Finances

November 20, 2024 Published by South Alberta Chapter - By Sundeep Bir

The Importance Of A Condominium Audit

From the Fall 2024 issue of the CCI South Alberta CCI Review

Running a condominium corporation involves numerous responsibilities, with accurate fiscal management being one of the most crucial. Effective financial stewardship ensures that property values remain stable, and residents enjoy a high quality of life. Each Canadian province has its own regulations regarding condominium audits, making it essential to understand the financial responsibilities in your area. Let us explore why conducting a condominium audit and having yearly financial statements are so vital for any condominium corporation.

What is a Condominium Audit

Before diving into the importance of annual audits, it is helpful to understand what a financial audit entails. A financial audit is a thorough review of a corporation’s finances over the past fiscal year by a Chartered Professional Accountant (CPA). It provides insights into the condominium’s fiscal management, detailing income and expenditures to assess overall financial health. During an audit, various documents are inspected including contracts, paid invoices, income records and bank statements.

Are Condominium Audits Required in Alberta?

Every Canadian province has its own rules regarding condominium audits. In Alberta, condominium corporations must provide yearly financial statements that comply with GAAP, but an audit is not always required. Corporations must prepare audited statements if so stated in their condominium bylaws.

Even though not all corporations are mandated to have a professional audit completed, many choose to do so. The primary reason is the potential inaccuracies in unaudited financial statements, with over 90% requiring adjustments. To protect a condominium’s finances, yearly comprehensive financial audits is recommended.

Who Uses Condominium Financial Statements?

Condominium financial statements are not just for the Board of Directors. They are essential for various stakeholders, including:

• Condominium Property Managers
• Potential Buyers
• Real Estate Lawyers
• Mortgage Lenders
• Government Agencies
• Commercial Lending Agencies
• Trade Creditors

Incorrect financial statements can negatively impact these parties, emphasizing the need for proper financial maintenance to ensure the community’s success.

The Benefits of a Condominium Audit

Increase Transparency

Transparency is essential in condominium management. Owners want assurance that their investment is well-managed. Since the owner's condominium fees or contributions go directly to operating expenses and the condominium's reserve fund, it is essential to show exactly how the funds are allocated throughout the year. Yearly audited financial statements provide detailed insights into the community’s operations, fostering trust in its leadership.

Creates a Check and Balance System

Since Condominium Boards are generally volunteer positions, it is rare to find members with strong financial backgrounds. To help ensure the condominium budget is followed, many corporations choose to hire a Condo Property Management firm to oversee their finances. While outsourcing the corporation's finances can be an excellent way to streamline the accounting of a condominium corporation, it is crucial to have a checks and balance system in place to ensure condominium contributions are allocated correctly. An audit conducted by a CPA firm is your greatest protection against financial mismanagement, as it allows the Corporation to see how its funds are used throughout the year. A condominium audit provides an in-depth look into the condominium's health and the stewardship of the Condominium Board of Directors.

Income Tax Returns

An annual audit assist filing the required income tax return. Regardless of size, all condominium corporations must submit a tax return yearly. Professional auditing services can ensure that tax returns are accurately filled out and filed, reducing the risk of errors and penalties.

Provide Peace of Mind for Future Purchasers

A well-managed condominium with transparent financial practices attracts potential buyers. Annual audits display how effectively the condominium allocates its funds and provide clarity on revenue and expenses. This transparency enhances the condominium’s appeal, making it a more attractive investment.

Ensure Condominium Property Act and Regulation Adherence

Adherence to the Condominium Property Act of Alberta and bylaws is a key aspect of any audit. In Alberta, every condominium has a duty to ensure compliance as per the act, including aspects regarding fiscal management. Non-compliance can result in fines or other legal repercussions. Regular audits help ensure that the condominium meets all statutory requirements, safeguarding the corporation from potential legal issues.

Avoid the Condo Blacklist

Proper fiscal management is crucial for a condominium’s success. Canada’s national housing agency, the Canada Mortgage and Housing Corporation (CMHC), monitors condominiums and may blacklist those “at risk” of losing value, affecting mortgage approvals and rates for potential residents. A professional financial audit demonstrates diligent financial monitoring, helping avoid this scenario.

Conclusion

Annual financial audits by a CPA firm are an essential practice for condominium corporations. They ensure accurate fiscal management, enhance transparency, provide peace of mind for current and future owners, and ensure compliance with legal requirements. While not all provinces mandate annual financial audits, the benefits they offer make them a valuable tool for maintaining the financial health and stability of a condominium corporation.

Conducting these audits can create a sense of security and trust within the community, knowing that their investment is professionally and carefully managed. With diligent financial oversight, condominium corporations can thrive, offering residents a stable, well-maintained environment to call home.

---

Sundeep Bir, Partner
S. Bir Professional Corporation