Stuart Saft in Legal/Financial on January 27, 2015
Everyone who reads the statement should note that its most important part is the auditor's opinion, which must indicate that there are no exceptions to (i.e., disputed issues with) the financial statements. Also, be certain to inspect the footnotes, which explain aspects of the financial statements that need additional information. On the other hand, don't worry if the auditor indicates that the board is not in compliance with the American Institute of Certified Public Accountants' Common Interest Realty Associations Guidelines. On advice of counsel, no co-op or condo in New York City provides the columnar table that the guideline requires.
You should treat it as a warning sign if the financial statements:
Audits and Opinion Letters
The first two items may indicate that the books and records of the corporation or condominium are not being audited. In this regard, if the statements arrive with a letter from an accountant that indicates that the accountant has done a "compilation," be warned: that is not an audit. A compilation means that the accountant just took the numbers from the treasurer or managing agent and put them into a table.
What you should get is an opinion letter stating that the auditor has examined the books and records and the report fairly reflects the financial condition when they were done. If your board doesn't get an audited financial statement but some other set of numbers, that in itself could be a warning sign: it would say to me either that the board is too cheap to pay for the audit or that it is hiding something. The annual audit is too important for price to be the reason not to obtain it. Refusing to get an audit is the financial equivalent of not going to the doctor for a physical; there may not be anything wrong, but there could be.
The late arrival of the financial statement could mean that either the co-op or condo's auditor took on too many clients and needs additional staffing, or that the managing agent's books and records are not being well maintained, or there was a problem in the auditor's attempt to obtain and report the information. Although I do not believe in pointing fingers, if this happens it is imperative to find out the reason for the delay and take action to prevent it from recurring.
Another sign of concern is when the audited financial statement arrives on time but the opinion letter is not clean; i.e., the auditor indicates that there is a problem with the co-op's or condo's books and records or the way in which they are maintained. This sign is not a yellow light; it is a red one. This is serious and must be attended to immediately. The worst problem with the auditor's opinion letter is if it indicates that there is an issue with the co-op's or condo's being able to continue as a "going concern," which means that it may not survive. This information demands a full stop and immediate handling.
The good news is that only a handful of co-ops and condos have failed over the last 50 years, so, properly handled, these problems do not mean that your investment is lost. It just means your statement requires your time and attention.
Stuart Saft is a partner at Holland & Knight.
This story is part of a new series that will highlight certain issues that, if ignored or misunderstood, could signal trouble.
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