that come the next month. Recognizing these bills and building a checklist to help your accounting team record them in the correct period will eliminate a very large time-waster. Entering vendor invoices in the right period help the board evaluate the effectiveness of the budget and if additional dollar amounts should be approved in subsequent years.
Next is identifying potentially troublesome owner balances. These are the accounts receivable and represent money which should have been paid in but wasn't. Recording the receivable helps prove to the board that all assessments were charged and ho much is potentially at risk of not being collected.
The final big accrual item is the amount of expenses considered prepaid. Prepaid insurance is the one we typically see and, while it is not hard to calculate, it can take some time.
While boards and owners usually understand the cash-basis financial statements you typically issue each month, it does make sense to make a few adjustments to your accounting process so they have all their income and expenses recorded to the right period. It will help the board make better decisions.
There are two items which are almost universally requested during an audit: the legal representation letter and bank confirmations. Both are extremely effective audit tools to help the auditor evaluate the association's financial statements.
One thing you can do to help the auditor is prepare a brief summary - no more than a paragraph or two - of issues that the board sought legal representation about. This could be a collection issue (typically the biggest issue facing boards) or it could be about construction defects. At either the beginning or end of the summary, provide the attorney's name and contact information. Her email address is also very helpful if you have it.
This information helps the auditor prepare an effective letter for the attorney to review and sign-off on. One of the biggest challenges is when we identify an issue in the board minutes and after talking with the community manager think it needs to be disclosed and then we find out that the lawyer didn't add it to the legal representation letter. This generally requires the auditor to send a new letter which adds time and costs to the process.
Bank confirmations are another very important step. At C.O.R.E. we use an online confirmation system which helps us control the work flow. But, the important thing is to make sure that the auditor knows if the association's authorizing signers has changed - like the board president or treasurer. Updating the documentation with the right signers allows the confirmation process to go smoothly and timely, speeding up audit completion.
Finally, every once in a while it is necessary to confirm other balances, like past due owner balances. When the auditor feels that step is necessary, it is very helpful to make sure that all the contact information is made available so that returned mail is minimized.
If you would like to know more about how you can more effectively prepare for the annual audit and also minimize the time it takes to help the auditor complete the work, feel free to contact us. We will be happy to assist you in the process.
An area we often spend time and effort working with managers and boards with is addressing allowances for doubtful collections. This is also known as bad debt and is probably the least understood accounting adjustment we have to explain.
As the books are adjusted to accrual, one of the questions that the association faces on its audit is, "How much of the past due balance is probably not going to be collected?"
Sometimes, property owners fall behind on their mortgage, property taxes and sadly their assessments. We know you work hard to keep owner payments up to date and communicate constantly with them to help get payments caught up. The reality is though, sometimes all your hard work and effort isn't going to pay off.
The allowance is an accounting adjustment which attempts to address that sad fact. It is meant to put the expense of the uncollectible amount in the period in which the assessments were recorded.
There are several methods to determine the amount that should be allowed. Every accountant and auditor has their preference, but it is really best left to your professional judgement in working closely with your board.
The most common is using the specific allowance method. With this method, you and the board evaluate which of the past due accounts are unlikely to ever be collected and the total amount is written off to bad debt and recorded to the account Allowance for doubtful accounts. It is not the preferred method as it does not take into consideration the fact that other past due accounts may fall into the category of uncollectible in the near future, but it may be the best way to handle it.
Another method is looking at the aging of the past due amounts and assigning a percentage based upon your experience. It could be that your experience in managing community associations has taught you that 50% of accounts with balances past due more than 90 days will likely never be collected and than 10% of those more than 30 days late will go without being paid. You would record the total calculated amount to bad debt and off set this to the allowance account.
Finally, the association can look at the bad debt as a simple percentage of the assessments. If you look across your companies entire portfolio of associations you can select the best percentage which reflects your understand of collection patterns.
Regardless, your deep understanding of your association clients will help them record the most appropriate amount, making their homeowner association audit go that much smoother.
Typically, when auditors perform a condo association audit, we do not test management's internal controls. There are many reasons but the most honest is that each association, individually, does not usually have tens of thousands of transactions. But the fact that the auditor isn't testing your controls, doesn't mean they are not important.
Where you have standardized processes, let your auditor know. This is especially important around the reserve fund. If, for instance, none of the community managers has signature authority over reserve funds, this is an important area to understand as it points our audit work to look for possible breakdowns between the approval of the expense and the actual check writing and signing.
Some areas where the auditor is most concerned is how approval is sought for those accounts where transactions exceed the budget. An effective control process would be to ensure that the board authorizes all transactions where the amounts go over budget. This is one area where we have substantial troubles with boards and managers. Consider the optics of any decision you make as management to spend money which exceeds the budget. Imagine how challenging it can be when you have a complete change in the board and no one remembers saying yes to an expense. When in doubt, get board authorization and require the board to document it in the minutes. Documenting who reviews expense transactions and how reserve projects are put out to bid will save you an immense amount of time and effort and save you from the dreaded material weakness in internal controls letter.
If you have written accounting policies and procedures, this is an important tool to help us complete the association audit timely and effectively. Email them to the auditor so they can add them to their file and your association clients will be thankful you did.
The auditors' goal is to issue a clean, unqualified audit opinion on the associations' audited financial statements. We get there by performing tests of the balances, confirmations and analysis. Your help by answering questions timely and truthfully can speed up completing the audit tremendously.
At the end of the condo association audit, you and the board are generally asked to review and approve the
Some auditors combine the Management Representation Letter and the Board Representation Letter.
The important thing to understand about the representation letters is that it is a summary of everything you, the community manager, and the board, have stated and provided to the auditor.
For instance, in most representation letters, one of the items is that the association has title to all assets listed on the balance sheet. Another representation is that the auditor was provided all relevant information.
We occasionally hear concern about signing the representation letter at the close of the association audit. Thankfully, the concern mostly comes from a new board president or treasurer who is not certain about what was provided. When this happens we are happy to discuss their concerns to help them feel comfortable with providing the signed letter.
Once the representation letters are received, the audit is considered complete and the association receives the financial statement.
If during the homeowner audit, you have particular concerns, you should reach out to the audit manager and discuss them. At C.O.R.E., we understand that you work hard and appreciate that you try to set up strong controls to help minimize the risk to your association clients.
We hope we can be of service to you and your association clients.
We have provided some files which you can use or share to help your associations with their audits and accounting. We have also included some example BPMN files for you to use in documenting your various approval processes.
workflow on addressing overbudget expenses (png)Download
workflow on the budget creation and approval process (png)Download
PDF of presentation on Internal controls (pdf)Download
PDF of presentation on Doug's book, Trade HOA stress for success (pdf)Download
PDF of presentation on HOA Financial statement analysis (pdf)Download