Dear Community Management Company,
In response to the emails we have been receiving, please allow me to once again point out to you certain truths regarding the relationship between the auditor, the board, you as management and the owners. This is a very important point to understand and can save you from performing an inordinate amount of rework, recriminations, general ill-feelings and time wasted writing pointless emails to me about how your feelings are hurt.
First, please understand that we are performing an audit of the financial statements prepared by management on behalf of the readers of that financial statement – i.e. current and prospective owners. We are engaged to perform the audit by the board of directors who are elected by the owners’ within the association. Our audit is on the financial statements prepared by you, as management.
It has likely not slipped by you that you, as management, are not included in the chain of authority. We are engaged to audit your work. The people who hire us, as part of their fiduciary responsibility, verify that we are independent of management. That means we do not work for you, are not paid by you, and are not responsible to you. We are, in fact, completely independent of you.
Auditor independence is an ethics requirement. Auditor independence means that we are not involved in any manner with the people or companies we are auditing. One step that we at C.O.R.E. take is to verify, prior to the start of any engagement: be it audit, review, consulting or other, that the work we are being asked to do does not put us in a position where a reasonable person might conclude that our work could be compromised because of some other relationship.
This doesn’t mean, by the way, that we cannot perform consulting or even management services. We can even elect to perform certain services on behalf of management. As a matter of fact, given the, shall we say, ethically challenged behaviors we have witnessed of late, we are seriously contemplating offering association management services. The owners have the right to have someone looking out for their best interest and we think we are a superior choice for the right board and association.
What we could not do, is perform an independent audit of that association for which we are also performing management services. THAT, is a conflict of interest. The board and owners deserve to have someone independently examine our work to ensure we comply, not only with GAAP, but with basic common-sense internal control. The obvious things like getting board approval for writing yourself a check in excess of your contract. And the not so obvious things like performing and paying yourself for work that the board authorized another contractor to do.
Being able to offer a superior service to what you are offering is not a conflict of interest. It is competition. Modern capitalism encourages those who can offer a superior service at a reasonable price to put inferior businesses in that marketplace – OUT OF BUSINESS. Walmart put tens of thousands of small time corner drug stores out of business and there was never a conflict of interest – there was just good old fashioned competition.
But you are correct, we could, in theory, leverage our position as the independent auditor to point out your significant internal control weaknesses over your clients’ money to suggest they hire us instead. But if you were to think about it you would realize that would create a conflict of interest. I cannot audit someone with the intention of going to work for them in another capacity because, you guessed it, there are ethics rules against it. And we take our ethical responsibility seriously. You do not want to even hint otherwise.
No, I do not owe you an explanation for a report to the board on your material weaknesses over internal control. No, I am not obligated to help you fix your accounting errors. No, I don’t have to ignore your failure to follow ethical business practices. And, finally, no, I don’t have to communicate with you directly. Unless you are ready to pay my rather hefty consulting fees. Which, by the way, I couldn’t take, because it would cause a conflict. Elegant, isn’t it?
Competing with you for management services is not a conflict of interest my dear management company friends. Making journal entries to paper over your accounting errors 12 months after the fact possibly is. Perhaps other auditor’s don’t see the irony, but make no mistake, we do.
Because if a board ever questioned your logic, they would wonder why they have to pay three times:
- Once for you to get it wrong in the first place
- Once for the auditor to make adjustments to fix your error
- and you the second time to post the journal entries to the accounting system you control and shouldn’t have gotten wrong to begin with
Please, management, remember that the auditor does not work for you. We are ok if you don’t want to refer us to your boards – they will find us anyhow. We are even OK if you want to form a CPA firm to perform audits in competition with us. We actually encourage it – after all –
you might learn something.
And for those management companies who take their responsibilities seriously, we would like to work with your boards in auditing you. We appreciate that are open to the fact that sometimes things go wrong and you want to get it right. We are thankful that you are open to constructive criticism and are willing to evaluate how our thoughts on effective internal controls might work better for you. And we are happy to refer our audit clients to you. Not because we are friends or you give us a kick-back but because you have your clients’ interest in mind and that makes our job just a little bit easier. So thank you and we look forward to auditing you.
Have a great day.
Accounting Clarity 