It is always refreshing to see associations which take responsibility for their future replacements by trying to find investments which can actually grow beyond the rate of inflation. A solid investment plan can help them ease the burden of reserve assessments by using collected funds to grow at an accelerated, but reasonably safe, rate of return.
Auditing these investments is challenging though.
Conceptually, auditing investments is not any harder than auditing cash. Except that investments carry certain additional disclosure requirements and the treasurer typically has little to no exposure on how to record the transactions let alone report them to be audited. Which means that our work as the auditor grows significantly.
You see, Generally Accepted Accounting Principles (GAAP) requires that the investments be reported as either trading, available for sale or held to maturity. How many investment advisors even understand what can be assigned to these categories? And our role, as auditor, is to make sure that the investments are properly categorized and that the related gains, losses, and earnings is properly reported in the statement of activity; i.e. the profit and loss statement. To ensure that they are properly recorded in the period, the accounting department has to know the difference between realized and recognized gains and losses, temporary impairment, other than temporary impairment and put those in the right reporting areas.
Which of course leads to another big accounting issue, accumulated other comprehensive income. This is the series of holding accounts for the unrealized gains. You have to know how to close out the transaction to recognize the ultimate sale of the investment.
Did I mention that you have to also track bond premiums and discounts and do some accounting work to get the amortization right? Again, all this has to be tracked correctly to report in accordance with GAAP.
The rub is that treasurers and boards don’t really understand the complexity of this and often don’t really care. Their issue is the investment and the return, not its reporting. Which brings us to our dilemma.
Trying to account for, and then audit, investments can add a substantial cost to the engagement. It is a cost that probably won’t be valuable to the board and owners in the association. So, do we allow for a GAAP departure on the investments and simply say they are recorded at cost and have associations report gains and losses at the time of sale?
It is a difficult position. On the one hand we want the statements to fairly represent the financial activity of the association but on the other hand we don’t want to drive up the cost of the engagement to the point where they find another auditor. One who perhaps will take huge shortcuts on the reporting and auditing side. Yes, we see that far too often as well.
So, putting your reserve fund to work by investing it strategically and at reasonable risk is a fair approach to managing the money. But there are other things to consider besides the actual investing and you, as a board, need to be aware of these issues and take a position on how to report this to the owners in your association financial statement.
Have a great day and an awesome weekend. And, if you are looking for an experienced audit team to help you maintain effective controls over your association’s finances, feel free to contact us anytime. We look forward to the opportunity to be of service to you.
Accounting Clarity 