Tag: auditor

Why GAAP matters

~ C.O.R.E. Beliefs ~ Leave a comment

Sadly I am not allowed to say too much about today’s meeting as the board was in executive session but the gist of the other accountant’s opinion is that economic reality doesn’t matter only the legal form of a transaction.

Really?

When pressed about how that could possibly be the case since contractors obviously have earned a certain amount of revenue based upon an economic theory, the reply was, “Well you can’t confuse for profit with non-profit.”

Really?

When asked how, when a contract shows the total amount due or, if you elect you can pay a sum each month over XXX number of months and it includes interest at Y%, this someone does not create a sum certain for accounting purposes,  there is not somehow some understanding that the sum certain is a receivable, the replay was, “The contract says it is revenue only upon the payment of the monthly amount.”

Really?

The board naturally is confused.  Rightly so.  Two professionals, two different opinions, one type of transaction.

Except that one professional has a position backed up by research on the application of GAAP and how the Accounting Standards Codifications call for the transactions to be recorded.  The other is an opinion based upon his 30+ years of experience so he doesn’t need to know GAAP.

Honestly, if I were the board I would fire us both.  Me for yelling at a dumbass accountant who thinks that if he appeases his fired client he will continue to reap referrals and the other accountant for being a dumbass and trying to provide accounting 101 lessons.

I was wrong to lose my temper.  At the end of the day the treatment we selected is appropriate and consistent with GAAP.  But there was almost $2,500 of billing listening to a lecture of how debits are on the left and credits are on the right.  I was infuriated not for myself but the fact that these board members have owned and run businesses, sat on boards and really do understand the basics of accounting theory.  They paid $2,500 to listen to a self-proclaimed expert prattle on how form matters over substance.

Each person in the room understands that Enron happened.  That WorldCom cost them and their friends dearly.  When no matter how you cut it, you can’t incur an expense without the expectation that there exists a pool of resources to pay the attendant liability. And one expects their financial statements to reflect the reality of that situation.

GAAP exists for a reason.  GAAP doesn’t reflect – or rather should not reflect – the mere form of a transaction.  GAAP reflects economic reality.  And it does matter.  Because the next time you go to buy a home and you look at the books and it shows zero receivable from the owners and a bank liability of any amount, please understand, you are likely facing a special assessment only no one wants you to know.  And, had those books been properly kept on GAAP, you would have known the problem exists.  You probably still would have bought but at least you won’t be able to say (with a straight face) that you weren’t warned.  Which is the whole point of a financial statement anyways – to help you make better investing decisions.

So, GAAP is GAAP.  If you are bothered by the fact that your accounting is complex, look to the reality of your transaction as it is likely complex.  The further you get from doing work and billing for it, the more complex you make accounting in addressing your transactions.  Don’t blame the accountants… We are simply the messengers.

The Right Way

~ C.O.R.E. Beliefs ~ Leave a comment

People’s reaction to conflict is often amusing.  Last week’s battle with a management company is a great example.

When we first brought the issue to the attention of the management company, they told us that they had authorization to do the work and invoice for it.  Never mind the fact that the minutes to the directors meeting didn’t say that the management company’s proposal was accepted and approved.  The minutes were silent.

As I have pointed out in other blog posts, the minutes in this case were kept by the management company.  This is so even though the bylaws state the board secretary is responsible for recording the meetings and securing the minutes.  But even though the management company kept the minutes, the minutes did not provide approval.

They did the work anyways.  And then billed extra.  We questioned the transaction as we think any good auditor would.

The manager’s response?  They updated the minutes.

Really?  I know, it is wrong on so many levels.  But even though they updated the minutes they still didn’t say that the board approved the transaction.  Even they knew there is a line they can’t cross.

After that, we were met with silence.  Three times we inquired as to additional proof that the transaction was valid and we were met with silence each time.  They figured we would go away or worse, feel no choice but to accept their statement.

But there was a right way to handle this.  First would have not been to do any work not explicitly authorized by the board.  The management company, after all, works for the board the same as the auditor does.  They have a contract which specifies the work they are to do and the compensation they are to receive.  When there is work to be performed beyond the management agreement, that work needs to follow the basic rules the board has laid out.

The right way would have been to solicit three bids from reputable contractors.  The manager would have presented these to the board so they could make an informed decision.  The manager then would have contacted the awarded contractor and scheduled the work.

The right way would include not submitting a proposal from a contractor who didn’t agree to the terms that were apparently presented to the board.  The right way would also not have the manager offer to step in to fulfill the service when the contractor said no.

From our perspective as the auditor, there is a right way and a wrong way.  The right way means acting with integrity and intention.  It means accepting responsibility when things go wrong and reconsidering your processes so that they can’t happen again.

The wrong way is to blame the CPA for questioning the transaction.  The wrong way is to say that the board is wrong and to argue that everyone knew how hard you worked.  The wrong way is to tell us that you can find five different CPA firms who will see it your way and that you will make sure we never audit another of your clients.

As auditors, C.O.R.E. Services follows a simple rule: Do it the Right Way.  If at the end of the day, our clients, the boards of property owner associations and other entities, prefer to have us focus on their rules and compliance so they can feel good about the financial statements, then we will continue to offer our service.  And if the market shifts and these same boards no longer want to know that things are done correctly, well then the market will win and we will have to find some other line of work where our integrity and intention will matter.

As we explained to this community manager, the cost for their referral was too high.  I would rather starve then become beholden to a community management company who skates on ethical thin ice.  And if the day comes when boards would prefer to have a community management company lackey as their auditor so they can avoid the conflict of challenging the manager’s decisions, then we will stand by waiting for the inevitable lawsuits to begin so we can offer our services in support of the litigation.

Do things the right way.  Act with intention.

If you are a board who would like to ensure that your community manager is preparing financial statements you can rely upon, feel free to reach out to us.  And, if you are a community manager who lives with intention and works with integrity, we would love to get to know you and help you by auditing your work on behalf of your boards.  Our mutual client will be most grateful for the opportunity for us to work together on their behalf.

Have a great Monday.

The Possible

~ C.O.R.E. Beliefs ~ Leave a comment

There are times when I think we do not spend enough time thinking about the possible.  What I mean to say is, we are almost always fixated on the probable, or most likely to happen, outcome.  This is as true in accounting and auditing as it is in life itself.

One important aspect of our role as auditor though, is to consider the possible.  For instance, theft of company assets.  When we look at how assets are controlled, from their purchase to their ultimate disposal, we are looking for possible holes in that system.  Who approves a bad debt write-off, who can set the selling price of a piece of equipment that is no longer in use; the issues which concern is are possibilities.

If we focused solely on the probable, we would potentially miss a warning sign.  Is it probable that the purchasing agent is receiving a kick-back from a vendor for steering business their way?  Maybe not.  But what controls, what business process reduces the possibility?

It is one of the things that concerns us regarding condo and HOA audits.  As the association’s independent auditor, we are first and foremost concerned with the financial statement and the fact that it is materially correct.  But when you think about what provides a materially correct financial statement, it is all the controls and safeguards of the manager – who is charged with the board with carrying out the daily activity of the association.

This is the main reason we spend so much energy on understanding how the community manager does the job.  Who has access to a checking account, who initiates the transaction, who approves it?  These points reduce or increase the risk of misuse of the association’s assets. There are far too many stories about trusting a system that really did not provide any safeguards and addressing that possibility is the responsibility of the auditor.

For instance, what if employee A of the community manager could initiate a transaction for say, yard maintenance.  Employee A contacts the maintenance company, negotiates the price and sets the contract.  Employee A then reviews their work and approves payment.  Finally Employee A can write the check and have someone else sign.

This seems harmless doesn’t it?  After all, employee A can’t sign the check so the asset is safeguarded right?  Not at all.  Employee A could have created a fact maintenance transaction, set up a fake company, approved the work and, because everything was signed off on, the check is cut.  To employee A.

Is it probably this happens in any particular association?  No.  But this scenario could result in this possible outcome.  And the auditor should know that and make appropriate comment.

Community Managers will argue that this couldn’t happen.  They are, however, arguing that it is not probable because they believe they know their employees.  The fact that it could happen though is what we are concerned with when we try to determine the risks of weak internal controls.  Boards need to be made aware that the risk exists so they can take steps, if they feel it necessary, to eliminate, or at least reduce, the risk of it happening.

As a director, make sure your auditor works to understand how the community manager is operating and how it impacts your association.  Press them on their thoughts on what risks might exist to the assets of your association.  Your auditor should have a good grasp of the fundamentals of the control system and can give you some good points to consider.  And if they can’t, it may be time to switch auditors.  C.O.R.E. is here to help you, the board, rely upon your manager.  We do this by looking at the managers controls and how they impact your association.  Feel free to contact us to schedule a conversation about how we can be of service to your association.

Have a great weekend.

 

Dad, What do you do?

~ C.O.R.E. Beliefs ~ Leave a comment

Brendan and I have been going to the gym 2-3 times a week and lifting weights.  He is starting to learn how to control free weights and he is enjoying charting his progress.  The other day, while we were between sets, he asked me, “What do you do as an accountant?”

One of those exciting moments every parent of a pre-teen lives for!

So I explain to him that I am an auditor, which is not really an accountant but a scientist.  He seemed puzzled but I pressed on.

“Do you remember learning about the scientific process?” I asked, he replied yes and then started to explain that you first set a hypothesis, test the hypothesis, and then draw a conclusion from your test.

I told him that is what makes an auditor a scientist.  We follow the exact same pattern.

Whenever an auditor begins work, we start by creating a hypothesis.  We changed it around a bit to state we test assertions but in reality we create the hypothesis about management’s assertions.  Ok, that is a little wonkish so perhaps an example.

The books show that the company has $100,000 in a bank account.  Management has made several assertions:

  • That the $100K Exists
  • That the Company has a Right to the money
  • That the $100K is Complete and all transactions are recorded
  • That it is actually Valued at $100K
  • That it is actually Classified as a bank account
  • And that management Cutoff all transactions on the right date

Six assertions on one little bank account but any one of them being an incorrect assertion possibly means that the $100K isn’t really.  So, as an auditor/scientist, the first thing we do is form the hypothesis; and our hypothesis is always a negative.  For instance, some of the hypotheses for this bank account could be

  • There really isn’t a bank account with $100K in it (it doesn’t Exist)
  • The bank account is in the name of another business (There is no Right to it).
  • Management failed to get checks signed and mailed by year end (The transactions are not Complete)
  • The account is in Peso’s in a Mexican bank (the Value is not $100K dollars but 100K Pesos)
  • The account is an investment account (it is not Classified correctly)
  • Management recorded deposits that were actually received later (they didn’t get a good Cutoff)

We create these hypothesis and then test them.  For a bank account, we have a ready-made solution – the bank confirmation.  We send out a letter to the bank and ask them to say they agree, or confirm, managements assertions.  The bank writes back and says, “Yes, there is $100K in the bank, it is actually in US Dollars and it is a demand deposit business checking account in the Company’s name.

One confirmation and poof, four assertions are taken care of.  Our hypotheses were disproven and we can safely say that, as far as those assertions go, management was correct.  As a matter of fact, one of the best forms of evidence for an auditor is when a third party can provide evidence that a transaction exists.  We can confirm a lot and prefer it whenever possible as it can help us with more than one assertion – other tests typically only go after one assertion at a time – which means we can spend hours trying to prove the remaining assertions.

Oh yes, by the way, I lost him at the six assertions – he is only 13 after all.  And, to be honest, he is far more curious about the times we catch people making poor choices and how we deal with it.

I told him to read my blogs.  No, he prefers Star War’s books.  But someday he will.  In the meantime, I hope you begin to have an appreciation of what steps we take as auditors to ensure that management is recording transactions to your books accurately.

An audit is designed to prove that the financial statements being presented are fair and accurate.  Management makes those six assertions on every account and ever dollar reported.  So, the next time you are meeting with your auditor, ask him about management assertions and how they design their hypothesis.  If nothing else, it is a great way to find out if they pay attention to their checklists!

Have a great day.  If you are looking for a firm to perform a review or audit of your financial statements, we would love the opportunity to be of service to you.  Go to our website, look us over and then click the Get a Quote tab.  We are a little wonkish but love to get the job done right and on budget.