As Miami’s real estate market shows signs of cooling, developers of joint-venture projects already underway may look for ways to speed up delivery and save dollars. While eschewing regular audits may seem like a logical step, not performing them could threaten not only the success of a venture but also the future of all those involved in it. If errors are left uncorrected or required actions remain undone, the development team runs the risk of lost opportunities as well as potential issues with lenders and investors—the lifeblood of a development. Basically, an audit is a critical evaluation of the recorded financial information in a venture. Conducting regular audits promotes transparency. It allows the principals to determine whether any modifications to a project’s accounting and reporting procedures are needed. It can save a project’s developers, lenders and investors from ugly surprises and embarrassment down the road. It gives all parties involved the comfort of knowing that the assimilation and reporting of vital financials is off to a good start—and with reliable oversight and reporting, they can continue to identify errors and potential problems on a timely basis.
So why do some developers resist regular audits at critical points in the development of their projects?
Many feel that audits that are not actually required by law are a waste of time and money. To quote an old saying, that’s being penny wise and pound foolish. It’s true that if auditors find the books are in order and no adjustments are required, their work may seem like an unnecessary expense. But in today’s fast-pasted real-estate development environment, it’s easy for a mistake to go unnoticed. Regular audits ensure that, months or years, later little oversights don’t surface as major issues incurring significant penalties. It’s always better to be sure that any errors or irregularities are rooted out before they have a chance to spread.
Nobody likes to invite criticism. It’s not pleasant for finance and accounting teams to have auditors pore over their work in search of mistakes. But that discomfort will be more than offset by the opportunity to make any necessary corrections in a timely manner or by the auditors’ opinion that their financial statements are in order.
The advantages of regular audits far outweigh these objections. For example, an audit of a venture in its early stages can allow time for oversights to be corrected or an election made before reporting and election deadlines have passed.
A good audit not only covers the basics such as a joint venture’s cash flows, debt and equity structures, budgeting, tax-planning opportunities and the like. It also brings to light any accounting disagreements or potential weaknesses in internal controls. And it encourages a better understanding of a venture at both the project level and the organizational level.
In fact, an audit that includes an evaluation of a venture’s organizational structure is crucial in Miami’s multicultural market, since an improper or inefficient tax structure may have profound consequences for foreign investors. Auditors can work with all parties to ensure that all necessary steps are taken to avoid unnecessary penalties and taxes. They can protect the financial health of a joint venture.
Audited financial statements are often required by traditional lenders and other funding sources. Such statements testify to the credibility of a joint venture.
In addition, audited financial statements used in conjunction with waterfall or other distribution criteria eliminate the need for claw-backs due to reporting or distribution errors, which are not only embarrassing but can inflict serious damage to the reputation, credibility and livelihood of a project’s principals.
The financial discipline an audit regime provides gives important assurance to a developer as well as the project’s lenders and investors that the financial affairs of the venture are being handled correctly and transparently. This is critical to maintaining a continued flow of financing and capital investment in current and future projects in a tax-efficient, financially responsible manner.
The bottom line is when under taking a joint-venture project, developers need to be sure to conduct audits regularly.
Steve Klein is managing corporate and real estate partner at Gerson Preston accounting firm in Miami.