Last edit: 2010 Feb 16. Click History for a list of changes and updates.
__ The continuation of this post is an email to the board summarizing the accounting and audit concerns regarding MOA's financial accounting and reports. Fourteen subject areas are covered, which is an indication of the magnitude of the opportunities for improvement. My goal is to help make the accounting and accounting practices so well founded that even over a beer after a round of golf the members comment that they have no quarrels with the accounting. With solid credibility in the accounting, the members can better spend their efforts on helping to make the necessary improvements.
__ Please post your comments.
Don Nordeen
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Continue reading Audit Considerations for 2006.
- Key Words:_ Financial Information, 2006 General; Financial Information, 2005 General; Financial Information, General; MOA Accounting Practices; MOA Board of Directors; MOA Operations, General/Total
Audit Considerations for 2006 (continued)
Date:
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2007 May 7 11:31:13 EST
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To:
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Floyd Burchard, Tad Latuszek, Bill Martella, Bob Olszewski, Vicky Rigney, Carolyn Study, Kirk Yodzevicis
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From:
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Don Nordeen
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cc:
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Leo Lyddy, Dan Stone, Mary Woodhouse, Christine Zarichney
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Subject:
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Audit Considerations for 2006
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Date: 2007 May 07 (Updated 2010 Feb 16)
Re: Audit Considerations for 2006
Dear Colleagues:
__ Please forward this email to MOA's CPA so that the CPA firm is not blindsided by a review of their 2006 reports which may involve matters not disclosed to them. It is better to deal with such matters before the report than to have a cloud placed on the 2006 reports due to insufficient disclosures. The Appendix to this email provides a summary of concerns previously expressed to the board. I also recommend that the correspondence from Leo Lyddy and all other members who have expressed concern about the accounting and the reports from the CPAs.
__ It may be easier to read this email online at[http://swagmanmwpoa.blogspot.com/2007/06/audit-considerations-for-2006.html]since all the internet links to the various references can be accessed by clicking on the links provided. All of the links should also be available from the email by clicking on the URLs. You may need the access information listed below my "signature" to access the posts and files.
__ All members have an interest in full and accurate accounting information. The measure of the credibility of the accounting information provided is that members outside of meetings state that they believe the accounting to be full and accurate (my term; others may have a different term). Achievement of this goal requires use of accounting standards developed by professionals by consensus, and listening and understanding to what information members want. Members are the primary customers. This is clearly stated in the standard I believe applies to owners associations, AICPA Audit & Accounting Guide for Common Interest Realty Associations in §1.33:
"The primary users of the financial information of a CIRA are unit owners, whose periodic payments of assessments or carrying charges enable the CIRA to perform its functions. They are primarily interested in information that indicates whether assessments are used for their designated budgetary purposes, and whether adequate funds have been accumulated for future major repairs and replacements. Adequate financial reporting may assist owners in assessing the extent to which the CIRA is meeting its responsibilities to maintain the common property."
__ When financial reports are published or made at a members' meeting, does the board want the members to question the accounting or to respond to what the numbers and reports mean? One aspect of the answer is that the financial reports include the unfunded liabilities in the financial numbers, not just in the notes.
__ The audit reports for 2005 represent a major improvement over the CPA's reviews provided in prior years. Much new information is disclosed in the 2005 reports including direct and indirect statements of deficiencies in the reviews for prior years. In addition, information confirming statements and concerns by members regarding the financial condition of MOA were also disclosed. However, there are other issues that were not addressed. Those issues are embedded in the beginning financial numbers for 2006 and are unlikely to be uncovered by an audit of 2006 financial records.
__ Hopefully, MOA's new CPA firm will find and correct the deficiencies in the 2005 reports, some of which may require restatement of prior reviews and the 2005 audit. However, I believe it is unreasonable, and certainly inefficient, to expect that the new CPA will be able to find all of those deficiencies including those in prior reviews without being given a list of concerns.
__ One of my good friends has a son in law who is a forensic accountant for one of the Big "four or five" accounting firms. Over dinner and in other conversation, I asked him how he goes about finding major errors in a forensic audit. His reply was that the major source of information comes from interviews of the personnel. The interviews provide the basic symptoms for investigation in the accounting.
__ This is similar to what we expect from medical services and automotive repair services. We wouldn't just go into a medical facility and say "Find my ailments." or into an automotive repair facility and say "Fix my car." Of course, we would provide the symptoms.
__ The two MOA members who are likely to critically review the audit reports for 2007 are Leo Lyddy and me. Leo and I may have a better understanding of the problems and deficiencies than does any current board member or staff member. Leo and I will certainly review the 2006 audit report with a high degree of scrutiny. In all fairness to the new CPA, the firm should be advised of the "symptoms" that others have observed. I requested information on attending the meeting with the new CPA firm. No reply from the board or staff was received. Such closed meetings always raise the question "What is the board hiding?" This email summarizes my concerns, most of which have been previously communicated to the board. I recommend that it be forwarded to the CPA. Also I recommend that Leo's correspondence to the MOA board also be forwarded.
__ The manner in which information was provided to the CPA firm for the 2005 audit was less than satisfactory. The last paragraph of the cover letter for the CPA's MOA report states, "We have applied certain limited procedures, which consisted principally of inquires of management regarding the methods of measurement and presentation of the supplementary information." Who is management? What questions were asked? What were the answers from management? In an audit, the information used should be verified by documentation.
__ Mr. Burchard has expressed concern in board meetings about the disclosures by Ms. Zarichney to the CPA firm. A verbatim transcript of one exchange in the 2005 Nov 30 Board Minutes.pdfFN1 at[http://swagman.typepad.com/michaywe_poa/files/moa_bd061130_minutesar.pdf]; FN1 raises serious questions about the disclosures made. Mr. Burchard provided a further explanation in a later board meeting which I recall as stating that the concerns were valid, but that they may be outside the scope of the engagement letter. Moreover, some of the provisions in the governing documents and the members' motions defining the dues cap and restricting use of the Capital Improvement / Debt Reduction Dues of $60 per lot are missing from the CPA's audit report. I am not aware of any corrective actions taken by the board to ensure that such insufficient and improper disclosure is prevented in the future.
__ The Appendix to this email provides a summary of my list of concerns (my list of "symptoms") regarding MOA's accounting and prior reviews and the 2005 audit. I am not in any way requesting that the CPA endorse by concerns — only that the concerns be given consideration and appropriately addressed, in the CPA's opinion and expertise, in the 2006 audit reports. I don't want the new CPA to be blindsided by not being advised of the outstanding concerns. These outstanding concerns, if addressed, likely would affect the beginning numbers for 2006.
Don Nordeen
(989) 939-8240
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Appendix — Concerns Regarding MOA's Accounting
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Table of Contents for Appendix (Not part of Email)
- A. Generally Accepted Accounting Principles
- B. Related-Party Transactions
- C. IRS Tax Status
- D. Capital Improvement / Debt Reduction Dues
- E. Reserve for Capital Repair, Replacement and Renovation (RRR)
- F. Consolidated Financial Reports
- G. Removal of Assets from PCC
- H. Depreciation
- I. Financial Information for Members
- J. Booking of Association Dues and Related Accounts and Transactions
- K. Bad Debt Expense
- L. Legal Actions
- M. Fewer Notes without Loss of Information
- N. The Primary Customer is the Members
A. Generally Accepted Accounting Principles
__ In reviews and audits for prior years, the reports have not stated the applicable accounting standards. I believe the applicable practice (standard) is the AICPA Audit & Accounting Guide for Common Interest Realty Associations (AICPA A&A for CIRAs). The CPA's reviews for 2004 and prior years are not consistent with the provisions in AICPA A&A for CIRAs. Consequently, adjusting entries or restatements to the reviews for prior years may be required. The cover letter for the 2005 audit report refers to the"Practitioners Publishing Company Guide to Homeowners' Associations and other Common Interest Realty Associations (PPC Guide)"but not to the AICPA A&A for CIRAs. I believe the requirements are stated in AICPA A&A for CIRAs, and it is the "second level" GAAP (See House of GAAP) at[http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles_%28USA%29]for MOA. Scroll down to the House of GAAP chart.
__ The cover letter for the 2005 audit report includes a curious statement:
"The 2004 financial statements were review by use, and our report thereon, dated April 29, 2005, state we are not aware of any material modifications that should be made to those financial statements for them to be in conformity with generally accepted accounting principles. However, a review is substantially less in scope than an audit and does not provide a basis for th expression of an opinion on the 2004 financial statements taken as a whole."
This is inconsistent with the prior-year adjustments that were made on page 12 of the 2005 audit report for MOA. This also sidesteps the question of whether or not the 2004 and prior-year reviews should comply with the AICPA A&A for CIRAs. If so, many other adjustments should be made, most of which affect the beginning financial numbers for 2006. __ This issue of applicable accounting standard (GAAP for MOA) needs to be defined in the 2006 audit report for MOA to eliminate the current doubt and confusion. If AICPA Audit & Accounting Guide for Common Interest Realty Associations (AICPA A&A for CIRAs) is not the applicable standard, then an explanation of why not and a statement of what is the applicable standard is needed.
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__
B. Related-Party Transactions
__ These have major implications since the Pines Club Corporation (PCC) is a wholly-owned subsidiary. Which transactions should be recorded in MOA's accounting and which in PCC's is not uniquely defined. There are tax implications as transactions are moved from one to the other which could be troublesome since MOA currently has a tax exempt status with the IRS.
__ (¶ edited 2010 Feb 16)There is also an important tax implication as described on page 12 of MOA's 2005 audit report. In my view, the adjustments described on page
__ (¶ edited 2010 Feb 16)I believe the initial error was to cover PCC's operating losses with additional investment from MOA rather than by an expense from MOA and revenue to PCC in the amount of PCC's operating loss. This would basically have recognized that the operating losses for the golf course and bar & restaurant are covered by part of the annual dues, as would have occurred if all accounting were done in MOA's books. The result would have been zero operating profit (loss) for PCC, with the net operating profit (loss) reflected in MOA's accounting, again as would have occurred if all accounting were done in MOA's books. None of the adjustments for unrealized gains (losses) would have been required, nor would any Deferred Federal Income Tax Benefit would have been created. MOA would have an operating loss (unfavorable change in net assets) for prior years back to 2000. There would have been no problem with the IRS tax status
__ My recommendation is that correcting adjustments in prior years be made to reflect covering PCC's operating losses with an expense from MOA. The adjustments should be made back to 2000 to provide correct current numbers on MOA's books. Amended tax returns should be filed for PCC and MOA as required by tax law. There may be additional adjustments in tax returns for MOA with correct accounting for the Capital Improvement / Debt Reduction Dues described below.
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C. IRS Tax Status
__ MOA currently has an IRS 501(c)(4) tax exempt status. IRS provides a general discussion of Social Welfare Organizations at[http://www.irs.gov/charities/nonprofits/article/0,,id=96178,00.html]which includes a link to a more detailed document, IRC 501(c)(4) Organizations.pdf at[http://www.irs.gov/pub/irs-tege/eotopici03.pdf]. On page 14 in the section on Homeowners’ and Tenants’ Associations, the article states, "To be described in IRC 501(c)(4), a homeowners' association must primarily serve the community rather than the private interests of its members." My interpretation is that all MOA facilities would have to be open to the general public.
__ If the changes in accounting for related-party transactions discussed above are implemented with restatements back to 2000, then MOA would have had operating losses for all years. Even though the tax status might not be correct, the effect is nil.
__ (¶ added 2010 Feb 16)The AICPA A&A Guide for CIRAs states in Chapter 6 — Income Tax Considerations, §6.06, Federal Form 990:
"6.06 CIRAs that file Federal Form 990 do so because they are exempt under IRC sections 501 (c)(4), 501(c)(7), or 501(c)(12). Few CIRAs meet the eligibility requirements of section 501(c). The exemptions of CIRAs should be reviewed annually to make sure that all tests have been met to maintain eligibility for the exempt status. If a section 501(c) exemption no longer applies, the CIRA is required to file Form 1120 or 1120-H."
This CIRA provision requires an annual review, presumably by the preparer of the tax return. The first paragraph above indicates that MOA does not qualify for IRS 501(c)(4) status. Moreover, there is no advantage to MOA for the IRS 501(c)(4) status because MOA does not make a profit and therefore has no tax liability. __ My recommendation is that MOA apply for rescission of the IRS 501(c)(4) tax exempt status and amend tax returns as necessary based on the adjusting entries discussed above.
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D. Capital Improvement / Debt Reduction Dues
__ The annual dues are set by the board of directors, but cannot be greater than a dues cap approved by the members. The exclusive approval authority reserved to the members is defined in the Declaration of Master Covenants, Conditions and Restrictions (DMCCR) with approval according to provisions in the bylaws. The dues cap is therefore recorded in the motion approved by the members with the representations as included with the notice of the meeting.
__ Enactment of CI/DR Dues — In 1997 and reaffirmed in 1999, MOA members approved a restricted increase in the dues cap of $60 per lot (property unit) with the language:
"an increase in the cap for the annual dues of $60 per lot to be used for debt reduction first and then for capital improvement and accumulation of a capital improvement “trust” fund with the dues to be decreased if the trust fund reaches $250,000" (emphasis in the original).
A total dues cap of $240 was, in effect, was a result of a three-part motion approved in 1997 and reaffirmed in 1999 of which the CI/DR Dues cap of $60 was the first part.
__ MOA accounting beginning in 1997 kept the collection of CI/DR
Dues in a separate account with use only for payment on principal for
the long-term loans then in effect. The last payment on the old debt
was made in early 2000. The CPA's reviews in this period recognized
the restricted use of the CI/DR Dues.
__ Increase in Total Dues Cap from $240 to $400 in 2002 — In 2001, a motion to increase the total dues cap from $240 to $400 was not approved by the members. The notice of the meeting included the representation that the $60 restricted dues for capital improvement and debt reduction would be retained. This same motion was again noticed in early 2002 and was approved by the members. The result is that the members approved total dues of $400 per lot (property unit) per year — $340 regular (unrestricted) and $60 restricted for debt reduction first and then capital improvement, etc. See Representations and Motion on Capital Improvement / Debt Reduction DuesFN1 at[http://swagman.typepad.com/michaywe_poa/2007/05/representations.html]FN1 for the details for these motions.
__ Consequently, the dues cap for the total dues is now $400 of which $340 is regular (unrestricted) dues and $60 is restricted for debt reduction first and then capital improvement. The board has approved assessment of these total amounts.
__ Since 2000, MOA's accounting has reflected a separate line item for the collection of CI/DR Dues, but has not established a separate restricted fund and used those funds according to the restrictions. Since there was no long-term debt in early 2000, a proper use of the CI/DR Dues was for capital improvement. Accordingly, all of the CI/DR Dues could likely be allocated to capital improvement in 2000. Long-term debt was taken on in 2001, so the CI/DR Dues could then only be used for payment of principal. A review of the records is required. In all subsequent years, the CI/DR Dues can only be used for principal payments which should include the principal payment on the capital lease of equipment which has been shown as a current liability in some of the financial statements.
__ Very likely, there will be a fund balance after review of the above items. According to the AICPA A&A Guide for CIRAs, this would be reflected as an "Owed to CI/DR Fund" as a current liability for unrestricted operations and the CI/DR Dues Fund would show an "Owned from Operations" in the amount of the shortfall in funding. The Fund should have a significant current balance since all of the CI/DR Dues collected has not been used to pay principal on long-term debt.
__ Tax Implications — Since the CI/DR Dues are specifically for debt reduction first and then capital improvement, the CI/DR Dues should be entered directly into the restricted CI/DR Fund and are likely not taxable income. The effect is to further increase MOA's operating losses for years back to 2000 if the accounting for those years is restated. Those adjustments should be part of any amended returns.
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E. Reserve for Capital Repair, Replacement and Renovation (RRR)
__ Contrary to the requirement in SOP 93-5, the prior CPA made no statement about the Reserve for RRR in reviews prior to 2005. My understanding is that SOP 93-5 applies to review and compilation engagements as well as audit engagements. None of the reviews for 2004 and prior years included any disclosures concerning reserves for future repairs.
__ Certain disclosures were included in the 2005 audit report for MOA The cover letter identifies the supplementary information as required by GAAP (seems to be a recognition that AICPA A&A for CIRAs applies, or at least SOP 93-5 but the applicable standard is not cited). Note F on page 18 is a major disclosure concerning the required reserves and the funds that have been allocated to a reserve. However, the Statement of Financial Position does not include a separate column for the reserve fund to show the shortfall in the financial statements. The disclosure regarding the governing documents is incomplete. The full requirements in the CC&R for Michaywe Common Properties are:
"Article IV, Section 2. Reserve Fund
The Board of Directors of the Association shall forecast and establish a sufficient reserve fund for periodic major repair, replacement and renovation of the Michaywe' Common Properties, as well as tor emergency expenditures. The reserve fund shall be funded through operations, Association dues or special assessments approved by the Members, pursuant to the terms of the Master Deed Restrictions for the Michaywe' Community and the Association Documents. Notwithstanding anything contained in this Declaration to the contrary, the Association shall have the authority to approve expenditures from the reserve fund, provided such expenditures are for the purposes for which the fund is established, without the approval of the Owners or Members. Funds available for operation of the Michaywe' Common Properties, from any source whatsoever, shall first be applied to fund the reserve required herein, and only after the reserve is funded, such funds may be used for operations, improvements and any other permissible purposes."
(¶ edited 2010 Feb 16)A key provision in the governing documents omitted in the 2005 audit report is the requirementthat "Funds available for operation of the Michaywe' Common Properties, from any source whatsoever, shall first be applied to fund the reserve required herein, and only after the reserve is funded, such funds may be used for operations, improvements and any other permissible purposes." Another key provision omitted is the requirementfor"... a sufficient reserve fund for ... repair, replacement and renovation ...".
__ (¶ added 2010 Feb 16)The 2005 audit report does not address the requirement to fund the reserve before funds may be used for any other purpose.
__ A significant disclosure is made on pages 20-21 of the 2005 report. However, there was no audit to compare the list of capital assets in the accounting to the list of components on page 21. There is no reserve for replacement, or major renovation, of any of the buildings. Some buildings are missing from the list. Other assets such as sidewalks, fences, and directional signs are not included.
__ In the absence is a comprehensive reserve study by a professional defining"... a sufficient reserve fund for ... repair, replacement and renovation ...",
I believe a default requirement of the current depreciation should be
used so that an accounting with appropriate footnote is included in the
Statement of Financial Position. This would show a shortfall of
considerably more than the $600,000 stated in the 2005 audit report.
__ It is very important for the members to see a line item in the Statement of Financial Position showing the shortfall of funding for the RRR Fund. It is not sufficient to disclose a shortfall, now approaching $1,000,000, in a note.
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F. Consolidated Financial Reports
__ Given that PCC is a wholly-owned subsidiary of MOA and that transactions can readily be moved between MOA and PCC, only consolidated financial statements reflect the true financial condition for MOA. The current accounting by MOA obfuscates the understanding of the financial condition of MOA.
__ Simplification of the related-party transactions described in Section B above would help in the understanding and presentation of the consolidated statements. Footnotes may be appropriate to explain what accounts were consolidated in creating the consolidated statements.
__ (¶ added 2010 Feb 16)The consolidated statements should be the same as would be generated for MOA if MOA included all transactions currently recorded in PCC.
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G. Removal of Assets from PCC
__ Apparently, some assets as required by the Liquor Control Commission requirements must be held by the entity holding the liquor license. Under the provisions of the Covenants, Conditions and Covenants for the Michaywe Common Properties (CCR for MCP), approval of the members is required for selling assets. Such approval of the members has never been obtained. Other assets were also transferred from MOA to PCC — in effect another sale. Assets held by PCC are governed by a different law than the one covering assets held by MOA. Moreover, an investment in PCC as an asset, in lieu of the real asset, for MOA certainly has less value than value than the real asset. Again, members' approval for the transfer (a sale) is required but was never obtained. Further, the assets held by the respective organizations should be consistent with the county records concerning title to the assets. Transfer of an irrigation system, an integral part of the golf course, to PCC is particularly questionable.
__ The long-term solution is to have MOA hold the liquor license so that MOA can also hold all of the assets. The liquor license issueFN1 at[http://swagman.typepad.com/michaywe_poa/2007/01/liquor_license__1.html]FN1 is being investigated by Representative Elsenheimer's office. My information is that other property owners associations hold the liquor licenses directly even though they may have law-enforcement officials as members.
__ Memo: The issues of breakdown in income and expenses for the various functions and activities should not be affected as long as the breakdown is also "consolidated" meaning that applicable income and expenses are allocated from both MOA and PCC.
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H. Depreciation
__ A review for completeness is needed. The date of the last physical inventory and comparison to the capital inventory in MOA's accounting is unknown. The asset and depreciation listings in the CPA's reviews from 2000 to 2004 appear to be well founded, but the completeness is not addressed.
__ Note B(5) on page 11 of the 2004 review is a summary listing of fixed assets. The tables show the addition of "Land Improvements - Non-depreciable" in the amount of $749,900. No explanation is provided. To my knowledge, no land was purchased. Whatever was done to create this designation was financed in the capital improvement for the golf course. No description of this asset is available. This classification is likely incorrect at its worst and requires explanation at best. What is the description of this asset in the capital inventory in MOA's accounting?
__ Since MOA is unlikely to ever generate a profit — particularly if parts of the annual dues are not taxable — the depreciation should be crafted to best represent the actual depreciation occurring. There is no need for accelerated depreciation to reduce taxes. Such would also provide a better default estimate for the reserves in the absence of a professional reserve study.
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I. Financial Information for Members
__ A Breakdown of Income and Expenses by Major Function and Activity is a very important supplemental report. Since MOA has insufficient funds for current operations, full-cost accounting is needed to provide the costs of operating and maintaining the various functions and activities (golf, bar & restaurant, indoor swimming pool, outdoor swimming pool, Opal Lake facility, community center, cross-country ski trails, MOA administration, and other activities). The board, with or without the advice/approval of members, may have to close and possibly dispose of facilities. Good numbers are needed by facility and activity for such decisions.
__ Most of the issues were addressed in my Motion to the MOA members re Financial InformationFN1
at[http://swagman.typepad.com/michaywe_poa/2004/06/motion_concerni.html]FN1 presented at the 2004 annual meeting and voted on (not approved) at the
2005 annual meeting. Even though not approved, some 150 members voted
for the motion which is an indication of their expectation for
improvement. Curiously, many of the provisions in the motion in the
reports are presented in the CPA's 2005 audit reports — another
indication that the provisions in the motion reflect good practice.
__ (¶ edited 2010 Feb 16)The information provided by MOA to members incorrectly describes the bottom line as "profit" when the number does not include all of the costs.A more correct description would be a Statement of Partial Revenues and Partial Expenses.The 2005 audit report for PCC states on page 13 that "rents in excess of $195,000 per year would be necessary to break-even" on a number of items listed, MOA rents the facilities to PCC for $1 per year. This means that the reported operating loss for the golf and the bar & restaurant operations is about $200,000 larger (unfavorable) than stated. The costs listed for the MOA column are too large by this amount.
__ A second important parameter for MOA's operation is the tracking of Working Capital over time. Since this parameter is defined in Accounting Research Bulletin No. 43, issued by the AICPA [American Institute of Certified Public Accountants], available from the FASB’s FARS product. A pdf file can be downloaded at ARB#43[URL is [http://www.regents.state.la.us/pdfs/ Administration/OSRAP/2002/acct.pdf].]. I have posted this document on my Michaywe weblog at[http://swagman.typepad.com/michaywe_poa/2005/08/working_capital.html]FN1 . This is highest level "House of GAAP" standard, and provides a clear definition. Use of such "boilerplate" should make it beyond attack by members. But more important, it provides the useful parameter for tracking short-term financial capability. Other standard financial parameters should be adopted and based on professional practice.
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J. Booking of Association Dues and Related Accounts and Transactions
__ MOA has two significant problems in this area: (1) only about 90% of the dues billed for the current year are collected in the fiscal year, and (2) the total amount of delinquent dues (prior to current year) is less than the uncollected dues for the current year. For (2) the result is that the total delinquent dues continues to increase year to year.
__ The accounting by the prior CPA is ridiculous. All of the outstanding accounts "have been written off as bad debts". Most are covered by liens and are collectible but with unknown dates.
__ (¶ edited 2010 Feb 16)Leo Lyddy has researched several books on this subject. He advises that "Revenues should be recognized in the accounting period in which they become available and measurable." I generally agree with that concept, but should be consistent with accrual accounting which usually involves estimates. The dues collected should be booked into
__ Collection of delinquent dues from prior years would be treated in a similar way. Interest would be booked by debiting Accounts Receivable and crediting Uncollected Interest. Estimates would be required for accrual accounting, but would be adjusted to actual at the end of the year. The Accounts Receivable balances by year would show the outstanding collectible dues and interest by year. The dues and interest revenues would show the amounts collected for the year. All of the accounting can be done by year class and aggregated as appropriate for simplification in presentation, with a separate schedule by year if appropriate. The non-current Accounts Receivable and Uncollected Dues and Uncollected Interest should likely be shown as non-current assets and liabilities.
__ The above also eliminates the need to set up reserve accounts for uncollected dues and interest. The above described accounting creates those amounts automatically as the balances in Uncollected Dues and Uncollected Interest accounts.
__ The Statement of Financial Position would then show these important financial numbers without footnotes, write-offs, etc. The basic accounting is used to present the information in a format useful to members and the board.
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K. Bad Debt Expense
__ The practice of the CPA, as reflected in the 2005 and prior reports is to write off all uncollected dues. This is obviously incorrect as described above. But it has another very undesirable result which is to overwhelm the truly bad debt — the debt written off from Accounts Receivable.
__ Failure to collect debt has many consequences to an organization. Internal controls should require a high-level approval to place the emphasis on debt collection, rather than expensing bad debt.
__ The above accounting would use Bad Debt Expense only which there are write-offs from Accounts Receivable, which would provide an important number to members and the board.
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L. Legal Actions
__ MOA has been involved in several legal actions which have not been described in the prior audit and reviews. It is my understanding that one or more legal actions is active. I consider the legal action to be active until any judgment has been collected. Further, the details of prior legal actions, or settlements, were not disclosed in the prior reviews and 2005 audit.
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M. Fewer Notes without Loss of Information
__ The reports need to be as simple as possible but no simpler. The many notes in the 2005 audit reports provide useful information. However, many are the result of the basic accounting being deficient. I believe that the need for many of the notes can be eliminated by a better and more descriptive choice for accounts and categories.
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N. The Primary Customer is the Members
__ This is clearly stated in the standard I believe applies to owners
associations, AICPA Audit & Accounting Guide for Common Interest
Realty Associations in §1.33:
"The primary users of the financial information of a CIRA are unit owners,
whose periodic payments of assessments or carrying charges enable the
CIRA to perform its functions. They are primarily interested in
information that indicates whether assessments are used for their
designated budgetary purposes, and whether adequate funds have been
accumulated for future major repairs and replacements. Adequate
financial reporting may assist owners in assessing the extent to which
the CIRA is meeting its responsibilities to maintain the common
property."
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____________________
FN1 Memo: The linked Weblog is password protected. Go to Welcome and Home Page for information on name and password.
- History:_
- 2010 Feb 16 — Edit with additions to make the post applicable to the 2009 audit.
- 2007 May 07 — Initial Post
- Links:_ Audit Considerations for 2006 at [http://swagmanmwpoa.blogspot.com/2007/06/audit-considerations-for-2006.html]
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