CIRA Audit and Accounting    Update 2011    Michael Kosinski, CPA    LarsonAllen    Mkosinski@larsonallen.com             ...
Objectives    • At the end of this session you will be able to       – Identify potential audit and accounting issues rela...
What is a CIRA?    Common Interest Realty Association    Is a non taxable corporation… not tax exempt    Forms of CIRAs   ...
Brief History    2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   2011      Cutoff            Reserve...
Operating Environment       Foreclosures         Local Economy                    Audit Risk         National             ...
Statutes - 2011 Changes    • Changes to provisions to liabilities to master      associations during foreclosure    • Chan...
7                            Wiki for CIRA    ©2011 LarsonAllen LLP
Statutes - Important Thresholds                    • $100,000     Compiled       • $199,999              • $200,000     Re...
Bad Debt    “Management considers all assessments      receivable to be fully collectible; therefore, no      allowance fo...
Common Property                                    Other          Type      Ownership                                   Fa...
Reserves     “We can evade reality, but we cannot evade       the consequences of evading reality”     -Ayn Rand          ...
Income Taxes - 1120H        Exempt Function          Non Exempt Function         Capital Contributions         Developer S...
Income Taxes - 1120        Member Income            Non Member Income         Capital Contributions         Member Service...
Income Taxes - Apportioned Expenses     • Interest – accounting, audit, tax prep, fidelity       bond, management     • Gu...
Developer Subsidy - Condominiums     • Examine subsidy requirements         – Non-assessment Revenues and Expenses        ...
Developer Subsidy – HOA     • Developer Subsidy – HOA – Post October       1, 1995     • Must be in the documents     • Ex...
Developer Subsidy - Reserves     • Do not use reserve funds in place of deficit       subsidy     • 61B-20.006 Enforcement...
Successor Developer Issues     Was Turnover Triggered?        Will you be the        successor developer?           What l...
Other Associations                      Timeshares                                   Commercial       Cooperatives        ...
Timeshares     •   Capitalization of Interior Furniture     •   Property Taxes     •   Foreclosed Unit Weeks     •   Tax C...
Cooperatives     • Have title to the property     • Owners are stockholders     • Transfer of interest requires approval o...
Commercial Associations     • Can Not File 1120H     • Much of the same requirements     • Question as to whether Rev Ruli...
Fraud Risks     • Incentives – Changes in management       companies, auditors, reserve study       preparers, pressures t...
Fraud Risks     • Opportunities – Lack of board oversight,       management has access to several associations       bank ...
Some Responses     •   Confirm cash     •   Journal entry testing     •   Data extraction software     •   Expenditure vou...
Conclusion     • Dealing with issues early prevents unwanted       surprises     • Know when to obtain an outside opinion ...
27                             Questions???     ©2011 LarsonAllen LLP
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2011 CIRA Update

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2011 Presentation at FICPA FGCU conference covering changes in the CIRA operating environment

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2011 CIRA Update

  1. 1. CIRA Audit and Accounting Update 2011 Michael Kosinski, CPA LarsonAllen Mkosinski@larsonallen.com ©2011 LarsonAllen LLP ©2011 LarsonAllen LLP1
  2. 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 LLP2
  3. 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 LLP3
  4. 4. Brief History 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Cutoff Reserves Hurricanes Developer Foreclosures ©2011 LarsonAllen LLP4
  5. 5. Operating Environment Foreclosures Local Economy Audit Risk National Housing Economy Slowdown ©2011 LarsonAllen LLP5
  6. 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 LLP6
  7. 7. 7 Wiki for CIRA ©2011 LarsonAllen LLP
  8. 8. Statutes - Important Thresholds • $100,000 Compiled • $199,999 • $200,000 Reviewed • $399,999 • $400,000 Audited • And Over ©2011 LarsonAllen LLP8
  9. 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 Collectible9
  10. 10. Common Property Other Type Ownership Factors Cash Flows Association CIRA Retains Real Proceeds Property No Members Capitalization ©2011 LarsonAllen LLP10
  11. 11. Reserves “We can evade reality, but we cannot evade the consequences of evading reality” -Ayn Rand Reserve Study Requirements Methods ©2011 LarsonAllen LLP11
  12. 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 LLP12
  13. 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 LLP13
  14. 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 LLP14
  15. 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 LLP15
  16. 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 LLP16
  17. 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 LLP17
  18. 18. Successor Developer Issues Was Turnover Triggered? Will you be the successor developer? What liability are you assuming? ©2011 LarsonAllen LLP18
  19. 19. Other Associations Timeshares Commercial Cooperatives Associations ©2011 LarsonAllen LLP19
  20. 20. Timeshares • Capitalization of Interior Furniture • Property Taxes • Foreclosed Unit Weeks • Tax Considerations ©2011 LarsonAllen LLP20
  21. 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 LLP21
  22. 22. Commercial Associations • Can Not File 1120H • Much of the same requirements • Question as to whether Rev Ruling 70-604 applies ©2011 LarsonAllen LLP22
  23. 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 LLP23
  24. 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 LLP24
  25. 25. Some Responses • Confirm cash • Journal entry testing • Data extraction software • Expenditure vouching • Scanning the general ledger detail • Review of vendor lists ©2011 LarsonAllen LLP25
  26. 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 LLP26
  27. 27. 27 Questions??? ©2011 LarsonAllen LLP

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