This is a question we get frequently. The need for an Association audit in Portland or Seattle areas depends on your state law and your Association by-laws.
Washington state requires that Homeowner Associations have their financial statements audited if you have more than $50,000 in assessments. Condo Audits in Seattle need to happen if the condo has more than 50 units.
The state of Oregon typically doesn't require audits and instead requires that Associations have their financial statements reviewed. For the difference between audits and reviews, see our FAQ.
But even Oregon Associations may need to have an audit if the by-laws state that it is required. So always start with the by-laws and then see what your state requires.
We take a deep breath before answering this question.
Typically the owners can vote to waive having the financial statements audited. It should be done in very limited circumstances though and should never be waived for consecutive years.
There is the fact that the by-laws may state that an audit is required. Can the board vote to not comply with the basic rules to which all owners agreed? And what if there is a financial problem that goes undetected?
In most cases, only owners can vote to waive the audit requirement but we strongly suggest the board get legal advice and discuss the issue with their auditor before carrying out such a vote.
We try to explain it this way.
In a review, we trust what we are provided and perform limited tests to verify the information.
In an audit, we do not trust anything provided and attempt to find independent objective information to support what we are told.
Because a review has limited tests, the accountant cannot provide assurance that the information being reported is in fact materially correct. The accountant essentially says, "Nothing has come to our attention which leads us to believe there is a something wrong."
An audit, because of the procedures and processes used by the auditor, allows for the accountant to express an opinion. So the standard auditor report basically says, "Enough work was performed to say that the financial statements are free from material error."
If you go to our documents page, you will see examples of audit and review reports. Look at the conclusions and opinion sections and notice how the language is different between them.
Properly planned audits are designed to test for the existence of fraud, theft and other activities. This doesn't mean, however, that all forms of theft will be caught.
As an example, lets say that XYZ Association has a part-time bookkeeper. The bookkeeper is hourly and submits a timesheet. Hours are not supposed to be in excess of 20 hours per week.
The treasurer is supposed to review all time sheets prior to entering into the payroll system.
Bookkeeper always enters 20 hours per week. Treasurer always approves the timesheet.
One audit test would be to review the timesheets to verify approval by the treasurer. In this case, because the timesheets are approved, the auditor would not necessarily question if the 20 hours were legitimate. It might not even come to the auditors attention that the bookkeeper recorded 52 weeks (or more) of exactly 20 hours per week.
No vacation, no sick days no crazy-mad days where extra hours were needed to prepare for a board meeting where things changed at the last minute.
Effective internal controls require that transactions like this be evaluated and questioned by the appropriate level of management. In this case, the treasurer should be asking if the time is accurate and the auditor would likely not figure out if the time recorded was accurate or not.
The auditor does have a professional obligation to discuss findings with the appropriate level of management. In this case, if the auditor detected that the time was inaccurate, it would be discussed with the board so that proper steps could be taken to address the findings.
Occasionally we discover, during our audit, that the accounting records are not accurate. When we find that an account does not balance to its supporting documents it typically needs to be adjusted.
We quote our engagements as a flat fee for the audit (or review). When we have to make adjustments to the books, it means that we have to stop the audit, make an adjustment, document the adjustment and then re-audit that account. All of this is time we did not anticipate when we quoted the engagement.
Instead of trying to record our time separately for the amount of time spent auditing versus adjusting the books, we decided to charge for the journal entry line. This way we can keep our fees for the audit reasonable and comparable for Associations and charge for the additional work required for adjusting the books.
Our current charge is $30 per journal entry line so the typical adjustment is $60. If we make two adjustments, it would generate a charge of $120 for accounting services. We think it is easier to explain 4 journal entry line items than 1.0 hour of time making journal entries.
The goal is to not make journal entries which means that the financial statements are accurate when the information is given to us.
We are happy to discuss with you and your management company ways to reduce additional accounting costs so that your financial information is accurate and ready to be audited.
The Washington laws governing condominium and homeowner associations annual financial statements state that the financial statements are to be prepared in accordance with generally accepted accounting principles (GAAP).
GAAP calls for reporting on a full-accrual basis - or recognizing events when the occur not necessarily when cash is affected.
GAAP for condo and homeowner associations also calls for disclosure of relevant information that is not necessarily found in the body of the financial statements. These disclosures are found in the notes and supplementary information.
One of the more important disclosures can be found in condominium associations that borrow money for renovation projects. The total debt will be shown on the balance sheet but it won't show the payment terms. The disclosure will provide detail on the interest rate, the loan period and the collateralization. This information can be very important to current as well as potential buyers of condo property.
Another important item which is disclosed is a summary of the reserve study. This schedule is typically found in the supplementary section and reports two potentially very useful items: The expected amount and timing of the replacement/repair work and the amount of reserve funds current set aside to cover these items.
As auditors of condo and homeowner associations, we get that cash accounting is generally easier to understand. But beyond the compliance requirement, we also believe that knowing how much assessment is uncollected and how much the association owes vendors can be very helpful to decision making.
And, for those who insist on knowing the cash activity, GAAP statements include a statement of cash flow which shows how much cash came in and went out.
We are happy to have an informal presentation to any board who would like to know more about GAAP and cash and how to use the financial statements. Send us an email for details and schedule a conversation.