Fiscal Management

There are three different methods used in the preparation of a year end financial statement, which should be done by an independently contracted Certified Public Accountant (CPA). The three types are:

1. Audit
2. Review
3. Compilation

All three methods are considered to be levels of service, if you will, and each has certain assurances. In a nutshell a compilation has either none or very little assurances, a review has limited assurances and an audit has reasonable assurances. The assurance levels can vary to some degree based upon the CPA, although generally accepted accounting principles (GAAP) are part of the requirements of any CPA.

The Audit is the most extensive financial review that can be done. The association’s financial condition is analyzed objectively. In order for an audit to be completed a full set of minutes, bank statements, budgets, financial statements and other documentation may be necessary. Depending upon the policy set by the association the CPA may either come into the office where the records are kept or they may be checked out and taken off-site. In order for the Board to fully protect itself, a policy should be made not to allow any records to leave either the premises or the management company’s office. This gives the best controls to the association and a CPA should readily recognize that requirement.

Once the audit is completed, the Board will receive a balance sheet, statement of revenues and expenses, statement of changes in fund balances and a cash flow statement. Additionally an opinion and footnotes are attached as well.

A Review is the “middle of the road” review and falls between an Audit and a Compilation. A Review does not dig as deeply into the financial records of the association and uses only the end of year financial statement information provided by the management company. Most of the information gathered for a Review comes from interviews with the “Association personnel and analytical procedures applied to financial data.”

There is no opinion from the CPA with a Review and the scope of a Review is much less than in the case of a full audit. A disclaimer is made in the account’s report immediately stating that all financial information used to create the Review comes from the management company.

A Compilation offers the least amount of assurances and is the lowest level of service available during the review of the association’s financial records. There are no GAAP requirements and the work can be done by an accountant but does not require a CPA. Additionally, there are no guarantees that the information being provided is accurate. This offers the Board no real assurances and is typically done by smaller associations wanting to save money. The small savings that can be gained by doing a Compilation, pale in comparison to the risks being taken by the Board of Directors.

Regardless of which method is chosen, the association should always refer to the governing documents to make sure that, at a minimum, the work being done is not in conflict.

Communication plays an important role in letting the owners know where an association stands with respect to financial stability. It allows the Board and management company to point out what a great job they are doing in protecting the assets and maintaining the property in a proactive basis and it allows for the owners to know when things are not going as well due to budget over-runs, large unexpected or unbudgeted expenses and collection problems with its’ membership.

Clear and concise communication is necessary in order to allow the owners to have a certain level of comfort in knowing that the Board is doing its best to take care of the association’s day to day affairs. Whether the association decides to do a Review, Audit or Compilation, annually a letter to the owners should be attached with the document to the owners. This tells the owners that the Board is doing its fiduciary responsibility and is taking the time to look at and understand their capacities as Board members.

Corey Recla
CMCA®, PCAM®, AMS®,
Chief Executive Officer
EMB Management
Bellevue, WA