JeffH4 (Georgia)
Posts: 3
Posts: 3
Posted:
If a association is looking to have a financial audit completed during a management company tranistion what type of audit should they have done?
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Financial Audit
Started by JeffH4 • 2 replies • 1836 views
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JosephW (Michigan)
Posts: 882
Posts: 882
Posted:
When you deal with accountants, you'll need to watch your terms. "Audit" means full audit. The lesser examinations are "compilation" and "review" and yes, if the management firm was handling your funds, I would suggest the audit. Here's a quote from an article from a CPA - "A financial review consists of the auditor inquiring of association or management company personnel in order to verify the financial records of the association. Unless deemed necessary, the accountant is not required to obtain any independent corroboration to substantiate the personnel presentations. In contrast, as part of a certified audit, the auditor must obtain independent evidence to substantiate the assertions made by the association's employees and management.
In addition to a big difference in detail and thoroughness, a review can cost hundreds of dollars less than an audit. The board of directors makes the decision on what level of analysis will take place. Although many state laws governing associations and an association's governing documents may require an independent audit, some boards choose to save money and contract for a review. Should an association ever face a legal challenge of its financial records and management, the legal and financial exposure faced due to a review can prove much more costly in the end than an audit. A review does not require the auditor to formulate an opinion as to the records as is required under standard rules for an audit. An audit, therefore, provides the association legal protection regarding misstatements or errors in the financial records. A review does not provide that same level of legal protection."
Joe
In addition to a big difference in detail and thoroughness, a review can cost hundreds of dollars less than an audit. The board of directors makes the decision on what level of analysis will take place. Although many state laws governing associations and an association's governing documents may require an independent audit, some boards choose to save money and contract for a review. Should an association ever face a legal challenge of its financial records and management, the legal and financial exposure faced due to a review can prove much more costly in the end than an audit. A review does not require the auditor to formulate an opinion as to the records as is required under standard rules for an audit. An audit, therefore, provides the association legal protection regarding misstatements or errors in the financial records. A review does not provide that same level of legal protection."
Joe
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DonN (Michigan)
Posts: 357
Posts: 357
Posted:
JeffH4
JosephW's recommendations are excellent. A review is "penny wise and pound foolish". A audit provides a much better accounting of the stewardship of the board than does a review. The members deserve that quality of financial information.
In many associations, the board has a conflict of interest in selecting the CPA and deciding on audit vs. review. If the board is performing a management function, rather than just a board function (set direction, establish policies, approve annual budget and operating plan, approve major expenditures, and conduct oversight), then the board is auditing itself — a clear conflict of interest. This is particularly true if the board selects the accounting system and makes the accounting policy decisions. It is the classic fox guarding the hen house.
Consider what happens in a public corporation. The board performs only the usual and customary board functions. The management of the company makes the accounting and policy decisions. The management performs the management functions. The board in its oversight role audits the management. Moreover, the audit committee of the board is usually composed only of outside directors.
All of this speaks to the need to have an independent audit committee elected by the members which is charged with the responsibility of ensuring the integrity of the financial numbers and the accounting system, and making an annual report to members on that responsibility. The audit committee should select the CPA, not the board.
Click on search above and search on "audit review" for a wealth of information and the issues involved.
JosephW's recommendations are excellent. A review is "penny wise and pound foolish". A audit provides a much better accounting of the stewardship of the board than does a review. The members deserve that quality of financial information.
In many associations, the board has a conflict of interest in selecting the CPA and deciding on audit vs. review. If the board is performing a management function, rather than just a board function (set direction, establish policies, approve annual budget and operating plan, approve major expenditures, and conduct oversight), then the board is auditing itself — a clear conflict of interest. This is particularly true if the board selects the accounting system and makes the accounting policy decisions. It is the classic fox guarding the hen house.
Consider what happens in a public corporation. The board performs only the usual and customary board functions. The management of the company makes the accounting and policy decisions. The management performs the management functions. The board in its oversight role audits the management. Moreover, the audit committee of the board is usually composed only of outside directors.
All of this speaks to the need to have an independent audit committee elected by the members which is charged with the responsibility of ensuring the integrity of the financial numbers and the accounting system, and making an annual report to members on that responsibility. The audit committee should select the CPA, not the board.
Click on search above and search on "audit review" for a wealth of information and the issues involved.
Don Nordeen
Governance of Property Owners Associations
Governance of Property Owners Associations
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