Biscayne Beach condominium in Downtown Miami's East Edgewater neighborhood

MIAMI—If audits are so beneficial, why do so many real estate joint ventures skip them? And what kind of costly mistakes could developers expect to avoid?

GlobeSt.com caught up with Steve Klein, a partner at Miami-based accounting firm Gerson Preston, to get his insights on how audits have saved developers significant dollars in part two of this exclusive interview. You can still read part one: Are You Skipping This Critical Development Step?

GlobeSt.com: If audits are so beneficial, why do so many real estate joint ventures skip regular audits?

Klein: There is an old saying that one can be penny wise, but pound foolish. Annual audits are not always required and therefore many developers believe they are not necessary and view it as an additional expense in cost and time. While the cost savings may be real when there are no required adjustments and the project is proceeding as budgeted and scheduled, the real value occurs when there are errors or other areas that need to be communicated do occur.

However, the viewpoint that an audit is not necessary is a mistake, especially for small to mid-size developers who are experiencing rapid growth. In the fast-paced environment of real estate development, developers can easily lose their discipline. Regular audits insure a developer gets it right in the first place and not wait years before identifying a problem where outside third parties discover the problem and thereby incur significant penalties and worse.

Not performing any audit can often be similar to an ostrich hiding its head in the sand, if nothing happens it is ok, but if actions are required but not taken, the entity runs the risk of lost opportunities and potential issues with lenders and investors, the lifeblood of a developer.

GlobeSt.com: What are some roadblocks or red flags you have identified as a result of the audit process and how did it help prevent the client from making a major mistake?

Klein: Audits provide an opportunity to gain an understanding of the entity at the project level and at the organizational level. A good auditor evaluates the organizational structure. In a market like Miami where foreign investors are frequently involved, the structure may have profound tax consequences for the investors.

When an improper, or tax inefficient structure is identified, we work with all the parties involved to ensure each and all can take the necessary steps to improve or correct the structure to avoid unnecessary penalties and taxes and to help safeguard the financial health of the joint venture. A timely audit at the early stages of the venture may allow time for elections to be made and oversights corrected before reporting and election deadlines have passed.

GlobeSt.com: Is there anything else developers should know about the auditing process during a joint-venture?

Klein: Yes, audits by their very nature are critical, this may cause some discomfort to certain members of the finance and accounting team because their work is being looked at by those capable of understanding and evaluating the accounting. This discomfort is more than offset by the corrections made, if necessary, and the auditor's opinion that the financial statements to be issued are fairly presented.

To sum it up, the financial discipline an audit regime provides, gives important assurance to the developer, its lenders and investors that the financial affairs of the developer are being handled responsibly and with transparency. This is critical to maintaining a continued flow of financing and capital investment in current and future projects in a tax and financially efficient manner.

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