generally accepted accounting principles GAAP
Question
Is there a Generally Accepted Accounting Principle (GAAP) that mandates audits NOT be performed by INSIDERS?
The books being audited are for a Homeowners Association which is governed by state condominium law. The state condominium law mandates that audits be performed annually ACCORDING TO GAAP. One Homeowner is the Treasurer. They got another homeowner (who is not a CPA and may have little to no financial training) to do an "audit" on the Treasurer's books for the HOA. This would be similar to one employee of a company being called upon to audit the financial work of another employee managing the company's books, or an "internal audit". The company may or may not be called upon to have an external audit, depending on how they are organized as a private or public company. The HOA is not a public company but is governed by state law calling for audits according to GAAP. Isn't there a GAAP rule that requires audits to be performed by disinterested 3rd parties in an "arm's length transaction" so as to avoid insider collusion or dealing? The homeowner doing the "audit" in this situation has an incentive to not cite the Treasurer on any wrongdoing if the wrongdoing did not personally damage the "homeowner auditor". This is because if there was a lawsuit over the damages caused by the Treasurer's mistakes by incompetence, fraud or malfeasance,, there would have to be additional expenses to the Homeowners Association for counsel or even a deductible to be paid to the insurance company for the Officer's Liability Insurance under a claim to protect the HOA from further damages -- all of which the "auditing homeowner" would have to share in to pay for as a fellow homeowner. What does GAAP have to say about insiders performing audits when compliance with state regulations are at issue? Which rule of GAAP would this be? Extra points for reciting Chapter & Verse of the GAAP rule and any links to the specific website of reference. Thank you!
6 months ago - 2 answers
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Audits are performed by CPA who is independent of the entity being audited. What is being done in this case will be of little value and cannot be described as an audit. There is no way a non CPA can attest that your records are in accordance with GAAP. He will not have sufficient knowldge of GAAP to start with. His opinion will be meaningless on these financials. An audit from a very small local CPA would be about $5,000. I am guessing this short cut is being done to save some money. GAAP deals with debits and credits and does not address audits. GAAS are the generally accepted auditing standards. This treasurer is taking on an uncessary risk by not having audit performed. I suggest raising a complaint with state condo board.
by David Z
6 months ago
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Other Answers
No, its the state board of accountancy along with the AICPA (American Institute of Certified Public Accountants) that determines independence guidelines. GAAP is only for accounting rules. Although as a homeowner, if I found out that a fellow homeowner was conducting the audit, i'd want some kind of independent attestation of the audit results. I live in a condo too and eventhough I can audit my condo's books for them at a cheaper rate, they and myself would not agree to it because it also looks bad if the state decides to do a tax return audit.
by Frank112- 6 months ago