As a real estate cooperative or condominium board member, one of your most important—but often overlooked—responsibilities is choosing the right level of financial reporting. The type of financial statement your CPA prepares affects your building's financing options, transparency, and even unit values. Yet many board members aren't familiar with the meaningful differences between the three services CPAs provide: audits, reviews, and complications.
Understanding these distinctions is essential to making an informed choice that serves your building's best interests.
Your Three Options: A Quick Comparison
Audit
- What's Included: Comprehensive testing, verification, and opinion
- Assurance Level: High
- Typical Cost: Highest
- Best For: Most buildings, especially those with financing
Review
- What's Included: Analytical procedures and management inquiries
- Assurance Level: Limited
- Typical Cost: Moderate
- Best For: Mid-sized buildings without lender requirements
Compilation
- What's Included: CPA organizes management's data into financial statements
- Assurance Level: None
- Typical Cost: Lowest
- Best For: Debt-free buildings under 10 units
Understanding the Three Service Levels
Choosing the right level of financial reporting is one of the most important responsibilities for any real estate cooperative or condominium board. Each option—audit, review, and compilation—offers a different level of assurance and cost. The right choice depends on your building’s size, financing, and stakeholder expectations.
Below is a breakdown of what each service includes and when it’s appropriate.
Audits: Comprehensive Verification
An audit represents the most comprehensive service. Your CPA gives an independent opinion that your building's finances are fairly presented and reliable.
This requires extensive work. The auditor evaluates how your building's finances are managed and tested, assesses fraud risk, and performs substantive testing—including examining documentation, confirming balances with banks, and testing data accuracy.
Most buildings receive a "clean" opinion, meaning the financial statements are fairly presented. The auditor must also report any material weaknesses in internal control. Audits are typically necessary for buildings with debt, larger buildings with substantial budgets, and situations where shareholders or unit owners expect the highest level of transparency. In many instances, the building’s bylaws explicitly require them.
Reviews: Limited Assurance Through Analysis
A review sits between an audit and a compilation. Your CPA conducts analytical procedures—comparing current year numbers to prior years and investigating unusual fluctuations—and makes inquiries of management.
Unlike compilations, reviews do provide assurance, characterized as "limited assurance." The CPA's report states that based on the review, they aren't aware of any material modifications needed to the financial statements.
A review involves significantly more work than a compilation but substantially less than an audit. The CPA doesn't test internal controls, verify transactions with third parties, or examine documentation in depth.
Reviews can work for mid-sized buildings without lending relationships requiring audited statements, particularly when bylaws don't mandate audits but stakeholders want professional assurance.
Compilations: Basic Organization
In a compilation, your CPA takes financial information from management—typically your property manager or treasurer—and formats it into proper financial statements like a balance sheet and income statement.
However, your CPA does not verify the information, test transactions, or examine supporting documentation. The CPA provides no assurance that the numbers are accurate or complete.
Compilations work only for very small buildings—typically under ten units—with no debt and close-knit ownership groups. While the low cost is attractive, the lack of assurance creates problems when seeking financing.
Buildings that could afford stronger reporting but present only compiled statements may raise questions for potential buyers, lenders, and stakeholders about the board's commitment to transparency.
When Your Building Needs Each Service
Different buildings have different financial reporting needs. The right level of service depends on your governing documents, financing requirements, and the expectations of owners and lenders. While most buildings require audits, there are situations where a review or compilation may be appropriate.
Most Buildings Need Audits
Several factors typically make audits necessary:
- Governing Documents: Many bylaws explicitly require annual audited financial statements.
- Financing: Lenders require audited statements before extending credit to buildings.
- Unit Owner Mortgages: Fannie Mae guidelines have become increasingly stringent, making audits valuable for facilitating unit sales—even for debt-free buildings.
- Size and Complexity: Larger buildings—typically over ten units—generally need the transparency audits provide.
Audits are also critical during:
- Construction defect settlements or major insurance proceeds
- Management company changes
- Developer turnover to unit owner control
- Contentious board elections
- Suspected financial irregularities
When Reviews or Compilations Work
Reviews can be appropriate for mid-sized buildings without debt when bylaws don't mandate audits and stakeholders understand review limitations.
Compilations work only for very small buildings—under ten units—with no debt, close-knit ownership, and no need to present statements to lenders.
The Real-World Impact on Your Building
Choosing the right level of financial reporting isn’t just an accounting decision: it directly affects your building’s financial health, reputation, and long-term stability. From financing and property values to governance and risk management, the level of assurance you select can have tangible consequences for every owner.
Access to Financing
Buildings presenting reviewed or compiled statements may find financing difficult or impossible to obtain. This affects not just building-level mortgages but individual unit owners seeking financing.
Property Values and Sales
When potential buyers evaluate units, they or their attorneys review the building's financial statements. Audited statements demonstrate sound management and provide confidence, supporting property values and facilitating sales. Weaker reporting can slow sales or reduce offers.
Early Problem Detection
Higher-level engagements catch problems before they become serious. Auditors must report material weaknesses in internal control and identify concerning trends—particularly valuable for detecting fraud or embezzlement.
Board Protection
Engaging appropriate professional services demonstrates the board takes its oversight responsibilities seriously, providing protection against mismanagement allegations.
Selecting the Right CPA Firm
Once you've determined the appropriate service level, selecting the right firm is equally important. Real estate cooperative and condominium accounting has unique aspects that not all CPAs understand well.
Look for firms with specific experience serving cooperative and condominium associations. They should understand real estate cooperative accounting nuances including proprietary lease structures, flip taxes, and the interplay between corporation finances and individual shareholder responsibilities. For condominiums, they should understand areas like common element accounting and association governance.
Ask prospective firms about their experience with buildings similar to yours. Discuss their engagement process, timeline, and deliverables.
At Revonary, our team specializes in real estate cooperative and condominium audit services. We understand the unique requirements of real estate cooperative and condominium associations and deliver services that go beyond compliance to provide genuine insight into your building's financial health. Our experienced professionals ensure you receive the level of financial reporting that best serves your building's needs.
Getting the Financial Reporting Your Building Deserves
The choice between audits, reviews, and compilations significantly impacts your building's financial health, financing access, and stakeholder confidence. For most real estate cooperative and condominium boards, the decision is straightforward: audited financial statements are the appropriate choice—and often the only viable choice given bylaw requirements and lender expectations.
The smallest buildings with simple finances and no external requirements might reasonably choose compilations. Some mid-sized buildings without lending relationships might find reviews appropriate. But the vast majority will find audits necessary.
The key is matching the service level to your building's specific circumstances while ensuring compliance with bylaws and meeting stakeholder expectations.
Your building's financial reporting affects everything from mortgage approvals to property values. Don't leave it to chance—let Revonary's real estate cooperative and condominium specialists guide you to the right solution. Contact us today to discuss which level of financial reporting your building needs.
.png)