Perhaps the best way to gauge the financial performance of your company or homeowners association is to read the financial statement. The information it contains is used by lenders, owners, potential buyers and other interested parties to assess the financial condition of the organization, (for example, its ability to pay debts and continue as a going concern).

In general, when most people think about financial statements, they naturally ask if the financial statements are audited or unaudited. However, generally accepted accounting principles (GAAP) actually allow a CPA to provide a wider range of assurance on financial reporting with regard to financial statements other than those two generic levels. This wider range of assurance includes three levels of service, which consist of the traditional audit, a review, and a compilation. Each level offers different assurances and services, and of course, different costs to the client. This article will help you determine which service level is best for your organization.

Audited financial statements have been subjected to detailed audit procedures, as required by professional standards, by an independent certified public accountant and include the CPA’s opinion on the financial statements stating that they are presented fairly, in all material respects, in conformity with GAAP. Reviewed and compiled financial statements contain no such opinion or statement, and they offer significantly lower or no level of assurance as to the fair presentation of the financial statements in accordance with GAAP. Following is a more detailed description of each of these three levels of financial statement service offered by a CPA, which will help you answer the question: What level of service is right for my organization?

Audit
For many organizations, the answer to this question should be easy, because their bylaws require that financial statements be audited by a CPA. That’s because audits provide the highest level of assurance. An independent CPA uses various techniques to verify the accuracy of the information in the financial statements, and then expresses an opinion on the fairness of the financial statements and provides assurance that the underlying data has been tested and is materially correct.

In an audit, the CPA firm provides written assurance that the financial statements are “fairly presented, in all material respects, in conformity with generally accepted accounting principles.” The measure for “fairly presented, in all material respects” indicates there is a level to which the CPA will audit, meaning all transactions will not be looked at during the audit.  The determination of what is material to the financial statements is a matter of professional judgment by the CPA, who will determine materially based on many factors, including the needs of the organization and the users of the financial statements. 

The auditor will consider the internal control of the organization in order to design the audit procedures, and if deficiencies in internal control are identified, they will be communicated to the organization’s leadership (board of directors) along with other recommendations on improvements to the organization’s accounting procedures. 

Audits may also be needed when there is a change in management agents, when transitioning the board of directors from developer to association control, where conflicts of interest may be present, and to assist management with resale certificate disclosure requirements. For the board of directors, an audit helps ensure that they have maintained their fiduciary duty to the association.

Reviews
Reviews provide a much lower degree of assurance than audits. During a review, the CPA firm makes inquiries and performs analytical procedures, which allows the CPA to express limited assurance that it is not aware of any material changes that need to be made to the financial statements for them to be in conformity with GAAP. For example, in a review, a CPA would likely ask management how inventory quantities are determined. In an audit, the CPA would observe the taking of physical inventory, and personally review the obsolete or damaged items.

During a review, the CPA will inquire about changes to governing documents and actions by the board of directors documented in the minutes from board meetings, compare income and expenses with prior year amounts and budgets, and prepare a summary of replacement reserve transactions along with the financial statements. The review report provides negative assurance stating “we are not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with GAAP.”

Although a review doesn’t provide the same degree of assurance as an audit, some financial statement users may find it an acceptable alternative. If an organization’s bylaws don’t require an audit, the board may decide the limited assurance provided by a review is worth the trade off for a less expensive service.

Compilations
Compilations provide no assurance; they are akin to an unaudited statement. The CPA firm only assists in preparing the financial statements, but it’s not obliged to verify the information. Since the information hasn’t been verified, the CPA gives no assurance as to whether the financial statements are fairly presented in accordance with GAAP. The CPA only makes certain that the data are in the correct format and clerically accurate. However, if during the compilation, a CPA has reason to believe that the information supplied by the client is inaccurate, incomplete or otherwise unsatisfactory; the accountant is required to obtain revised or corrected information before reporting on the financial statements.

In the end, it is up to the person or entity using the financial statement to determine the financial health of the business and to assess their own level of comfort with the statements. HOAs and other organizations must ensure that their financial statements will satisfy the level of scrutiny their lenders, owners, and other interested parties require.