Understanding CPA Service Levels: Compilation, Review and Audit. A Primer.

The first level of financial reporting is performed by cooperative or the condo association or its management company as monthly "interim" (meaning not year-end) financial statements. The purpose of these is to provide the board and management with the financial tools to evaluate financial performance, primarily budgetary. This is known as managerial accounting, and is completely separate from external financial reporting. Financial statements prepared for this purpose are generally considered to be for internal use only.

There are three levels of

financial-statement services:

compilation, review, audit.

If an additional, secondary level of financial reporting exists, it generally applies only to the co-op or condo's year-end financial statements. This generally means that that an independent CPA will be associated with the year-end financial statements. The purpose of these is not just for management use, but for external financial reporting to co-op shareholders, condo unit-owners and others. While some governing documents contain vague wording in this area, and simply refer to distribution of "year-end financial statements," others require that financial statements be "prepared by an independent CPA." They may be even more specific in defining the level of financial-statement services as either compilation, review, or audit.

CPA ABCs

CPAs must comply state regulations, of course, as well as with AICPA (American Institute of Certified Public Accountants) professional standards on performance of services. It is the AICPA that established the service levels of compilation, review and audit and created the standards of performance for each of these levels of service. The CPA must also comply with generally accepted accounting principles (GAAP), which are established by the Financial Accounting Standards Board (FASB), codified in 2009 

Here are brief summaries of each of the three levels of service:

• Compilation — The CPA compiles information in the form of financial statements. Such information is specifically the representation of management of the association.  The CPA takes little responsibility for these statements, is required to perform very few procedures and gives no assurance as to compliance with generally accepted accounting principles. The CPA is not required to be independent of the associations, but must disclose if he or she is not independent. 

• Review — The CPA performs limited procedures, consisting primarily of inquiries and analytical procedures, and provides negative assurance to the association that financial statements are properly prepared in accordance with GAAP. This level of service requires familiarity with the industry by the CPA and that the CPA be independent with respect to the association.

• Audit — The CPA performs an examination of the financial statements and issues a positive statement as to their compliance with GAAP. Extensive procedures are performed. This level of service requires more extensive industry knowledge by the CPA, and that the CPA be independent with respect to the association.

Gary Porter, CPA, RS, PRA, is the primary author of the Practitioners Publishing Company's Guide to Homeowners Associations andHomeowners Association Tax Library. A past national president of the Community Associations Institute and a member of the Association of Professional Reserve Analysts, he is author of the 1988 book The Reserve Study Manual. This was adapted from his article at the website HOA Pulse.

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