It goes without saying that condominium corporations have significant and complex financial reporting responsibilities—many of which are overseen by volunteer boards of directors staffed by unit owners who may or may not have accounting or financial management expertise. Because condominium corporations are required under the Condominium Act, 1998 (the Act) to publish financial statements each year, this sets the stage for occasional errors and omissions.
The good news: your condominium corporation has an opportunity to be proactive, to enhance its existing reporting processes to ensure a smooth annual audit, to streamline financial structures and be more deliberate in keeping your community informed about its financial health. That’s particularly important at a time when condo communities are facing mounting inflationary pressures such as enhanced maintenance and labour costs.
As you likely know, auditors are required to highlight any reporting deficiencies outlined in the Act, while also providing comprehensive financial statement opinions. It’s no surprise that Adams + Miles Condo Group auditors see common deficiencies that could result in incorrect assumptions being made by financial statement readers, along with a raft of other challenges. Another piece of good news: these deficiencies are entirely avoidable.
Here are some of the most common condo audit oversights—with ways to prevent them en route to finalizing your condo corporation’s financial statements:
The Challenge: Deficient reserve investments
When funds received from owners have not been deposited into a reserve fund bank account or reserve investment, inadequate investments will be available to cover the necessary reserve fund.
The Solution: As mentioned above, if $120,000 has been allocated to the reserve fund for the year, 1/12th—or $10,000—should be physically transferred from the operating bank account to the reserve bank account each month. Don’t be distracted by reserve fund surpluses. Expenditures that were deferred in previous years will still require funding down the road. And don’t use reserve funds to finance operations. This can lead to cash flow problems that could spell disaster over the long term.
The Challenge: Ineligible reserve expenses
Section 93 (2) of the Act prohibits corporations from claiming reserve expenditures that are not major repairs, or for replacement of common elements or assets.
The Solution: While the Act does not define “major repairs,” every corporation should establish a minimum amount that can be charged to the reserve fund. This can be defined by distinguishing major from minor repairs and replacements. Minor repairs, annually recurring items, preventive maintenance and additions, alterations or improvements to the common elements and monthly maintenance contracts, may not be charged to the reserve fund. Always seek professional advice from an auditor, reserve fund planner, or solicitor when determining eligible expenses.
The Challenge: Ineligible investments
Section 115 (5) of the Act defines an eligible investment as a bond, debenture, GIC, term deposit, or other similar instrument that is guaranteed by the government of Canada or any Canadian province; or issued by an institution located in Ontario and insurable by the Canada Deposit Insurance Corporation (CDIC).
The Solution: Avoid investing in stocks or mutual funds, and limit investments to $100,000 per financial institution. Be sure to work with a financial advisor familiar with the Act. The goal is to invest in low-risk vehicles that help protect your principal.
The Challenge: No (or late) notice of future funding of the reserve fund
Section 94 of the Act requires that condominium corporations conduct a reserve fund study within the first year of operation, then every three years thereafter. A Notice of Future Funding of the Reserve Fund is required within 120 days of approval.
The Solution: For newly registered buildings, engage an engineer to begin a study immediately. Ensure that enough time is allocated to complete the study for Director review and to incorporate any changes before year end.
The Challenge: Failing to follow notice of future funding of reserve fund allocations
Section 94 (8) of the Act requires that a corporation follows the allocations outlined in the Notice of Future Funding (NOFF).
The Solution: If the NOFF indicates allocations for the year are $120,000, they should be at least this amount. If the corporation has excess operating cash, directors can opt to add more. Where directors choose to establish a different funding plan than the one advised, ensure that it’s properly documented in the approved study.
The challenge: No reserve bank
Section 115 (4) of the Act requires that condominium corporations have a reserve bank account where funds received from owners are allocated.
The Solution: At registration of the Corporation, open general and reserve bank accounts. Ensure funds from owners are allocated to each account monthly upon receipt. For example, if reserve fund allocations for the year are $120,000, 1/12th—or $10,000—should be physically transferred from the operating account to the reserve account (not just by journal entry).
The challenge: Bank and investment accounts are not solely in the name of the Corporation
Section 115 (2) of the Act requires that bank accounts and investments (either operating or reserve) be in the name of the Corporation.
The Solution: When opened, ensure that bank accounts and investments are in the Corporation name ONLY and never in the name of the property management company or anyone else. Even social or holiday accounts should be in the name of the Corporation. Each account should have two signatories and be shown as an asset on the balance sheet.
The Challenge: No investment plan
Section 115 (8) of the Act requires condominium corporations to develop an investment plan.
The Solution: Ensure your investment plan is documented in meeting minutes. Work with an investment advisor to help establish a plan based on reserve fund expenditure requirements.
Perhaps the most important piece of advice: work with an accounting firm with direct condominium audit expertise to understand and manage your condominium corporation’s reporting requirements under the Act. There’s simply no substitution for comprehensive experience in such a highly specialized field.
Christina Ajith-Brandford, Partner
Contact a member of our Condo Group today to ensure your financial statements are deficiency-free and meet the requirements of the Condominium Act.