Although homeowner associations are created as nonprofit corporations, this does not mean the associations do not engage in financial transactions or require the services of a certified public accountant (CPA). For example, it is common for an association’s governing documents to require a financial audit or review on an annual basis, and associations are required to file tax returns every year. Further examples of situations in which it may be beneficial to consult a CPA include :
- A change in types of investments.
- Financial and tax implications of non-routine legal issues such as litigation.
- Acquisition and/or disposition of units.
- Entering into leases (e.g., installation of cellular antennas and laundry contracts).
- Deciding on fidelity insurance limits.
- Pros and cons of special assessments versus bank loans to finance major construction projects.
SERVICES OFFERED BY CPA’s
1. Compilations, Reviews and Audits
CPA’s offer many different services that may be utilized by associations. However, some of the most popular services include compilations, reviews and audits. A compilation consists of the preparation of financial statements from financial information provided by the client. A review goes a step further, adding inquiries of management and analysis that were not included in the compilation. An audit constitutes another step up by verifying certain items with outside parties and testing selected transactions by examining supporting documents. An audit provides the highest level of assurance that financial statements fairly present the client’s financial position and results of operation in accordance with generally accepted accounting principles.
An audit is not, however, a guarantee against fraud – despite what many people believe. The Enron and WorldCom scandals have brought a lot of attention to the significance of audits and auditing standards are being changed to address the issue of fraud. However, a financial statement audit is not a fraud audit, regardless of new standards requiring auditors to further contemplate the possibility of fraud. A true fraud audit is a highly specialized, costly service best provided by a Certified Fraud Examiner (CFE).
If there is evidence of fraud, by all means hire a CFE. Remember though, that fraud is not discovered nearly as often as it is charged. I have been told countless times by community association board members and unit owners that a management company or fellow board member was stealing money. In almost every case, there was simply a misunderstanding and no inappropriate action had taken place.
When a CPA finishes an audit or review, he will present the client with a draft of the financial statements and a representation letter. This letter is required by the American Institute of Certified Public Accountants (AICPA) and must be signed by the client before the financial statements can be released in final form. The representation letter formally tells the CPA that no material facts were withheld during the audit or review and that no misrepresentations are contained in any of the documents.
2. Tax Issues
CPA’s can also offer valuable advice about an association’s choice of tax forms. Associations (other than certain commercial condominiums, timeshare associations and cooperatives) have the right to choose annually between Form 1120 and Form 1120-H. A well-informed decision requires a great deal of knowledge as well as an understanding of the unique attributes of a particular association. There is no “one-size-fits-all” advice on this topic. Additionally, a CPA can assist an association with preparation of its tax return.
HIRING A CPA
The accounting, audit, and tax needs of a community association are highly specialized, so the most important factor in choosing a CPA should be community association industry knowledge and experience. The best resources to help an association identify appropriate candidates are community association managers and lawyers that specialize in community association law and industry publications.
After identifying qualified candidates, interview them to determine the best match for your association’s needs. Once the selection has been made, the CPA should ask the association to sign an engagement letter that describes the responsibilities of both parties. An engagement letter should be executed whether the engagement is for an audit, a review or a compilation of the association’s financial statements.
Although homeowner associations are not organized as for-profit corporations, they nevertheless have certain financial obligations that require the assistance of a CPA. Some of the more typical CPA services utilized by associations are discussed in this article. However, your association may have additional needs that were not addressed here. Remember, an association will incur much higher costs if it contacts the CPA after the fact. Therefore, if you are unsure whether your association requires the assistance of a CPA, contact your manager, attorney or CPA prior to making the decision.