Your Accountant Wants You to Know About Section 57 of the Condo Act

calculatorCondominium associations with annual revenues exceeding $20,000.00 should take specific note that Section 57(2) of the Michigan Condominium Act provides that an independent certified public accountant must perform an annual review or audit of the association’s financial documents, including its books, records, contracts, and financial statements. Specifically, Section 57 provides as follows:

(1) The books, records, contracts, and financial statements concerning the administration and operation of the condominium project shall be available for examination by any of the co-owners and their mortgagees at convenient times. (You can read more about dealing with record examination requests under this subsection here.)
(2) Except as provided in subsection (3), an association of co-owners with annual revenues greater than $20,000.00 shall on an annual basis have its books, records, and financial statements independently audited or reviewed by a certified public accountant, as defined in section 720 of the occupational code, 1980 PA 299, MCL 339.720. The audit or review shall be performed in accordance with the statements on auditing standards or the statements on standards for accounting and review services, respectively, of the American institute of certified public accountants.
(3) An association of co-owners may opt out of the requirements of subsection (2) on an annual basis by an affirmative vote of a majority of its members by any means permitted under the association’s bylaws.

The audit and review requirements under Section 57(2) only apply to condominium associations with annual revenues of more than $20,000.00. This revenue cap is designed to help alleviate what could be a costly burden of an audit or review for smaller associations. Even if your association’s revenues do not exceed $20,000.00, however, be sure to review your governing documents as there may be similar provisions that still require an audit or review. Conversely, your governing documents may even contain more restrictive provisions than the Section 57(2) requirements.

Under Section 57(3), associations that are subject to the audit and review requirements under Section 57(2) (i.e., those associations with revenues exceeding $20,000.00) may opt out of those requirements on an annual basis if approved by a majority vote of the association’s members. For those associations interested in opting out, note that the opt out must be done prior to the end of the fiscal year and cannot be done retroactively.

Review or Audit?

So, if your association is required to have a review or audit, how do you choose which to have performed? Accountants provide three levels of financial statement services: compilations, reviews, and audits, with compilations being the most basic financial statement service and audits being the most thorough. First, note that compilations are not acceptable under Section 57(2) as the statute explicitly requires either a review or an audit be performed. When deciding whether a review or an audit is necessary for the association, boards of directors may wish to consider the following:

1. Audits are generally more expensive than reviews because they require a higher level of scrutiny and assurance. The board should consider the association’s budget and the cost-effectiveness of each option.
2. An audit provides a higher level of assurance compared to a review. The auditor will express an opinion on the financial statements’ fairness and accuracy. A review, on the other hand, provides limited assurance and is less comprehensive, with the accountant conducting analytical procedures and inquiries. If the board is looking for more confidence in the financial statements, an audit may be preferred.
3. Larger and more complex community associations may benefit more from an audit due to the inherent greater risk of misappropriation that comes with a larger budget. Smaller associations with less complex financial activities might find a review sufficient.
4. If the association has experienced past financial issues or concerns, such as fraud, mismanagement, or significant discrepancies, the board may opt for an audit to provide a higher level of scrutiny and assurance.
5. The board should also consider how often the association undergoes financial examination. If the association typically undergoes a review annually, the board might consider conducting a more thorough audit every few years to ensure greater accountability and transparency.
6. If the association has recently transitioned from a developer-controlled board to an owner-controlled board, an audit may be recommended to confirm whether funds were mismanaged or misappropriated while the developer was in control, and it will also help the association plan for its future budgets and reserve contributions.

Risks of Noncompliance

Associations that are required to perform a review or audit under Section 57(2) that fail to do so without obtaining approval from a majority of its co-owners under Section 57(3) run the risk of being subjected to a co-owner lawsuit under Section 107 of the Michigan Condominium Act, which gives a co-owner the right to “maintain an action against the association of co-owners and its officers and directors to compel these persons to enforce the terms and provisions of the condominium documents.” Being part of such a suit can be costly for an association, as Section 107 further provides that, “the co-owner, if successful, shall recover the costs of the proceeding and reasonable attorney fees, as determined by the court, to the extent that the condominium documents expressly so provide.” Note that condominium Bylaws often explicitly provide that co-owners are not entitled to recover costs or attorneys’ fees. Nevertheless, it is always prudent for a board of directors to avoid this risk by complying with the Section 57 requirements.

Our new condominium association clients are occasionally surprised that they are required to comply with Section 57 of the Michigan Condominium Act. While many others decide to vote every year to opt out of the requirement, boards of directors must make sure to reexamine this issue on an annual basis to determine whether an audit or review is justified. And of course, be sure to discuss the matter with your community association manager and legal counsel as needed.