Gary Porter in Board Operations on July 5, 2013
July 5, 2013 — The controlling documents of most co-ops and condominium associations outline the requirement for the preparation of your financial statements. In addition, several states have minimum financial statement requirements. It's important for boards to understand that there are different levels to what a Certified Public Accountant (CPA) reports. Here's a primer for condo and co-op board members.
The first level of financial reporting is performed by cooperative or the condo association or its management company as monthly "interim" (meaning not year-end) financial statements. The purpose of these is to provide the board and management with the financial tools to evaluate financial performance, primarily budgetary. This is known as managerial accounting, and is completely separate from external financial reporting. Financial statements prepared for this purpose are generally considered to be for internal use only.
If an additional, secondary level of financial reporting exists, it generally applies only to the co-op or condo's year-end financial statements. This generally means that that an independent CPA will be associated with the year-end financial statements. The purpose of these is not just for management use, but for external financial reporting to co-op shareholders, condo unit-owners and others. While some governing documents contain vague wording in this area, and simply refer to distribution of "year-end financial statements," others require that financial statements be "prepared by an independent CPA." They may be even more specific in defining the level of financial-statement services as either compilation, review, or audit.
CPAs must comply state regulations, of course, as well as with AICPA (American Institute of Certified Public Accountants) professional standards on performance of services. It is the AICPA that established the service levels of compilation, review and audit and created the standards of performance for each of these levels of service. The CPA must also comply with generally accepted accounting principles (GAAP), which are established by the Financial Accounting Standards Board (FASB), codified in 2009
Here are brief summaries of each of the three levels of service:
Gary Porter, CPA, RS, PRA, is the primary author of the Practitioners Publishing Company's Guide to Homeowners Associations andHomeowners Association Tax Library. A past national president of the Community Associations Institute and a member of the Association of Professional Reserve Analysts, he is author of the 1988 book The Reserve Study Manual. This was adapted from his article at the website HOA Pulse.
Engage, enrage, ask questions and give answers with your community of board members. Submit your questions and comments here!
Thinking of buying a co-op or condo? Already bought, and not sure how co-op/condo life and rules work? Learn all about purchasing a place and living in your new community. It's not like renting, and its not like owning a house. What's it like?