A forensic audit to review the suspected financial mismanagement of a prior manager often results in good money disappearing after bad.
This article explains that (unfortunately) there is often little recourse for suspected mismanagement of funds by a previous strata manager.
Understanding the Limitations of Audits
When owners or councils suspect financial mismanagement by a previous strata manager, the knee-jerk reaction is often to call for a forensic audit. The term itself evokes a sense of thoroughness and precision, but in reality, such audits may not yield the clarity or satisfaction hoped for. It’s important to understand what an audit actually entails before investing time and resources.
An 'audit' is designed to provide an opinion on whether a set of financial statements materially reflects the true financial position of the strata company. This involves sampling documents, verifying bank balances against statements, and conducting a high-level review of income, expenses, and balance sheet items. However, this process is not exhaustive and is not necessarily tailored to uncover detailed irregularities or fraudulent activity. As such, an audit may not provide the peace of mind that owners seek when they have concerns about the financial stewardship of a previous manager.
The Process: Simple Yet Time-Consuming
For those intent on verifying the legitimacy of the prior manager’s financials, the process is fairly straightforward but laborious. It involves comparing bank statements with the financial records to ensure that all payments align with approved expenses. This might mean cross-referencing payments with invoices stored in archives and confirming the legitimacy of every transaction.
However, even with the most meticulous approach, missing or incomplete records are common. In such cases, the lack of documentation could be due to simple neglect or, in more serious instances, mismanagement or fraud. Yet, proving wrongdoing is difficult, particularly when evidence is scarce or the previous manager is no longer active in the industry. In many cases, owners find that the time and effort spent on such investigations far outweighs any potential benefits, especially when there is no clear path for recourse.
Financial Recovery: Unlikely and Costly
Even if discrepancies or shortfalls are identified, the likelihood of recovering lost funds is slim. The legal and logistical hurdles involved in pursuing former managers are significant, particularly if they have since left the industry. Without a clear ability to enforce reputational or legal pressure, any financial recovery becomes a long shot.
Moreover, the cost of engaging professionals to carry out these investigations can quickly escalate. With hourly rates often being $300 plus, owners must weigh the potential benefits against the significant financial outlay required for such a review. Often, after considering the costs and likely outcomes, many councils decide that the potential peace of mind is not worth the substantial investment.
Alternatives to Forensic Audits
Given the limitations of forensic audits, it may be worth considering alternative approaches that are less costly and potentially more effective. For example, a preliminary review, by a qualified accountant or otherwise, could help identify any glaring issues without the need for a full-scale forensic audit. Simply checking more basic elements of financial reports could confirm the cash at bank aligns with bank statements at year end, the closing balance of one year aligns with the opening balance of the next, budgets in the reports align with those sent out the prior year etc could give some base level peace of mind. In addition, owners might focus on improving future financial oversight and internal controls rather than attempting to untangle the complexities of past mismanagement.
Quick Takes:
- Standard audits are not designed to uncover detailed financial irregularities.
- Verifying past financials is labor-intensive and may not yield actionable results.
- The cost of forensic audits often outweighs potential financial recovery.
- Consider less costly alternatives, such as a preliminary review, before committing to a full audit.
If you're a current Strata Manager partner with Ascend, feel free to Contact Us to discuss options in the event a new client requests a forensic audit of their financials.
The above content is of a general nature and should not be relied upon as professional advice. Ascend encourages readers to seek advice from suitably qualified professionals in relation to their specific circumstances and not to rely solely on the information provided above. Please contact our office for more information.
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