CPA

Who created the budget?
Who approves the budget?
Who implements the budget?

AS,

I see no reason to be concerned. I would venture that the majority of HOAs do not have a CPA review their budget. I would only be concerned to have a CPA prepare the annual income tax returns and perhaps conduct an annual review, compilation or audit of the financial records. Remember, a budget is only a "guesstimate" of income and expenses for the upcoming year; it is not a legally binding document.

Susanna,

While it's true those other individuals you name may be able to prepare the tax returns, I do think it wise to employ the services of a CPA. Not knowing the size of this assn, only makes my suggestion even more important. And to suggest the members vote to have a provision that requires a CPA conducted audit removed is ludricirous, IMO. I know you don't have much respect for CPAs, but that is totally your problem. Who would you suggest perform an audit? Perhaps the treasurer who might not have accounting, much less even bookkeeping experience. Do you even know what an AICPA sanctioned audit entails?

To all,
In the process of having a CPA do an audit, never been done in 27 years, in spite of document requirements. I am sure that when we finally get report, and get it behind us, we will appreciate we did the right thing. I am not sure how far back an audit can go. Comes a time after so much neglect you just have to bite the bullet.

I was willing to settle for a review to sort of find a new starting place but cooler heads decided an audit, and I am glad they did.

Roger,
Not knowing if Maryland has Statutes or laws that require auditing for the HOAs in their State, the O.P should check that also. In Florida we have a step system which requires an audit , depending on the annual income of the association. Once you pass $400,000 in annuals, then you are required to have an annual audit unless by a vote of the membership, you waive it for that year. The association must vote for the waive each year if they do not wish to have the audit.

We don't have a professional management company, and we don't have an annual audit requirement in our CC&Rs.

However, since our issues many years ago with a treasurer who did not file any taxes during his tenure (almost 3 years worth), the board has instituted the policy that our taxes by done by a CPA.

It's really not that expensive, and while not an audit, per se, having an unbiased professional looking at our books once a year doesn't hurt.

Wikipedia definition of audit:

I believe this says "audits" have to be verified by specific standards set by a professional organization, and that should be stated clearly in the audit report.
Nothing left to doubt here.

**************************************

The most general definition of an audit is an evaluation of a person, organization, system, process, project or product. Audits are performed to ascertain the validity and reliability of information, and also provide an assessment of a system's internal control. The goal of an audit is to express an opinion on the person/organization/system etc. under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements - a concept influenced by both quantitative and qualitative factors.

Traditionally audits were mainly associated with gaining information about financial systems and the financial records of a company or a business (see financial audit). However recently auditing has begun to include other information about the system, such as information about environmental performance. As a result there are now professions that conduct environmental audits.

In financial accounting, an audit is an independent assessment of the fairness by which a company's financial statements are presented by its management. It is performed by competent, independent and objective person or persons, known as auditors or accountants, who then issue an auditor's report on the results of the audit.

Such systems must adhere to generally accepted standards set by governing bodies that regulate businesses. It simply provides assurance for third parties or external users that such statements present 'fairly' a company's financial condition and results of operations.

Contents [hide]
1 Quality audits
2 Integrated audits
3 Types of auditors
4 Major auditing firms
5 Auditing firms around the world
6 See also
7 External links

This discussion about certified public accountants and audits seems to go on endlessly. Posters are making unsubstantiated statements as fact, that are simply not correct.

Robert's posting gets it right. "In financial accounting, an audit is an independent assessment of the fairness by which a company's financial statements are presented by its management. It is performed by competent, independent and objective person or persons, known as auditors or accountants, who then issue an auditor's report on the results of the audit."

Basically, for purposes of homeowners associations there are three levels of independent professional review:

• Audit (performed by a CPA or not)
  
• Review
  
• Compilation of financial reports

Each has different requirements and standards and expectations and uses. Here are standard report letters for each of the three levels.

AUDIT (CLEAN OPINION)

We have audited the accompanying balance sheet of (name) as of (date), and the related statements of income, retained earnings, and cash flows for the period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of (name) as of (date), and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.

REVIEW

We have reviewed the accompanying balance sheet of (name) as of (date), and the related statements of income, retained earnings, and cash flows for the period then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All of the information included in the financial statements is the representation of the management of (name).

A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.

COMPILATION OF FINANCIAL REPORTS

We have compiled the accompanying balance sheet of (name) of (date), and the related statements of income, retained earnings, and cash flows for the period then ended (and supplementary information), in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

A compilation is limited to presenting information that is the representation of management in the form of financial statements (and supplementary information). We have not audited or reviewed the accompanying financial statements (and supplementary information) and, accordingly, do not express an opinion or any other form of assurance on them.

The following statement is misleading at best and incorrect at worst: "Relying on management's financials is norm when performing a review. If the HOA wants the CPA to perform inquiries and analytical procedures and generate a financial statement then they must ask for a compilation or an audit.

Relying on management's financials is the norm under all circumstances.

To say that only a CPA is qualified to conduct an audit is simply not correct. However, it is reasonable that a third party, such as a bank, would require that a CPA express an opinion. If the financials are only to be distributed to members, for instance, it may not be necessary for a CPA to express an opinion about the financials.

I audit 50+ Homeowner Associations a year.

Someone posted earlier that you do not have to be a CPA to do an audit. I guess you could say so, but it would be useless if the person was not a CPA. Only a Certified Public Accountant can issue an audit or review report that would satisfy any audit requirement that your HOA may have. To issue an audit report or review report and not be a CPA would not be worth the paper written on, not to mention the legal implications.

HOA's may be required to have an annual audit prepared by many sources. The HOA organizational documents themselves may require it. Many states now require it due to the inceased amount of fraud that has been occuring among HOA's (many times by their management company). If your HOA actually has debt, the bank that issued the debt to you may require some form of financial statement prepared by an independent CPA.

Also, the tax return implications of filing Form 1120 under Section 277 or using Form 1120-H under Section 528 is a requirement beyond some board of directors as well.

As a side note, many states also require a periodic assessment of future capital repairs and improvements to be done by an engineering firm.

If you have questions about your local and regional requirements, call a local licensed CPA that specialized in HOA preparation, and they would hopefully take five minutes out of their day and help you out in regards to knowing your responsibilities.

Remember, in many states, HOA Board Members are now liable for fines for community oversights. None of the ones I have come across are immensely punitive, but I don't anyone volunteering to do some work for their HOA wants to be fined a few thousand dollars because they didn't get the HOA audited.

Mark,
Now we have confusion but good intelligent posts Mark.

You did say that the pasted post as above was all incorrect. My part of it seems to agree with what you are saying.

George will answer I am sure but I suspect you also copied some remark that George copied as he did mine (I think, hell I have been up most of the night so I'm not sure if I know ANYthing.)

Anyway this looks like your second post and we can always benefit from someone looking over our shoulder and helping out. Stick around, you might enjoy it here. You even get to fight with George and I, not to mention everyone else that posts here. Better than discussing your golf game with those that could care less.

One more item.

Some HOA's are small enough that filing Form 1120-H provides zero tax due and there is no need to compare to filing Form 1120. However, some larger HOA's, especially those with non-exempt income or investment income may pay less tax filing Form 1120 under Section 277.

If you are actually paying taxes filing as an 1120-H, then it would be appropriate to look at filing as an 1120 under Section 277. Most HOA documents have a section that details the boards responsibilities in choosing the appropriate filing method that results in the lowest amount of taxes. Just because 1120-H is simpler, doesn't mean that it is the appropriate form to file in all cases.

Mark,
technically, I think you are right, but I don't think the OP is wanting a split hairs definition. I would answer yes, he should be concerned, not as to liability but certainly the information offered about the Budget should be taken care of and corrective actions taken, if any. If not and a review satisfies you documents, send out the happy word to your members.

Mark,

According to AICPA standards, only a CPA can perform an audit. If the assn's docs say ". . .a professional audit" or wording to that effect, that means a CPA. I know lay people can -- and do -- perform "audits" but they are not the type of audit a CPA would perform. If the assn is willing to pay the expense to have an audit performed, I would certainly hope they would employ the services of a CPA.

OP is asking about a BUDGET which, I think we can agree, is nothing more than a hopefully reasonable projection of income & expenses. PM + BOD ought to be able to handle that w/o further consideration.

Mark,

I don't think your reply was directed to me, as I'm not arguing semantics -- that, I believe, is George and perhaps Robert. I'm on the same page as you, Mark. I worked as an accountant at a CPA firm. My boss would NOT let me perform an audit because I was not a CPA. I guess there are some ethical people around!

AB3,

Wow, you must have been on a long vacation since this thread was started back in Nov and ended sometime in Dec!

I don't know what I said that you disagree with, but I will say you are wrong in thinking most mgmt co's have a CPA on staff. I doubt that is the case; however, I would venture to say they do employ accountants. I do agree most mgrs probably are not qualified to handle the bookkeeping duties. However, a CPA is certainly not required to code and record transactions; that normally is the job of a bookkeeper or accountant. My assn employs a CPA to prepare the taxes and an audit or compilation each year. We do not rely on the mgmt co to do the taxes even though an accountant is preparing our financials each month.

I'm curious to know why you think a bookkeeper would not be able to transition from one accounting software to another. Would you believe there might be some doctors and lawyers out there who couldn't do that! Being able to understand a computer software system has nothing to do with what line of work you're in.

It has been my experience that very few management companies have CPA's on staff. The larger management companies that do have them are usually in the position of corporate controller/CFO of the actual management company, and are not directly involved in the accounting done for the HOA's.

I can think of one management company in which I do audits for, they have over two hundred HOA's under management and they do not have a CPA on staff.

I am not implying whether that is good or bad, but if it is something important to the BOD, just ask your current management company or any new management company you may be considering whether they have a CPA on staff.

Most management companies have very thing margins, paying a CPA rate to do bookkeeping just does not make fiscal sense.

I will gladly give you my opinion, but please be advised that there are probably one hundred or more registered management companies in Virginia alone, so my sample size of what I have encountered may not be indicative of many of these companies.

All the companies I interact with do one thing usually very well, and that is tracking member assessments paid and due.

But, I have yet to come across a management company that has what I would call "great" accounting. But it does not need to be great, it just needs to be good enough for the auditor to be able to follow and make changes. I have come across a couple that have been adsolutely abysmal in which I have had to disclaim an opinion, which for those not familiar with the term means "here are their financials, but I am taking zero responsibility for them".

If I was on a board, this is what I would expect from my management company accounting wise, this list may not be all inclusive as it is off the top of my head, but here we go:

Bank and investment account reconciliations done accurately and timely.

Payment of bills in a timely manner to avoid late payment penalties. Any such penalties should be paid by the management company, not the HOA.

Preparation of a monthly report to the board containing the following: balance sheet, income statement, list of disbursements, assessments receivable aging, and a delinquency list. Comparison between actual results and budgeted amounts would be helpful for the board as well.

Preparation of annual package to be presented to your auditor including the following: balance sheet, income statement, assessments receivable aging, post year end disbursements (to help the auditor book year end Accounts Payable and Accrued Expenses, general ledger, tax documents (1099's, etc.), year end investment reports, all twelve bank statements for all bank accounts.

To answer your second question, some boards do put too much reliance on their management company. Unfortunately, having a management company does not remove responsibilty from the HOA board. In my humble opinion, the states have put too much responsibility on to the boards of HOA's, which in all reality is a pseudo form of local government that is not paid with tax dollars and is administered mainly by volunteers. The states are pretty much saying "please volunteer for your HOA board, we expect you to have the acumen of a Fortune 500 CFO and by the way if you mess up we may fine you, enjoy!"

But it is what it is. If I were to boil down the main responsibility of any board of directors it would be protection of the association assets. Meaning, protect your investments from loss (safe investments like CD's and money markets) and from theft (which has been rampant in HOA's lately), and manage the repair and replacement of the association assets. You will not be fined by the state for messing up the trash removal contract. However, if you are oblivious to the the Treasurer stealing $100,000 from the association checking account, or if the association does not have the funds available to pay for the replacement and repair of association property, you run the risk of being fined by the state if they find you negligent. None of these fines are huge from what I have seen, $1,000 to $2,000, but still, no one wants to get fined because they volunteered for their HOA board.

Hope this helps.

I am assuming that you are either wanting to report your board or your management company?

Most states manage the regulation of their associations through their real estate boards. Each state has boards set up to regulate certain industries that require a license. For example, I report to the Board of Accountancy, and if someone wanted to make a complaint in regards to my performance that would be one of the avenues they could do it (none so far, thank goodness!)

Some states also have some form of formal complaint process (Virginia is one of them) in which a panel of industry and non-industry members hear your complaint. The exact title of the one here in Virginia escapes me at the moment however.

I would start with your state Board of Realtors (it may be called something different, depending on your state). If they do not handle it they will probably be able to point you in the right direction.

Mark,
I think you reply is all that I could ask for. It is too bad that there is no requirement to read certain posts before you can first post on this site.

Your presentation happens to agree pretty much with my evaluation, based on time and reading some many posts and my personal experience. I know your answer is going into a "go to file" I keep.

Do you, when you make your formal report to the association include any of your summation as above. I know it proably depends on a bunch of things I am not privy to. However, because you are called in to do an audit or whatever, do you go beyond this is? We had an audit done recently and it appears some of the comments cause a reaction, more so than the audit. Our audit report was benign and figures were fine.

What you posted above seems valuable information for someone to have after an audit and probably in preparation of an audit.
I have no expertise in this field, as is probably evident by my remarks, but, thanks again.

Mark,
To my knowledge, in SC, for condos, we have a state statute and as near as I can determine we don't fall under any kind of regulatory state department. There is legislation being considered, (that goes no where), to assign oversight to the Consummer Affairs Office of SC.
I have never hear of anyone " going to" any state office to settle any issues. My experience is they get a lawyer and go before the judge. All depaends on who's suing who, who gets the first lawyer.
Could be association, could be member/owner or could be a company involved, or maybe an outside private (guest) that files a suit.
The new legislation is also touching on some kind of ombudsman program, for what that would be worth. My point of view is the cash strapped states are looking for income, and when, if approved as proposed (SC), they cam get $10.00 per unit condo or association unit, you are talking big bucks.

I believe that is what it is called. It is fairly new, just being approved in July of 2008, and I do not think the board was filled out until later in the year.

That is unfortunate if it is taking up to two years for complaints to be heard, the intention of the CICB was to improve the complaint process, not slow it down.

Thanks again Mark.
I was working with someone in that office however they are no longer there. I have received more help/knowledge from everyone here on this site than the replacement could provide.

As a manager with a company I would add to mark's list that each month a board should receive also the actual bank statements and the reconciliation reports from whatever software is being used. Bascially we give them everything excpet in most cases not the GL only because most board do not want to see that much detail. But it is printed and field with the rest of the financials for that month.

We do not have a CPA doing the financials but we do have one on retainer that periodically each month reviews the financials and is avialble for any problems or tricky situations in recording income or expenses that a board may wish to have done where our employee has not yet dealt with. IN addtion we do not do financials on Excel or Quickbooks or some such which I have seen and they are horrible to decipher, No background reports to trace entries so fixing the errors just a pratical matter is almost impossible in some cases.

As a double protection for both us as a company and the association we require, if their documents do not say differently, that as association has at a minimum a review every three years and an audit on the fourth year excepting situation when there is a very alrge influx or outlay of funds for example a large insurance settlement or construciton defect settlement. We also require an audit of at least two years of books when we take over an association from another managment company to try to ensure there is nothing lurking in the background that needs to be addressed. We always have the CPA do the taxes as well. We do have a working relationship with several CPA's in town and routinely bid their services for the associaitons.

The thought behind these requirements that we actually put in our management agreement is there is absolutely no reason to place the associations in a position of possible risk and liability by doing these functions internally. The cost is minimal in the scope of things and is again a good risk reduction activity for any associaiton that has management not to mention an owner who might be handling the money.