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Two Keys to Unlocking the Financial Statement

Lisa Prevost in Legal/Financial on May 20, 2019

New York City

Financial Statement I

Understanding the audited financial statement is a daunting task (illustration by Jeff Moores).

May 20, 2019

Understanding – and explaining – the audited financial statement can be one of the more daunting tasks facing co-op and condo board members. Sure, the board can rely on the property manager, along with the accountant who performed the audit, to be there at the annual meeting to walk residents through the balance sheet, the breakdown of cash flows, and other documents that make up the statement. But the board will still quite likely have to help with explanations. 

It only makes sense to spend time reviewing the statement ahead of the meeting. Admittedly, for any board member without a background in business or finance, reading through financial documents that can run to dozens of pages can be an exercise in frustration at best. But even if they don’t understand all the math, boards can assess the statement by focusing on six areas that auditing experts identify as primary concerns. Here are the first two: 

The Auditor’s Opinion. The first page of the statement is a memo from the auditor with a lot of boilerplate language about the auditor’s role and responsibilities. Look for the section marked “Opinion,” which is the auditor’s overall judgment as to the fairness and accuracy of the financial statements as prepared by management.

Carl Cesarano, a principal at the accounting firm Cesarano & Kahn, says board members should read that opinion carefully. Ideally, it should be an unqualified endorsement. If it is qualified in any way – for example, noting that the financial statements aren’t in accordance with generally accepted accounting principles – the board will want to read the details in the notes and possibly follow up with management. In rare cases, the opinion will be adverse, signaling that the auditor suspects some sort of deliberate wrongdoing such as fraud, Cesarano says.

God is in the details, and the details are in those notes. “The thing I always tell boards is, read the notes,” says Michael A. Esposito, a certified public accountant at the Kleiman & Weinshank division of WilkinGuttenplan, who teaches seminars on how to read co-op and condo financial statements. “The notes tell a story.” 

Operating Results. The aim is always to ensure that your assets are covering your liabilities. That can be more complicated than is immediately clear to the inexpert eye. But one thing you should look at is your operating cash and reserve fund accounts on the balance sheet. Financial statements typically display results for the past two years. “You must compare year over year what’s going on with these accounts,” Cesarano says. “If you see the operating cash being depleted, the question should be: are we taking in less money than we spend for day-to-day operations?” he says. “And if so, why?” 

You should also look at the Statement of Operations, which breaks out revenues and expenses and shows the totals for the past two years. “It’s maybe not as simple as this,” says Esposito, “but basically you’re looking to see if your income is more than your expenses.” 

If you are generating losses, a question should arise. “Does that mean you’re not charging enough maintenance?” he says. “By the same token, if you’re generating large surpluses, maybe you’re charging too much, or can keep maintenance flat.” 

Coming soon, steps three and four: Reserves, and Security Deposits.

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