Reading financial statements

“We've seen so many foolish happenings at companies where the auditors don't do their job.” —John Gilbert “This case is an example of our continuing efforts to hold auditors and other gatekeepers responsible for failing to fulfill their professional obligations.” —Scott Friestad The financial statements are organized on different sheets showing different financial positions and they can be extremely difficult for an owner to understand. Remember; the financial statements are the board's statements, not the auditor's. He or she just reports on what is provided to them.

Owners need knowledge
The biggest problem of all is that very few owners can clearly read financial statements and unlike stock market investors, they get no help from analysts and short sellers in finding the buried bodies. (As an aside, Warren Buffett believes that short sellers are useful in uncovering fraudulent accounting and other problems at companies.)

Here are a few things to watch for.

Negative numbers
Negative numbers can be shown three ways:

negative sign	-$257.369
in brackets	($257.369)
red ink	$257.369

Many owners don't understand that brackets around a number means it is a negative number.

Front pages
Look for any sentences saying that the corporation "has not followed the Condominium Act" or "has not maintained the reserve fund" or has "transferred funds from the reserves to the operating fund". Any wording along these lines needs to be read very carefully.

Qualified opinion
A qualified opinion may be given if:

1.	the auditor was unable to conduct complete verification of the accuracy of the accounting records due to missing invoices or receipts.
2.	there are significant uncertainties regarding assumptions underlying the financial statements.
3.	the auditor and the management were unable to reach an agreement regarding on how to treat certain assets.
4.	an unqualified opinion cannot be expressed because (a) the account books and records do not completely reflect conditions that conform to the provisions of GAAP.

A qualified opinion is rare and the owners should be very concerned if the auditor finds it necessary to qualify their financial statements.

However, just because an audit is unqualified, does not mean that there is nothing to worry about.

Two funds
There are two basic funds; the operating fund and the reserves.

Operating fund
This fund pays for all the monthly costs of operating the condo corporation. The utilities, management, superintendents, minor repairs and contracted services come out of this fund.

Watch the budgeted figures compared to the actuals. If the budgeted figures are regularly lower than the actuals, then the manager and the board either cannot budget, they are deliberately keeping the fees too low or they plan to use money that belongs to the reserves.

I like the financial statements to give a detailed list on income and expenses so the owners know, in some detail, where the money was spent. if you see that the statements have few lines with general headings such as:
Utilities
Contracts
Maintenance
Administration
Professional fees
Other
Then you are not being told very much.

Reserve fund
The reserve fund is the condo corporation's long term savings fund. It's funding is a requirement of the Act and the reserves is not a piggy bank that can be raided to top-up the operating funds.

Compare the amount of money that was spent from the reserves and the year end amount in the financial statements compared to the figures in the Form 15, the summary of the Reserve Fund Study and Cash Flow Table that each owner should receive every three years.

A board may brag about having $2 million in the reserves when the engineering study says the condo needs $8 million worth of work that has not been done.

Compare the interest that the reserves earned compared with the estimate in the engineer's Cash Flow Table to see if they come close.

Notes
The auditor's notes at the back of the financial statements are extremely important as that is where the auditor hides most of the bad news.

If there is anything there that you don't fully understand, ask the auditor to explain it to you at the AGM. If you are unsatisfied with the answer you get, vote against renewing his contract.


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