Many homeowners associations hire an independent certified public accountant (CPA) to conduct an annual audit of the association’s financial statements. The procedures CPAs perform during an audit have changed dramatically as a result of many highly publicized accounting scandals and audit failures nationwide in the past few years. Although the types of fraud seen in those well-known cases typically do not occur in homeowners associations, the changes in auditing procedures apply to audits of all businesses, large and small.
The biggest changes result from Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit (SAS 99). SAS 99 is effective for audits of financial statements for periods beginning on or after December 15, 2002. Its basic purposes are to improve audit quality and, specifically, improve the ability of auditors to respond effectively to the potential for fraud. Fraud is defined as intentional misstatement of financial statements or misappropriation of assets.
According to professional auditing standards, one of the auditor’s major responsibilities is “. . . to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” To fulfill this obligation under SAS 99, the auditor will expand audit planning procedures, perform additional analytical procedures to determine unusual or unexpected relationships between accounts, and increase inquiries of association management. The auditor will also assess the risks associated with revenue recognition, management override of internal controls and journal entries.
The auditor will inquire of the board of directors, bookkeepers, property managers, and others to determine if management has knowledge of any fraud or suspected fraud that would affect the association. The auditor will also examine programs and controls in place at the association or the management company to prevent, detect, and deter fraud. The board of directors, on behalf of the auditor, will send a confirmation letter to your association’s legal counsel, requesting responses to specific legal inquiries. Additionally, at the conclusion of the audit, members of the board of directors, the association manager, and the bookkeeper will be asked to sign a letter of representations, which contains significant and wide-ranging assertions about the correctness of the financial statements, including allegations of fraud or suspected fraud.
As a result of SAS 99, your association can expect more communication from your CPA. You should expect your CPA to make the inquiries described above and to report any fraud discovered to the board of directors. You should also expect your CPA to report any weaknesses in internal controls discovered during the audit and make recommendations to improve existing controls.
This article was written by Shelley Grange and Janna Williams, CPAs with Holben Cooper Christian Hay & Husman, Certified Public Accountants, LLC. Holben Cooper Christian Hay & Husman is a local CPA firm with over 55 years experience in the Denver area and provides auditing, tax, and consulting services for a wide range of clients, including homeowners associations.
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