All associations have some level of yearend financial reporting required. If you are small, under 50 units or $150,000 in revenues, you only need to produce a simple statement of cash receipts and expenditures. A little bigger? Florida statutes, and your governing documents, will determine what you are required to do.
The statute
718.111 (13)
(a) An association that meets the criteria of this paragraph shall prepare a complete set of financial statements in accordance with generally accepted accounting principles. The financial statements must be based upon the association’s total annual revenues, as follows:
1. An association with total annual revenues of $150,000 or more, but less than $300,000, shall prepare compiled financial statements.
2. An association with total annual revenues of at least $300,000, but less than $500,000, shall prepare reviewed financial statements.
3. An association with total annual revenues of $500,000 or more shall prepare audited financial statements.
(b) 1. An association with total annual revenues of less than $150,000 shall prepare a report of cash receipts and expenditures.
2. An association that operates fewer than 50 units, regardless of the association’s annual revenues, shall prepare a report of cash receipts and expenditures in lieu of financial statements required by paragraph (a).
3. A report of cash receipts and disbursements must disclose the amount of receipts by accounts and receipt classifications and the amount of expenses by accounts and expense classifications, including, but not limited to, the following, as applicable: costs for security, professional and management fees and expenses, taxes, costs for recreation facilities, expenses for refuse collection and utility services, expenses for lawn care, costs for building maintenance and repair, insurance costs, administration and salary expenses, and reserves accumulated and expended for capital expenditures, deferred maintenance, and any other category for which the association maintains reserves.
(c) An association may prepare, without a meeting of or approval by the unit owners:
1. Compiled, reviewed, or audited financial statements, if the association is required to prepare a report of cash receipts and expenditures;
2. Reviewed or audited financial statements, if the association is required to prepare compiled financial statements; or
3. Audited financial statements if the association is required to prepare reviewed financial statements.
(d) If approved by a majority of the voting interests present at a properly called meeting of the association, an association may prepare:
1. A report of cash receipts and expenditures in lieu of a compiled, reviewed, or audited financial statement;
2. A report of cash receipts and expenditures or a compiled financial statement in lieu of a reviewed or audited financial statement; or
3. A report of cash receipts and expenditures, a compiled financial statement, or a reviewed financial statement in lieu of an audited financial statement.
Such meeting and approval must occur before the end of the fiscal year and is effective only for the fiscal year in which the vote is taken, except that the approval may also be effective for the following fiscal year. If the developer has not turned over control of the association, all unit owners, including the developer, may vote on issues related to the preparation of the association’s financial reports, from the date of incorporation of the association through the end of the second fiscal year after the fiscal year in which the certificate of a surveyor and mapper is recorded pursuant to s. 718.104(4)(e) or an instrument that transfers title to a unit in the condominium which is not accompanied by a recorded assignment of developer rights in favor of the grantee of such unit is recorded, whichever occurs first. Thereafter, all unit owners except the developer may vote on such issues until control is turned over to the association by the developer. Any audit or review prepared under this section shall be paid for by the developer if done before turnover of control of the association. An association may not waive the financial reporting requirements of this section for more than 3 consecutive years.
Your Documents
718.111 (13)
(a) An association that meets the criteria of this paragraph shall prepare a complete set of financial statements in accordance with generally accepted accounting principles. The financial statements must be based upon the association’s total annual revenues, as follows:
1. An association with total annual revenues of $150,000 or more, but less than $300,000, shall prepare compiled financial statements.
2. An association with total annual revenues of at least $300,000, but less than $500,000, shall prepare reviewed financial statements.
3. An association with total annual revenues of $500,000 or more shall prepare audited financial statements.
(b) 1. An association with total annual revenues of less than $150,000 shall prepare a report of cash receipts and expenditures.
2. An association that operates fewer than 50 units, regardless of the association’s annual revenues, shall prepare a report of cash receipts and expenditures in lieu of financial statements required by paragraph (a).
3. A report of cash receipts and disbursements must disclose the amount of receipts by accounts and receipt classifications and the amount of expenses by accounts and expense classifications, including, but not limited to, the following, as applicable: costs for security, professional and management fees and expenses, taxes, costs for recreation facilities, expenses for refuse collection and utility services, expenses for lawn care, costs for building maintenance and repair, insurance costs, administration and salary expenses, and reserves accumulated and expended for capital expenditures, deferred maintenance, and any other category for which the association maintains reserves.
(c) An association may prepare, without a meeting of or approval by the unit owners:
1. Compiled, reviewed, or audited financial statements, if the association is required to prepare a report of cash receipts and expenditures;
2. Reviewed or audited financial statements, if the association is required to prepare compiled financial statements; or
3. Audited financial statements if the association is required to prepare reviewed financial statements.
(d) If approved by a majority of the voting interests present at a properly called meeting of the association, an association may prepare:
1. A report of cash receipts and expenditures in lieu of a compiled, reviewed, or audited financial statement;
2. A report of cash receipts and expenditures or a compiled financial statement in lieu of a reviewed or audited financial statement; or
3. A report of cash receipts and expenditures, a compiled financial statement, or a reviewed financial statement in lieu of an audited financial statement.
Such meeting and approval must occur before the end of the fiscal year and is effective only for the fiscal year in which the vote is taken, except that the approval may also be effective for the following fiscal year. If the developer has not turned over control of the association, all unit owners, including the developer, may vote on issues related to the preparation of the association’s financial reports, from the date of incorporation of the association through the end of the second fiscal year after the fiscal year in which the certificate of a surveyor and mapper is recorded pursuant to s. 718.104(4)(e) or an instrument that transfers title to a unit in the condominium which is not accompanied by a recorded assignment of developer rights in favor of the grantee of such unit is recorded, whichever occurs first. Thereafter, all unit owners except the developer may vote on such issues until control is turned over to the association by the developer. Any audit or review prepared under this section shall be paid for by the developer if done before turnover of control of the association. An association may not waive the financial reporting requirements of this section for more than 3 consecutive years.
If your documents specifically state that a specific level of service is required, such as an audit, then you must conform to that requirement. There is no ability to vote to downgrade. If, however, your documents are silent on the issue, the statute rules.
Reporting Levels
So, what do the varying levels mean? What is the difference between an audit and a review? Most property managers and board members don’t know, and therefore cannot properly evaluate their choices. Essentially, the difference is the level of assurance that the CPA will provide. Regardless of the level of service, the requirements for the disclosures to be included in the report are the same.
Compilation
The Compilation is the lowest level of service provided. A compilation basically involves presenting financial information in the form of financial statements, without expressing any assurance on them. The CPA is not required to verify or validate the numbers represented in the financial statement, nor is he required to be independent.
Review
A Review requires an independent CPA to make inquiries of the client and to perform analytical procedures related to the amounts and disclosures in the financial statement. By performing this inquiry and analytics, the accountant is able to provide limited assurance that there is no material modification that should be made to the financial statement. A review typically does not require tests of accounting records or the need to obtain supporting evidence.
Audit
The audit is the highest level of assurance, and as such requires the most work of the independent CPA. The most significant difference between an audit engagement and other financial statements is that the auditor is required to substantiate the figures and disclosures included in the financial statements through testing of the underlying accounting documents, physical inspection, the use of third party confirmations, or other procedures deemed appropriate. The auditor is also required to understand the association’s internal control structure and evaluate its effectiveness. The auditor’s report provides an opinion that the financial statements present fairly in all material respects, the financial position of the association and the results of operations in conformity with generally accepted accounting principles.
Independence
An independent auditor is a certified public accountant (CPA) who examines the financial records and business transactions of a company with which he is not affiliated. An independent auditor is typically used to avoid conflicts of interest and to ensure the integrity of performing an audit.
Per the AICPA, Independence is defined as follows:
a. Independence of mind is the state of mind that permits a member to perform an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.
b. Independence in appearance is the avoidance of circumstances that would cause a reasonable and informed third party, who has knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or member of the attest engagement team is compromised.
What does this mean to the association? Your CPA should not be affiliated with your bookkeeper, an owner or relative of an owner, etc. They should approach the audit or review with what we like to call professional skepticism: an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence. It requires balancing doubt with practicality. Obviously, an auditor cannot review every document, but must plan the audit with a critical eye toward the most important factors.
