When it comes to year-end financial obligations of associations, most boards are aware of general requirements, such as providing financial statements to the owners, finalizing a budget for the upcoming year, and completing a board-review of the association’s financial records. From time to time, boards may also opt for a more thorough assessment of the association’s finances by engaging a Certified Public Accountant (“CPA”) to conduct an annual audit or review. Some boards may not, however, be aware that their governing documents actually mandate a CPA audit or review be performed annually.
An annual audit is an official examination and verification of an association’s financial books, records, and statements, and is performed by a CPA. During this process, the CPA performs various tests to confirm balances and verify transactions in order to provide the highest level of assurance that the association’s financial statements are free from material misstatement and in conformity with the association’s accounting practices. A review, on the other hand, is a much more limited examination, aimed at providing a degree of assurance that there are not material modifications made to financial statements and that statements conform to the basis of accounting utilized by the association.
Our office generally recommends that boards have a CPA review the association’s financials annually, with a full audit performed every five years. Boards must be sure to check their governing documents, though, as some Bylaws require associations to obtain a CPA audit or review annually. The board should also determine whether applicable provisions authorize board members or owners to request that an audit or review be performed. For example, a provision may state that, in addition to an annual review performed by the board, a CPA audit of the books must be conducted if requested by “two board members” or “ten or more owners.”
Understanding the presence of audit or review requirements in the governing documents avoid claims of financial mismanagement or negligence. In our experience, owners never complain about a report detailing that the association’s finances are being properly handled.