Examining the statements
I read the minutes of an AGM for a condo in Scarborough where a new owner was furious to learn
that the Reserve Fund actually held just a small fraction of what the
financial statements and his Status Certificate claimed. If he knew the
truth, he would never have bought his unit.
How could this be?
A close look at the audited financial statements showed the games that the board was playing.
Fund Balances—Reserve Fund (page 4)
|
2013
|
2012
|
| Fund balance, beginning of year |
$534,037
|
617,429
|
| Fund balance, end of the year |
480,903
|
534,037
|
From these figures it seems that the condo corporation has almost $500,000 in the Reserves so they look
in reasonable shape. However, if you stop here, and don't look further, you have been badly deceived.
Notes
The next place to look is in the Notes at the back of the financial statements.
6) Reserve Fund
... The board has accepted the recommendations of the study which
suggests an annual contribution of $328,960 for 2013; expenditures of
$361,225 and an ending balance as at December 2013 of $600,403. Actual
amounts were $328,960, $328,960, $382,094 and $480,903 respectively.
Putting these numbers in a sentence makes it too difficult to read so let's put it into a chart.
|
Contributions |
Expenditures |
Ending balance |
Reserve Fund Study recommendations
|
$328,960
|
361,225
|
600,403
|
Actual amounts
|
328,960
|
382,094
|
480,903
|
So the Ending Balance in the Reserves is about $120,000 lower than it
should be. Not good but perhaps not awful. We need to look a little deeper.
Physical shape of the buildings
A walk through the buildings, the grounds and the underground parking
garage shows that the property is in extremely poor physical shape with
no sign that $743,319 was spent on major repairs and replacements.
Opening the door
We have to look at other pages to find the true financial picture.
Fund Balances—Operating Fund (page 3)
Year
|
2013
|
2012
|
| Fund balance, beginning of year |
$ (412,971)
|
(356,423)
|
| Fund balance, end of the year |
(668,223)
|
(412,971) |
A lot of people don't understand that brackets surrounding a number
means that it is a negative number. The Operating Fund is almost
$700,000 in the hole! That is $255,000 further in the red than it was
in 2012 and double what it was in 2011. This is very alarming. We need
to dig deeper.
Reserve Fund Receivables
If you see Reserve Fund Receivables on the Statement of Financial
Position page, usually page 2, it means that the money does not exist
in the Reserves and it is actually an
unpaid "debt" from the operating fund. A look at the Operating
Fund page, most likely will show a negative number.
Assets—page 2
|
2013
|
2012
|
Cash & equivalents—Operating Fund
|
(10,628)
|
33,928
|
Cash & equivalents—Reserve Fund
|
(27,736)
|
163,430
|
Receivables
|
27,342
|
119,794
|
Reserve Fund Receivables
|
508,639
|
370,607
|
This is unbelievable. The Operating Fund and the Reserve Funds have
bank overdrafts that total $38,364. (The total of the two negative numbers.) On top of that, the Reserve Fund is
owed $508,639 up by $138,000 from 2012.
Reserve Fund Receivable
Now this line tells us that the numbers shown on page 4 (Reserve Fund)
are not only false but are designed to deceive the owners and potential
buyers.
The listed Reserve Fund expenditures (page 4) are accurate but the Reserve Fund
starting and year end balances are as crooked as a dog's hind leg as
they consist of no more than an IOU from the operating fund; a fund
that is running a bank overdraft.
The board is responsible
In the auditor's opening page, they all say that something like:
"Management and its Directors are responsible for the preparation and
fair presentation of these financial statements in accordance with
Canadian accounting standards for non-profit organizations, and for
such internal control as management and its Directors determines is
necessary ..."
The auditor then goes on to say that his role is to obtain reasonable
assurance that the statements are free from material misstatement.
So the auditor is stating that if the owners or potential buyers read
the numbers on page 4, and his Note 6 in the back of the statements,
and take them to mean that there was $480,903 in the Reserve Funds at
the end of 2013, well then their complaint should be with the board and the management,
not him.
A warning sentence
Now this is very serious. At the very bottom of the first page, the auditor wrote a paragraph that stated in part:
"... the corporation has not deposited all monies received from the
owners to be allocated to the reserve fund into a reserve bank account
or reserve investments and, as a consequence, has an overdraft of
$27,736 in its reserve bank which is less than the amount necessary to
fund the reserve fund of $480,903."
None of the owners caught the importance of this. The auditor is saying
that instead of there being over $480,000 in the reserves, the reserves
are not only empty but are $27,736 in debt to the bank.
He did not mention the operating fund overdraft.
Going
through the notes, I saw that the corporation was paying off two small
loans, they were defending three lawsuits and they were
leasing building equipment (lease to own).
A clean audit report
Yet this financial mess received a clean audit.
So whose interests were being served by the auditor? Was it in the
owners best interest to think that the reserves in in reasonable shape?
(It would be if they are trying to sell their units.) Was this report
in the best interests of potential purchasers? (Obviously not.)
Or was this report
in the best interests of the management company and the elected board
of directors?
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