Many HOAs and condo associations believe that they are getting an annual “audit” report from a CPA. The reality is often that they are getting what is called an HOA compilation report. What is the difference? We will take a closer look at the differences and examine what is in a compilation report. It is completely different than filing Form 1120-H.
The three types of reports that can be issued are: (1) audits; (2) reviews; and (3) compilations. They vary in price with the audit being the most expensive and the compilation being the least expensive. Accordingly, the audit provides the most assurance on the financial statements and the compilation provides the least.
The type of report the HOA or condo association receives is dependent on the following factors:
- What is required by state law based on the size of the HOA (often driven by revenues);
- What is required pursuant to the HOA Bylaws; and
- What is desired by the Board of Directors of the HOA.
What is a HOA Compilation Report?
A financial statement compilation is provided to help the management of the association present its financial statements. This presentation provides no assurance that the financial statements are fairly presented and free of material modifications needed for the financial statements to comply with the applicable accounting framework. The accounting framework would be Generally Accepted Accounting Principles (“GAAP”).
Because the HOA compilation report provides limited assurance, the CPA will provide limited procedures. This will typically include minimal inquiries and no analytical, review, or testing procedures. In addition, it does not require an understanding of internal controls.
HOA Compilations are preferred by those cost sensitive associations whose financial statement users are satisfied with this type of engagement. However, given there is no assurance that the financial statements compiled, represent fairly the results and financial situation of the association, a compilation is not a favorite among lenders and creditors.
A compilation report addresses either a complete set of financial statements or individual statements. In a compilation, the the HOA Board assumes responsibility for the preparation and presentation of the financial statements. The CPA providing the compilation services must have adequate industry-level understanding and knowledge of the client to prepare the financial statements.
The CPA is required to have adequate documentation to give a clear understanding of the work that he or she has completed. This documentation should incorporate the engagement letter, critical issues, and any communications to management with respect to fraud or unlawful acts noted by the accountant.
When completed, the CPA gives a written report that should accompany the composed financial statements. This report states that the accountant has not audited or reviewed the financial statements, and hence does not state an opinion or offer any assurance that the financial statements are in conformity with GAAP.
In the event that the CPA considers the financial statements compiled may contain material misstatements, he or she should acquire extra information to confirm or deny this position. If he or she is unable to obtain such additional information, the accountant should withdraw from the engagement.
The reality is that most HOAs and condo associations have compilation reports and not audit reports. In most situations, this is adequate. However, if the Board desires a higher level of assurance they may want to consider an audit or review. Many CPAs will complete the report in addition to other tax services.