The new standards — directed at public companies, their management, and the accounting profession — were established by the Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002. In response and in an effort to police itself, the American Institute of Public Accountants issued 11 new auditing standards, effective for accounting periods beginning on or after December 15, 2006. The new standards apply to both public and private companies.

How are co-ops and condos affected? The most significant area is risk assessment. Before, that process simply identified risk. Now, a method is in that place that relates each risk to what can go wrong, and then considers each risk's effect on the financial statement.

These enhanced procedures require that auditors evaluate your relevant controls and verify that they are in place. Based on that, auditors ascertain what risks your building faces — and any significant risks will require special consideration.

If a firm utilizes the audit approach previously used by many smaller accounting firms, this will lead to much more testing. Further, audit sample sizes can no longer be smaller than those required by statistical sampling — and that means significantly more transactions may be examined.

What to Expect from Your Accountant

For the first time, standards require that internal controls actually be tested. (Internal controls are all of the processes used to assure the building is properly run and its assets are protected from theft.) Until now, external auditors were merely required to gain an understanding of a building's safeguards. They didn't have to verify that those were actually being performed. Now they do.

As a result, you should expect your accountant to perform more work upfront in planning for such a risk-based audit, and expect a variety of new questions and requests for information.

n An important benefit is that your accountant will know more of the details of how your building is run. This will allow him or her to offer more insights, comments and recommendations. However, the standards no longer allow for oral explanations by a management client — that's you — to be considered sufficient, and therefore your explanations need to be corroborated by other evidence.

Another new requirement is that the auditor must communicate to management and to those charged with governance, in writing, any significant internal-control deficiencies and material weaknesses.

•A significant deficiency occurs when the controls and/or their lack of application cannot reduce the risk of a misstatement in your financials to what would be considered a less-than-likely occurrence.

• A material weakness is when your building doesn't have strong enough internal controls to detect or prevent any material misstatements.

Also, the standards indicate that the failure to correct issues identified in previous years will be considered a significant deficiency. If corrective action isn't undertaken, the issue must not only continue to be reported, but also highlighted as unresolved.

There is now a much greater burden on both you and the accounting profession — and these higher standards carry a higher cost: In August 2007, the Corporate Library issued a study of 3,139 companies and found that audit fees rose 64 percent from 2001 to 2006. The median audit fee rose 345.68 percent.

Don't be surprised if your audit fees go up. Nonetheless, the enhanced audit procedures offer more reliable financial statements, and better protection from scrutiny.

Minday Eisenberg Stark, CPA CFE, is principal of MES. Stephen Beer is a partner in the CPA firm Czarnowski & Beer.

Adapted from Habitat July / August 2008. For the complete article and more, join our Archive >>