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Understanding Annual Financial Reporting Requirements for Associations

March 18, 2014

UNDERSTANDING ANNUAL FINANCIAL REPORTING REQUIREMENTS FOR ASSOCIATIONS

By: John H. Stroemer, CPA, CFST, CAM, GRI – Managing Partner

Background

The annual financial reporting requirements for condominiums and homeowners’ Associations in the State of Florida can be found in the Florida Statutes.  Chapter 718 of the Florida Statute pertains to Condominium Associations, while Chapter 720 pertains to Homeowner Associations (HOAs).  Whether your Association is a condominium or a HOA, the reporting requirements are similar for both.  You should consult the specific statute for a more detailed discussion.

The annual requirements vary based on the number of units/parcels in your Association, as well as the dollar amount of total annual revenues.  However, keep in mind Association by-laws should also be considered in relation to this annual requirement.

Required Financial Reports

A condominium that has fewer than 50 units and a HOA with fewer than 50 parcels, regardless of the Association’s total annual revenues (accrual basis), may prepare a report of cash receipts and expenditures with required reserve information.  If your Association is on an accrual method of accounting, the books will need to be converted to the cash basis.

A condominium with more than 50 units and a HOA with more than 50 parcels must look at total annual revenues to determine their reporting requirements.  The financial reporting requirements for these Associations include a complete set of financial statements (including footnotes) and must be prepared in accordance with Generally Accepted Accounting Principles.  This generally will take more time to complete and must include the many financial disclosures that are typically needed when a complete set of financial statements are prepared.

CPA Levels of Service

The level of CPA service performed on your year end financial statements is based on the total annual revenue of your Association.  The breakdown is as follows:

  • Total annual revenues of $150,000 or more, but less than $300,000 – prepare compiled financial statements.
  • Total annual revenues of $300,000 or more, but less than $500,000 – prepare reviewed financial statements.
  • Total annual revenues of $500,000 or more – prepare audited financial statements.

The important concept to understand here is the distinction between the three levels of service must be rendered by a CPA firm.  If you place a complete set of compiled, reviewed and audited financial statements side by side, they would appear to be almost identical.  Why?  Each is prepared in Accordance with Generally Accepted Accounting Principles.  Those principles apply no matter what service level is provided by a CPA firm.

What is Different is the Accountant’s Report

  • In a compilation report, the CPA firm provides no assurance on the financial statements.  Thus there is no testing done by the CPA firm relative to the Association’s financial records.  A compilation involves the placement of an Association’s accounting data into a financial statement format.  That format would include the footnotes to the financial statements.  In general, no reliance can be placed on information in a compiled financial statement since that information is the representation of management and there is no testing by the CPA firm.
  • Review engagements involve more than the simple placement of Association accounting data into a financial statement.  In a review, the CPA firm expresses limited assurance on the financial statements.  Typical procedures include an analytical review of the balance sheet and income statement, examination of Board of Directors minutes and interview of management personnel.  In a review report, the CPA firm provides “negative assurance” and states that nothing came to the CPA firm’s attention which would indicate that the financial statements were not in accordance with Generally Accepted Accounting Principles.
  • Audits are the highest level service provided by a CPA firm.  The end result of an audit is the CPA firm’s expression of an opinion on the financial statements taken as a whole.  This expression of opinion will typically indicate that the financial statements “present fairly, in all material respects, the financial position and results of operations” of the Association.  Audits involve considerably more work than reviews, and will undoubtedly require close coordination between the audit firm and the Association.  With an audit, detail testing of records will take place and the Association will be asked to provide back-up documentation to support account balances at the end of the year.

Some Common Misconceptions

In practice, the term audit can mean many things to many people.  Some common misconceptions (we hear all the time) include:

  • “If the financial statements have been audited, no fraud has occurred.”  Fact: Auditors are required to design audits to provide reasonable assurance of detecting material errors or fraud.  Thus, fraud can occur and not be detected through normal audit procedures.
  • “An audit guarantees that the financial statements are accurate.”  Fact: Auditors do not test 100% of transactions.  Thus, there is no way to guarantee 100% accuracy.
  • “The financial statements are the CPA firm’s statements.” Fact: Management of the Association is responsible for the content of the financial statements.  Auditors test transactions and account balances. Therefore, the financial statements are the responsibility of management.

An understanding of the levels of service required by the statutes is only the starting point for management and board members of an Association.  To make informed decisions related to the governance of your community, it is important to understand the services provided by the CPA firm.  If you have any additional questions, please feel free to contact our office at 1-855-STROEMER.

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