Condo Media - July 2018 - 16

Asked & Answered

Audit, Financial Review, Compilation

Making the Right Decision for Your Community

Our board is planning to hire a CPA to go
over the association's finances. We know
there are several different kinds of reviews
we might request-audits, compilations,
and financial reviews-but don't know
how to decide which option is best for our
community. Can you explain the advantages
and disadvantages of each? Also, are there
any laws or regulations that dictate which
option we must select?

Massachusetts is the only New England state that requires a financial review of any kind for condominiums;
the state condominium law requires an independent
review annually for associations with 50 units or more.
Condominiums in Rhode Island, New Hampshire, Maine,
and Vermont, and Massachusetts condos with fewer than
50 units, aren't required to have a financial review of any
kind unless their governing documents require it.
That said, an independent review of association
finances is a good business practice that most industry
professionals would recommend. Which brings us to
your key question: What kind of review is best?
Kenneth Bloom, CPA, a partner in Bloom Cohen Hayes
LLC, puts the three options on a sliding scale, based on
the scope of the work they entail. Compilations are on the
bottom-"the lowest level of service," he says. Financial
reviews are "in the middle" and audits are at the top.
Bloom describes a compilation as a "casual, off-thecuff " review of the association's financial statements.
"Casual" may be an understatement. "We take the client's financial statements, put them on our letterhead,
and send a bill for the service," Bloom explains. "We just
make sure nothing is ridiculously misstated or blatantly
wrong. That's all a compilation is required to do."
For small business owners who want this review for
themselves and who aren't providing assurances to third
parties, he says, a compilation is fine. But for purposes
of providing assurances to condominium owners, in his
view, "compilations are a waste of money and effort."
The financial review goes one step-and a large step-
beyond the compilation. Instead of simply glancing at

CONDOMEDIA July 2018

the financial statements, Bloom explains, accountants
"use analytical tools to reach our conclusion" about their
accuracy. Those tools include asking the association's
manager or treasurer to provide additional information
or explain discrepancies the review finds.
For an audit, the accountant takes one more step, examining a random sampling of transactions to verify that
established procedures and protocols are being followed.
The audit involves more scrutiny than a review. It is
also considerably more expensive, but Bloom doesn't
think it is necessary for most associations. "I'm sure
that if you took a random poll of CPAs who do audits
and reviews, most would strongly disagree with me," he
concedes. "But audits aren't usually worth the additional
cost for a typical association client."
Most boards that request an audit don't really understand them, Bloom contends. "They think they are
getting a guarantee against fraud," he says, "but audits
don't provide that assurance." Both audits and financial
reviews are designed to detect errors and discrepancies,
he explains, and "the likelihood of detecting inappropriate activity is not a whole lot higher in an audit than it
is in a review. I've discovered fraud several times in a
financial review," he notes, "but never in an audit."
Audits do make sense, he agrees, for the gigantic
master planned communities with thousands of units and
complicated structures that are common in other parts of
the country. But most condominium associations in New
England lack the size and complexity that might require
an audit. For them, Bloom suggests, "a financial review
provides the best value for the service they need."

Condo Media - July 2018

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