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CIRA Audit and Accounting Update
- 1. CIRA Audit and Accounting Update 2011 Michael Kosinski, CPA LarsonAllen Mkosinski@larsonallen.com ©2011 LarsonAllen LLP ©2011 LarsonAllen LLP 1
- 2. Objectives • At the end of this session you will be able to – Identify potential audit and accounting issues related to CIRA’s – Apply the proper accounting treatment these issues – Identify potential issues that may require outside counsel – Apply Florida State Statutes to the financial statement audit ©2011 LarsonAllen LLP 2
- 3. What is a CIRA? Common Interest Realty Association Is a non taxable corporation… not tax exempt Forms of CIRAs Governed in large part by Florida Statutes ©2011 LarsonAllen LLP 3
- 4. Brief History 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Cutoff Reserves Hurricanes Developer Foreclosures ©2011 LarsonAllen LLP 4
- 5. Operating Environment Foreclosures Local Economy Audit Risk National Housing Economy Slowdown ©2011 LarsonAllen LLP 5
- 6. Statutes - 2011 Changes • Changes to provisions to liabilities to master associations during foreclosure • Changes to bulk purchaser requirements • Assignment of rents to the association Consult an attorney… ©2011 LarsonAllen LLP 6
- 7. 7 Wiki for CIRA ©2011 LarsonAllen LLP
- 8. Statutes - Important Thresholds • $100,000 Compiled • $199,999 • $200,000 Reviewed • $399,999 • $400,000 Audited • And Over ©2011 LarsonAllen LLP 8
- 9. Bad Debt “Management considers all assessments receivable to be fully collectible; therefore, no allowance for uncollectible amounts is deemed necessary.” Intent Ability ©2011 LarsonAllen LLP Collectible 9
- 10. Common Property Other Type Ownership Factors Cash Flows Association CIRA Retains Real Proceeds Property No Members Capitalization ©2011 LarsonAllen LLP 10
- 11. Reserves “We can evade reality, but we cannot evade the consequences of evading reality” -Ayn Rand Reserve Study Requirements Methods ©2011 LarsonAllen LLP 11
- 12. Income Taxes - 1120H Exempt Function Non Exempt Function Capital Contributions Developer Subsidy Fines Late Fees Member Services Special Assessments Non Member Fees Member Dues Interest ©2011 LarsonAllen LLP 12
- 13. Income Taxes - 1120 Member Income Non Member Income Capital Contributions Member Services Developer Subsidy Fines Late Fees Non Member Fees Special Assessments Interest Member Dues ©2011 LarsonAllen LLP 13
- 14. Income Taxes - Apportioned Expenses • Interest – accounting, audit, tax prep, fidelity bond, management • Guest Suite Income – property insurance, management, utilities, repairs, security, janitorial, housekeeping • Apportionment methods • Keep in mind the 90% test ©2011 LarsonAllen LLP 14
- 15. Developer Subsidy - Condominiums • Examine subsidy requirements – Non-assessment Revenues and Expenses – Interest Earned – Bad debt and Depreciation “only regular periodic assessments for common expenses as provided for in the declaration and prospectus and disclosed in the estimated operating budget shall be used for payment of common expenses during any period in which the developer is excused” ©2011 LarsonAllen LLP 15
- 16. Developer Subsidy – HOA • Developer Subsidy – HOA – Post October 1, 1995 • Must be in the documents • Examine for expirations and maximums • Non assessment revenue expenses “the guarantor shall pay any deficits that exceed the guaranteed amount, less the total regular periodic assessments earned by the association from the members other than the guarantor during the guarantee period regardless of whether the actual level charged was less than the maximum guaranteed amount.” 708.308 ©2011 LarsonAllen LLP 16
- 17. Developer Subsidy - Reserves • Do not use reserve funds in place of deficit subsidy • 61B-20.006 Enforcement Resolution and Civil Penalties – Major Violations -Not providing sufficient cash/resources to provide payment on a timely basis of all common expenses including full funding of reserves. -Comingling reserve funds with operating funds ©2011 LarsonAllen LLP 17
- 18. Successor Developer Issues Was Turnover Triggered? Will you be the successor developer? What liability are you assuming? ©2011 LarsonAllen LLP 18
- 19. Other Associations Timeshares Commercial Cooperatives Associations ©2011 LarsonAllen LLP 19
- 20. Timeshares • Capitalization of Interior Furniture • Property Taxes • Foreclosed Unit Weeks • Tax Considerations ©2011 LarsonAllen LLP 20
- 21. Cooperatives • Have title to the property • Owners are stockholders • Transfer of interest requires approval of the board • Real property is capitalized more frequently • Must file 1120-C ©2011 LarsonAllen LLP 21
- 22. Commercial Associations • Can Not File 1120H • Much of the same requirements • Question as to whether Rev Ruling 70-604 applies ©2011 LarsonAllen LLP 22
- 23. Fraud Risks • Incentives – Changes in management companies, auditors, reserve study preparers, pressures to keep assessments low, employees underpaid, economic conditions • Attitudes – adverse relationships between CIRA and employees, personal difficulties of employees ©2011 LarsonAllen LLP 23
- 24. Fraud Risks • Opportunities – Lack of board oversight, management has access to several associations bank accounts, lack of financial knowledge, weak management company internal controls, little segregation of duties at the management company, board members may not closely review expenditures ©2011 LarsonAllen LLP 24
- 25. Some Responses • Confirm cash • Journal entry testing • Data extraction software • Expenditure vouching • Scanning the general ledger detail • Review of vendor lists ©2011 LarsonAllen LLP 25
- 26. Conclusion • Dealing with issues early prevents unwanted surprises • Know when to obtain an outside opinion • Be aware of unique developer issues • And of course Thank you for your time!!! ©2011 LarsonAllen LLP 26
- 27. 27 Questions??? ©2011 LarsonAllen LLP