To Audit or Not to Audit?

According to the recent National Strata Data Survey, the value of insured assets of strata and community properties in QLD approaches $200 billion. With the size, scale and complexity of strata assets there is risk, including financial risk which must be managed. Committee members can mitigate financial risk and ensure their fiduciary obligations are met by staying informed of audit requirements for Body Corporate financial statements.

Assurance from independent auditors with financial reporting expertise and industry knowledge is being demanded by a growing number of Body Corporate stakeholders and an independent audit provides credibility to the position told by the financial statements presented at the Annual General Meeting (AGM).

To assist strata owners understanding of what an audit means in practical terms, we will explain the annual audit requirements including the appointment process and what the auditor will and importantly will not do as part of their role.

Motion not to audit – The Art of The Double Negative
At its AGM each year, the body corporate must* make a decision about auditing the accounts. Owners vote to decide if the accounts are audited or not. Lot owners must navigate the apparent “double negative” of the motion NOT to audit to ensure that their body corporate financial statements are audited. *excludes small & two lot schemes

By requiring a Special resolution for the financial statements NOT to be audited, the legislators are acknowledging that an independent audit plays a crucial role in good governance. At the very least, detractors are required to mount a convincing argument as to why their body corporate financials should not be audited. At every AGM, you have no choice but to contend with the Statutory Motion where YES means NO, and NO means YES. s.153 of the Accommodation Module.

The body corporate can pass a motion at its annual general meeting NOT to audit its accounts. The motion must be passed by special resolution.

The motion not to audit must:
1. be in the form: “that the body corporate’s statement of accounts for the financial year (state the financial year concerned) not be audited” and
2. have voting instructions (an explanatory note) saying: “If you want the accounts to be audited, vote ‘no’; if you do not want the accounts audited, vote ‘yes’.

To be clear, an owner wanting body corporate accounts to be audited should vote ‘no’ to the motion not to audit the accounts. If a motion not to audit the accounts is not passed, the body corporate must have its accounts audited. It will then need to pass a motion to appoint an auditor, which must be passed by ordinary resolution.

Appointing an Auditor
A body corporate must also include on each annual general meeting agenda a motion to appoint an auditor. This normally follows the motion ‘not to audit’ the accounts. Section 153 is quite prescriptive about who can appoint an auditor.

These three main elements are:
1. The auditor must be named.
2. The auditor must be suitably qualified. s.154 of the Accommodation Module
3. The Body Corporate, and only the Body Corporate, chooses the auditor. This is a restricted issue, and therefore not a decision for the Committee. s.42 of the Accommodation Module

Who can perform a Body Corporate audit in Queensland?
The auditor who is appointed by ordinary resolution of the body corporate must:
• be independent
• have appropriate qualifications and experience
• not be a committee member or a body corporate manager.

Section 156 lays out who can perform an audit under the act referring to the necessary qualifications and experience. The person must be a member of one of the recognized professional accounting bodies (e.g. CA or CPA) and have a total of 2 years auditing experience, whether or not continuous.

Although not stated in the legislation, ideally the auditor should have specific audit experience within the body corporate sector with sufficient awareness and understanding of the relevant financial sections of the Queensland Body Corporate legislation.

So, what is an Audit?
An audit is an independent examination of the financial report of a body corporate for a specified period. Typically, in the Queensland Body Corporate sector the financial report comprises a balance sheet, a statement of income & expenditure relating to the Administrative Fund, a statement of income & expenditure relating to the Sinking Fund, and notes including a summary of significant accounting policies and other explanatory notes.

The overall purpose of an audit is to provide a professional opinion as to whether the financial reports present fairly, in all material respects, the financial position of the body corporate. The key objective is to obtain reasonable assurance about whether the financial report is free from material misstatement.

What a Body Corporate Auditor Does
The Body Corporate Auditor will ensure that independence is maintained from the Body Corporate management and the Committee to maintain the objective nature of any assessment given. The Body Corporate auditor will determine specific procedures supported by an understanding of the identified risks contained within the Body Corporate environment and the determining of controls implemented by the Committee, some assigned by agency, to their Body Corporate manager.

A Body Corporate Auditors procedure may include but are not limited to:
1. Specific queries to a range of key individuals, typically within the Body Corporate management business including the accounts team and the Body Corporate manager.
2. Review financial statements, key reports and general ledger records, review minutes, sight Bank statements and investment records, sight current Certificate of Currency for Insurance, Valuation, building manager contracts, specific supplier invoices and reconciliation of Income Tax & GST liabilities.
3. Seeking supporting evidence substantiating the existence of external Receivable or Payable amounts including confirmation of any long-term commitments such as Loans.
4. Making a professional independent assessment of the internal controls supporting the accounting function of the Body corporate manager.

What a Body Corporate Auditor Doesn’t Do
1. Provide a guarantee to the BC Committee that every item in the financial reports are 100% correct. It’s a selected based testing with an assessment determined based on materiality.
2. Form an opinion on the appropriateness of budgeting decisions as determined by the Committee.
3. Examine every single transaction in the specified period. We are not providing an assurance not that the transactions are perfect but that the financial statements are free from material misstatement.
4. Make any comment to the Committee or lot owners on the performance of the Body Corporate manager or the Committee, or any comment as to the quality of the Body Corporate’s risk management procedures and controls for which they are responsible.

The Body Corporate Audit Process
1. The Body Corporate Manager, on behalf of the Body Corporate Committee prepares the financial reports for the specified period. We note that the financial reports of BC’s are overwhelmingly special purpose financial reports and the financials should be prepared in accordance with the relevant Body corporate legislation and regulations.
2. The Body Corporate auditor, having assessed the internal controls and procedures of the Body Corporate manager, will commence the audit based on a customized audit program. Specific reports and documentation are requested with the audit conducted onsite at the Body corporate managers office or remotely as agreed.
3. The auditor examines the reports with supporting evidence, and make a professional, independent determination of any specific identified risks and make appropriate enquiries. The auditor will investigate, ask questions and seek further clarification.
4. Based on the above, the Body Corporate Auditor determines whether the financial statements provide a true and fair view of the body corporate’s financial position and its compliance with the Body Corporate legislation and relevant regulations.
5. The Body Corporate auditor will then typically issue a stamped set of audited financial statements via the Body Corporate with a signed audit report containing their opinion for distribution to the lot owners and made available at the next AGM.

Conclusion
The critical role that independent audit plays in the good governance of Body corporate in Queensland is acknowledged by the legislators in the prescriptive nature of Section 153 and the language contained within it. Consisting of 8 sub-sections in which the word ‘must’ features more than half a dozen times. The prescriptive nature highlights the importance, placed by the regulators, upon this section of the Act.

Independent audit plays a crucial role in Queensland Body Corporate and the protection of what is for many their most important asset. Transparency should be one of the key goals of financial reporting and to this end, the promotion of audit is not only embedded within the Queensland legislation but also consistent with Best Practice models internationally.

This article was contributed by Joel Russell, Client Director – Kelly + Partners.