Audit Committee - Agreed Upon Procedures

I am on our audit committee - which shall supervise the annual audit of our associations books, approve the budget and income statements which are presented to homeownership at the annual meeting.

Today I contacted our CPA to inquire about the audit, and he told me that it is very unusual to do a full audit - very expensive ($10K), rather he suggested to do what is called "Agreed Upon Procedures"

Basically he told me that we can request him to look at a number of income and expense transactions to make sure our management company is handling things properly with no errors.

I asked if this there was any state laws that governed the extent or frequency of the audit and he said no.

Does this sound right and is there any advise?

Thanks all.

William, it appear the CPA gave you a very reasonable cost for a full audit. I know of no HOA which does a real audit; only do a limited audit of the financials is done at best. Some do not even do a financial review and still call it an audit. I have previously posted some of the items necessary for a real audit.

To answer some of the questions:

We are a 106 unit townhome community in Charleston South Carolina.

We are to supervise, as representatives of the unit owners (HOA), the "audit", to assure them that the MC is handling things properly.

Gerald, is yours a full audit or some type of "review" because we were quoted in the range of $10K? From what I understand, the order of involvement and likely cost is audit, review, AUP (Agreed Upon Procedures).

From what I understand, the "Agreed Upon Procedures" is a list of agreed upon procedures, crafted by the CPA (Practiioner) in conjuction with the audit committee (cliant) which will when performed, statistically represents specific activities of the MC's bookkeeping lending credability to the HOA (third party or specific users). The activities are up to us to choose from, set the expectation , and the threshold of pass or fail. No opinion by the CPA is given - only data.

My problem with this is

1. We difinetly want an professional opinion as to the condition of the books.

2. I don't feel like I know enough to determin what activeties should be looked at and where a threshold of satisifaction would be. To me that is why you hire the CPA.

I sure will appreciate your help on this.

William

Refer to last post. Can anyone send me the page?

Thanks
William

I believe that all should treat the financial records as a trust obligation. The funds involved are not the board's funds or the audit committee's funds. They are the members' funds. Only an independent audit, conducted according to GAAP, can provide the required report to satisfy this trust (fiduciary) requirement.

Read a CPA's report carefully, If it is not an audit, the CPA's report will likely state that the representation of the numbers is by management, meaning the board of directors for POAs. Moreover, in executing a resolution of the board of directors, one of the directors likely signed a letter of engagement so stating. The directors could be personally accountable for the veracity of the numbers, a certification that they may not have the knowledge and capability to perform. What liability the board assumes if it signs a document defining "agreed upon procedures" should be investigated before agreeing to such, in my view.

Typically, laws and governing documents state, "Books and records shall be kept in conformance to GAAP." The board has a fiduciary duty to determine exactly what this means. What are the GAAP requirements for POAs? It isn't just the audit or review that must conform; the POA's books and records must conform.

For POAs, called common interest realty associations (CIRAs) in the AICPA literature, GAAP is a level two "AICPA Audit and Accounting Guide for Common Interest Realty Associations." This A&A Guide was first issued in 1991. A paper by Marilyn Z. Rutledge, available at > http://www.nysscpa.org/cpajournal/old/12106213.htm < provides a background and summary. This Guide applies to books and records, not just to audits. Search the internet on > "marilyn z. rutledge" < to obtain the qualifications of this author.

A good paper on the use of this A&A Guide for CIRAs is provided at Radford University at > http://gnac.radford.edu/commonintfinanrept-content.html <. As stated in the paper, Virginia POA Act requires "books and records of Common-Interest Community Associations (CIRAs) shall be kept in accordance with generally accepted accounting principles (GAAP)".

Florida HOA law recognizes the trust obligation regarding financial records and specifies minimum requirements for audits, reviews and compilations for HOAs.

I have summarized my research concerning accounting standards at > http://swagman.typepad.com/poa_governance/2005/08/aicpa_audit_and.html#more <. Please provide your comments to help in the improvement of my post. Thanks.

Don Nordeen
Governance of Property Owners Associations
http://swagman.typepad.com/poa_governance/

DonN,

Would you question the veracity of the audits or numbers if the D & O premium jumped significantly from the previous years? Just kidding.....well kind of.

The post you provided is invaluable, I appreciate your research and information. My NNJ HOA/COA by-laws and gov. docs. do not state, "Books and records shall be kept in conformance to GAAP".

Rather, it states Annual Audit: The Board shall submit the books, records and memoranda of the Association to an annual audit by an independent CPA who shall audit the same and render a report theron in writing to the Board and in summary form to the Owners and such Eligible Mortgage Holders or other persons, firms or corporations as may be entitled to same. While the Developer maintains a majority of the Board, the Developer shall have an annual audit of Association funds prepared by an independent public accountant, a copy of which report shall be delivered to each Owner within ninety (90) days of the expiration of the fiscal year of the Association. The audit shall cover the operating budget and reserve accounts.

As you can see, there is nothing written into the language regarding GAAP but the CPA practices must be governed by something. However, if the books submitted by the Boards are garbage, what does that say for the end product?

I have not clicked on your links and researched, will do so, but I ask you is there any state law that superceeds so that the HOA/COA's books and records must conform prior to submission to a CPA?

GeraldT1
NNJ

We recently learned that our own state statutes for non profits don't even mention an audit (strange). The prevailing view among parliamentarians is that the organization conduct an "Internal Financial Review." Then set the rules for that. Since it is administrative in nature, those rules would go into your association's "Standing Rules."

Ed, the management company did not handle this request properly. Usually the managing agent does not have the authority; this agent appears to be ignorant or incompetent. They should have relayed the homeowners request to the Board. The Board does not have to comply with a homeowners request. But if I was the new treasurer, I would certainly request a financial review. HOA's should have a financial review done by an independent authority on a periodic basis. I definitely recommend a transitional audit when taking over from the Developer. This would include a real financial audit; not just a bookkeeping review done by a CPA which the HOA calls an audit. Otherwise, based on HOA income compared to the high cost of a thorough audit, I seldom see the justification.