Many small associations (less than 50 units) and some larger associations feel that they do not need year-end financial statements prepared by a CPA firm. I recently spoke at a seminar where three board members shared the exact same feelings. One board member said, “We already pay our management company a fee to prepare our financial statements.”
Another board member said, “We have a financial statement from our management company, why should we pay for a second one?” Finally, an additional board member said, “They are too expensive!” These board members need to be educated on the importance of CPA prepared financial statements.
Questions to Ask When Considering a CPA Firm
When an association is making a decision on whether to have CPA prepared year-end financial statements, they have to answer the following questions:
1. Are CPA prepared financial statements required by the association’s by- laws or declaration?
These are the association’s most important documents. All associations must first review these documents before making any decision. These documents may require an independently prepared year-end financial statement. The documents might even be more specific and require a compilation, review or audit.
2. Are CPA-prepared financial statements required by the association’s lending institution?
Depending on the amount being borrowed by the association, the lending institution may required a compilation, review or audit. The board should review the loan documents to see if there is a requirement. If the association has previously had financial statements prepared by a CPA, the lending institution may be more apt to approve larger loans for capital projects.
3. Is the Board of Directors performing proper due diligence?
As part of board members’ due diligence, they should use an independent third party to review management company records. If the board feels the management company is doing good work, financial statements prepared by a CPA will only reaffirm their findings. If the CPA firm finds inconsistencies with the management company’s financial statements, the board can respond according. This also applies to self-managed associations where a single board member maintains financial records.
4. Are the management company’s financial statements prepared in the preferred format?
The association’s management company may prepare cash-basis financial statements while the board would prefer accrual basis reporting. Are reserve assessments actually deposited in the reserve fund? Are reserve expenses paid out from the same account? A fund financial statement will tell you for sure, but non-fund financial statements will not.
5. Will a potential buyer of an association unit trust internally prepared financial statements?
Third party prepared statements, especially those prepared by a CPA, will give more assurance to a potential buyer. The level of service (compilation, review or audit) will determine the level of trust a buyer has in the accuracy of those statements. Most financial statements prepared by a CPA firm will have notes to provide the most accurate information regarding the association’s financial health.
6. Are CPA prepared financial statements too expensive?
Again, the level of compilation will determine the cost of preparation. Cash-basis non-fund financial statements will be the least costly. While some boards may feel any fee is too expensive, the additional assurances provided by these statements are worth the expense.
Does your association feel year-end financial statements prepared by a CPA firm are still unnecessary?
Steven Silberman
Steve Silberman of FSB&W LLC has become a trusted business adviser, accountant and consultant in Chicago to a variety of clients, including physician practices, condominium and homeowner...
Read more
CAI - Illinois Chapter 
Brittany Kojzarek 
