Condo Financial Audits, Are They Really Necessary?
Disclaimer: We’re using Alberta as an example here, so here’s our reminder that provincial legislation is… well, it’s provincial. When I point at a section of the legislation (or regs), keep in mind it might change if you’re in another province.
With that out of the way – on with the show!
Many of you dear readers live in a Condominium, so you just might be familiar with the term ‘financial audit’. Some of you (we see you, treasurers) will know what I’m talking about immediately. For others, this might just be another vague grouping of words that probably has something to do with accounting.
This blog is mostly for the latter, but hopefully you savvy treasurers will learn something as well.
To help with this, we’re going to ask (and answer) two questions:
Question# 1: What is a financial audit in a condo/strata?
Let’s simplify this, a financial audit is pretty much exactly what it sounds like. Someone with a strong financial background (usually a CPA) will review the ‘books’ of a Condominium and provide a summary report.
The audit will run an average of 8-10 pages, and will offer a comparative analysis of the financials from the last two fiscal years. They will highlight areas where the condominium was over or under budget, and will provide insight into why that may be the case.
How do they do this? Well, they receive a package of all the monthly financials for the previous fiscal term, a copy of all the invoices paid, and a number of other supporting documents (contracts, etc.). They comb through all of those documents, compare them against the monthly statements, and make sure everything adds up.
That’s not all! The auditor will also highlight issues or suggestions for the Condo. Some examples might include recoding an expense from the Operating account to the Reserve account, or highlighting a duplicate invoice paid to a contractor.
The final report is a product of cohesion. The accounting staff (and often the condo manager) will work alongside the auditor to ensure the books are reported correctly. In this way they can be sure the final product is a clear representation of the previous year’s financials.
Question# 2: why does a condo/strata have an audit done?
You might be thinking: “I know this! They do this because they have to! It’s in the law.” and you know what, you might be right. Maybe. Sort of.
See, the legislation (and regulations) governing condominiums does not say that an Audit has to be done, only that it has to be done if it is required.
Wait, what?
Let’s break that down:
The Condominium Property Act of Alberta states:
(3) In addition to those duties assigned to the officers by the board, (c) the treasurer or, in the event of the treasurer’s absence or disability, another member of the board designated by the board shall: (iv) prepare or arrange for the preparation of audited statements and any budgets required under the Regulation, the Act and these bylaws.
The Regulation states:
Regulations 81: The Lieutenant Governor in Council may make regulations (d) for the purposes of section 14, (v.1) respecting trust accounts, including, without limitation, regulations respecting (C) the audit of trust accounts;
I know, I know. That’s a lot of legal jargon. In a nutshell, what this is saying is an audit must be done if the regs, act or bylaws require it – or if it’s deemed necessary by a legislative council.
Put another way: the legislation only requires audited financials be completed when (1) the bylaws say it needs to be done, or (2) some legal proceedings occur and a representative of a legislative counsel deems it necessary.
So… if most Condominiums get an audit done, then that means most Bylaws require it - right?
Nope!
Most condominium Bylaws in Alberta do not obligate a Condominium have an audit completed. They may encourage or support it, but not many require it. This is left up to the sole and reasonable discretion of the Board.
Okay then, so why do most condominiums get one done?
Well, there’s a few reasons for this:
1. Mortgages: our good friends over at the CMHC have a little thing called a ‘Condo Blacklist’. On this list are condominiums that are considered ‘at risk’ for losing value. For those properties, the CMHC may decline a mortgage, or require you pay higher rates. Often times, a mortgage lender will look for a qualified financial audit to verify the Condominium is (a) keeping track with their finances, and (b) being diligent.
2. Trust: being on a Condominium Board is a volunteer position. It can be rare a Board has members with a strong financial background. Instead, they trust their Condo Management firm are properly handling their finances. The annual audit acts as a check-and-balance to that, to help reassure everything is being done correctly. (or highlight if it isn’t)
3. Transparency: you know what most Condo Owners really want, more than anything else? Communication and transparency. The annual audit report allows every Owner a chance to review the finances of their investment, and to keep abreast of all happenings.
Phew, okay. That was some long-answers to some short-questions. If you made it through, we appreciate it! I sincerely hope this article has helped you better understand Condominiums!
We believe strongly in the power of better arming Condominium Owners, Boards, and this business as a whole with more information on our very unique industry.
Have questions, or something you’d like to see us write about? Feel free to contact us, anytime.
Thanks for reading!
Shaun Coles
Owner | SJC Document Reviews
