What to Look for In a Real Estate Cooperative Audit: Board Member’s Guide

Key Takeaways

1. The Auditor's Opinion Matters Most - A qualified, adverse, or "going concern" opinion signals that your cooperative's financial statements may not present an accurate picture and demands immediate investigation.
   
   
2. Reserve Funds Are Your Safety Net - Industry standards recommend reserves equal at least 10% of the cooperative’s annual operating budget. Buildings with declining reserves or no reserve study face mounting risks of special assessments and declining property values.
   
   
3. Liquidity & Cash Flow: A current ratio below 1:1, recurring operating losses, high arrears, or persistent negative cash flow all signal potential financial distress and warrant immediate attention.

For real estate cooperative board members, the annual cooperative audit represents far more than a compliance exercise. It's a comprehensive health check of your building's financial condition. Knowing how to read the warning signs can mean the difference between addressing problems early and facing a full-blown crisis.

Most bylaws and mortgage lenders require audited financial statements, which provide the transparency and accountability that protect both the building's value and shareholders' investments. Understanding what to look for is a fundamental board responsibility.

Understanding the Auditor's Opinion: The Headline Finding

Before diving into numbers in your audited financial statements, flip to the auditor's opinion letter: the most critical section of your financial statements.

A "clean" or unqualified opinion means the auditor believes the financial statements present fairly the cooperative's financial position. Any modification to this opinion—whether qualified, adverse, or a disclaimer—requires immediate attention.

A qualified opinion indicates material issues with financial statement preparation. An adverse opinion suggests the statements may be materially misstated. Most concerning is a "going concern" warning, which signals the auditor questions whether your building can continue operating under current conditions.

One important note here: Many real estate co-ops and condos get what’s a qualified opinion for a very specific, technical reason. It relates to industry guidelines from the AICPA (the professional organization for accountants) about how buildings disclose information on their reserve funds: the savings set aside for future repairs and capital projects.

In practice, most buildings don’t provide the level of detail those guidelines call for, so auditors often issue a “qualified” opinion just for that reason. It doesn’t mean anything is wrong with your finances—it’s more of a disclosure technicality that’s common and generally acceptable.

However, if your audit report is qualified for any other reason, that’s a red flag. It could mean the auditor couldn’t verify certain information or found an issue that needs to be addressed. Those situations deserve careful follow-up from the board.

Delayed Financial Statements: What Timing Tells You

Financial statements should typically be completed within three to six months after your fiscal year-end. Consistent delays signal potential problems: inadequate bookkeeping systems, an overwhelmed management company, or disputes between auditors and management about financial presentation.

Equally concerning is when a building suddenly switches from audited statements to compilations without clear justification. While smaller buildings may reasonably use compilations, larger cooperatives should maintain audited statements.

Related: Audit vs. Review vs. Compilation: Which Does Your Building Need?

Inadequate Reserve Funds

Beyond the operating budget, your reserve fund serves as the financial cushion for major repairs and replacements. Industry standards recommend maintaining reserves equal to at least 10% of annual operating budget, though many buildings should hold significantly more depending on age and anticipated capital needs.

Warning signs include:

• Declining balances without corresponding capital expenditures
• Levels consistently below 10% of annual budget
• No reserve study conducted within the past 3-5 years
• Using operating funds for capital expenses

While state laws vary, many communities aren’t required to prepare formal reserve studies. Still, skipping them creates a long-term planning gap. A reserve study projects major repair and replacement costs over the next 20–30 years and helps determine how much funding the association should set aside each year. Without this information, boards risk underfunding reserves, making it harder for owners to sell or refinance, increasing the chance of special assessments, and leading to sudden, steep maintenance fee hikes.

Poor Financial Ratios and Cash Flow Problems

Your cooperative's financial ratios provide objective measures of financial health. The most important is the current ratio: current assets divided by current liabilities.

Here’s how to calculate this: 

• Current assets: cash, accounts receivable, prepaid expenses
• Current liabilities: accounts payable, accrued expenses, short-term obligations

A current ratio below 1:1 typically indicates liquidity problems. A ratio above 1:2 indicates your building has sufficient assets and liquidity to meet its immediate financial obligations. 

Operating losses warrant examination. Some cooperatives show accounting losses for tax purposes while maintaining positive cash flow. However, when expenses consistently exceed maintenance income on a cash basis, the problem compounds. This year's shortfall becomes next year's starting deficit.

Also monitor accounts receivable aging. High arrears indicate collection problems and strain cash flow. Large unexplained cash fluctuations or persistent negative operating cash flow signal trouble.

Questionable Vendor Relationships and Expenses

Proper vendor management prevents fraud and overspending. Watch for:

• Payments to entities affiliated with the managing agent (require competitive pricing documentation)
• Multiple payments for the same invoice
• Contracts awarded without competitive bidding
• Consistently using vendors despite higher costs
• Unexplained spikes in professional fees
• Payments to unfamiliar entities
• Missing documentation for significant projects

For major projects, require at least three competitive bids and document the selection rationale. Competitive bidding, documentation, and oversight of related-party transactions prevent fraud and overspending.

Weak Internal Controls

Strong internal controls separate honest mistakes from fraud opportunities. The foundation is segregation of duties: authorization, recording, and custody of assets should involve different individuals.

Essential internal controls for real estate cooperatives and condominiums include:

• Dual signatures for checks above certain thresholds
• Regular financial statements to the board (monthly or quarterly)
• Board review of check registers and unusual transactions
• No cash acceptance (no audit trail)
• Clear oversight procedures for co-op credit cards
• Budget-to-actual comparisons with variance explanations

Key Takeaway: Even when perfect segregation of duties isn't possible, dual signatures and regular oversight reduce risk substantially.

The Board's Role in Audit Oversight

Board members have a fiduciary duty that includes active financial oversight.

Before the audit, ensure books and records are ready and ensure coordination between management and the audit firm you’ve chosen to hire. During the audit, be available for questions and respond to documentation requests promptly.

After the audit has been completed, take the time to read the entire financial statement, not just summaries. Review footnotes carefully—they contain valuable information. Meet with auditors to discuss findings and ask questions about unclear items. Review and then make a plan to implement any recommendations included in the management letter.

It’s also the role of the board to share the results of the audit at annual meetings between all the members of the cooperative or condominium. Present results clearly to shareholders and explain significant changes from prior years.

Moving Forward with Confidence

The warning signs discussed here—adverse opinions, delayed statements, inadequate reserves, poor internal controls, and deteriorating financial ratios—represent serious threats to cooperative financial health. However, early recognition enables corrective action before problems become crises.

Addressing these issues may require difficult decisions: maintenance increases, special assessments, or management changes. Yet delay typically worsens outcomes and limits options. With proper vigilance and timely professional guidance, most financial problems can be addressed before they threaten your cooperative's viability.

Even well-run cooperatives encounter challenges revealed through their audits. At Revonary, we specialize in real estate cooperative and condominium audit services and understand the unique financial reporting requirements facing co-op boards.

Whether you need help understanding your current financial statements, investigating concerning trends, or selecting a new auditor for your cooperative audit, we bring both technical expertise and practical guidance to every engagement.

If you need a specialized real estate audit firm equipped with the skills and experience to perform a financial statement audit of your cooperative or condominium, contact Revonary today.