When Is an Audit Required or Recommended? - Washington

When Is an Audit Required or Recommended? - Washington

Washington State Law - Requirements

Old Act Condominiums – Those created before July 1, 1990
64.32.170 (Horizontal Property Regimes Act) – Requires an audit once a year by an auditor – all condominiums. However, Washington state attorneys have advised that the Old Act defaults to the New Act audit requirements, UNLESS the Old Act Association’s governing documents require an audit. Then, an audit is required, regardless.

New Act Condominiums – Those created after July 1, 1990
64.34.372 (Washington Condominium Act) Condominiums with 50 or more units must be audited annually. Condominiums with fewer than 50 units – audit is required; however, can be waived by 60% of the owners (other than the declarant/developer)

64.34.308 (Washington Condominium Act) Transfer of control from the Declarant to the unit owners – a CPA audit is required as of the date of transfer unless two-thirds of the unit owners (other than the declarant) elect to waive the audit.

Homeowners Associations – excludes condominiums, non-residential developments and residential cooperatives
64.38.045 (Homeowners’ Associations) Associations with annual assessments of $50,000 or more requires an audit; however, can be waived by 67% of the owners. Note the test is “assessments” and does not include other income.

Common Interest Communities (CICs)- CIC’s created after July 1, 2018
64.90.530 (Washington Uniform Common Interest Ownership Act) Associations (CICs) with annual assessments of $50,000 or more must be audited annually by a CPA. If less than $50,000, annual audit is also required, but may be waived annually by unit owners other than the declarant of units to which a majority of the votes in the association are allocated, excluding the votes allocated to units owned by the declarant. See 64.90.075 and 080 regarding new and preexisting CICs. See 64.90.095 regarding election of preexisting CICs into this Chapter. See 64.90.100 regarding non-residential and mixed-use communities.

Recommendations:

Washington law allows some exceptions to the audit requirement of financial statements. Our firm has identified ten particular circumstances where we strongly suggest that an audit be performed. They are as follows:

  1. When large amounts of money are received for unusual circumstances. Two examples are construction defect settlements or large insurance proceeds.
  2. When there is unusual replacement fund/reserve activity. This may be when there are large reserve projects, when the Association is severely underfunded, or if the Association is not meeting budgeted expectations.
  3. When there is a change in management companies. (This is not an absolute, but it seems to be a good time to ensure that the transition between the management companies results in the correct balances being carried over and properly set up on the new books.)
  4. When there is little or no internal control. An example of this would be when the Association is self-managed, and the treasurer writes the checks, signs the checks and prepares the bank reconciliations.
  5. When the board has not been receiving financial statements on at least a quarterly basis. This is especially true when there is no standard accounting system in place.
  6. When there is suspected fraud or embezzlement. (Please tell your CPA of your suspicions before the engagement begins! Possibly, the CPA will refer you to a Forensic Accountant rather than the standard GAAP/GAAS audit.)
  7. When there is a lot of political infighting among the board members or there is a transition from one board to another which is not pleasant, such as the case of a recall.
  8. When the developer turns over control of the Association to the homeowners. (Even when not required by the state law.)
  9. When the Association is having financial difficulties. It may seem strange that the Association should spend more money when it is losing money. But, it may be that the Association needs a professional to spend some extra time on the books to ensure that everything is being properly recorded. When an Association is in financial trouble is when they need help the most.
  10. Associations with over $500,000 in annual assessments.