But once a year, most moderately-sized communities hire an outside accountant to provide at least some form of accounting review, to provide a check and balance against the work done by the day-to-day bookkeeper. That can mean uncovering fraud, but it doesn’t have to–sometimes small errors are made that can be easily corrected, or a bookkeeper may have simply made an entry that is not in sync with generally accepted accounting principles (or GAAP). Some managers and management companies do exceptional accounting work, and for some it’s not their strongest suit–but either way, it’s always a good idea to invest in the cost of a second look by a CPA.
Many state statutes and documents mandate that communities hire an accountant to conduct an accounting overview. There are three different types of overview, and the type conducted often depends on the annual budget of the association. For example, in Florida condominiums, associations with an annual budget under $100,000 are not required to do any review; those between $100,000 and $199,000 are required to conduct a compilation; those between $200,000 and $399,000 are required to conduct a review, and any community with an annual budget over $400,000 is required to perform a full audit. But what exactly are the differences between the different types of accounting services?
A compilation is the most basic form of accounting service performed by a CPA. In a compilation, the accountant assists the manager or bookkeeper to present the financial information, but he or she will provide no specific assurance that those stateements are free of material errors. Basically, the accountant reads the financial statements and uses his or her best judgment to determine whether the statements appear free of errors. the accountant does not perform any analysis of the association’s internal controls or assess the risk of fraud.
The next level of review, in fact called a review, has the CPA performing an analysis and inquiry into the financial statements that allows him or her to provide limited assurance that there are no material modifications to the financials required. The CPA will ask questions about procedures, but again a review does not contemplate testing the accounting output provided by the association and it does not assess the risk of fraud. Instead, the CPA performs a limited analysis of the financial data and makes inquiries of management when necessary.
An audit is the big enchilada, the highest level of financial review provided by a CPA. In an audit, the accountant will use generally accepted auditing standards (GAAS) to analyze the practices and procedures used by the principal bookkeeper of the association and analyze the risk of fraud. The auditor must confirm the financial statements by examining records and using specialized procedures that allow the professional to confirm the audited financial results. The CPA will then provide the association with an opinion letter certifying that the financial statements are materially correct, the books have been kept properly, and, where appropriate, state where the auditor has a concern about the finances.
Now, as you can imagine, the costs of these reviews differ dramatically. A compilation is thousands of dollars less expensive than a full audit. However, it does not provide nearly the comfort or level of service, and even in smaller communities it may be worth the investment to perform a full audit, especially if the board has any concerns that the finances of the community are not being properly kept, or if there is any suspicion of fraud by a manager or board member.
Whether or not your community is required by documents or statute to perform an accounting review, it’s a good, healthy practice for every association to hire a CPA annually to do at least some form of analysis. The more eyes on the finances of the association, the better off the association will be, and the less room for errors or bad acts.