An HOA audit is an instrument that can help you measure the financial health of your association. Unfortunately, not all associations take audits seriously — and therein lies the problem.
What Is the Purpose of an HOA Audit?
A homeowners association audit is a comprehensive inspection of an HOA’s financial accounts and reports conducted by a third-party professional. The goal of an audit is to objectively evaluate the association’s finances and assess its financial health. An audit is necessary because it provides assurance that an HOA’s financial statements and reports are complete and accurate.
When an HOA skips an audit, it runs the risk of financial mismanagement. Everything is connected to the audit — from budgeting and spending to accounting and fraud prevention. An audit can also identify minor issues before they worsen. Thus, it is important to include it in your HOA annual checklist.
HOA Audits vs Financial Review: What’s the Difference?
While they may sound like they offer the same things, a financial review and an audit are two different things. A financial review examines the financial records of an association and provides a report that the board can use to make short-term financial decisions.
In comparison, an audit is an extensive inspection of the association’s finances. It involves an in-depth analysis of the financial records, reports, and statements of the HOA, making sure to verify them for accuracy and completeness.
Instead of just examining documents at the surface level, a Certified Public Accountant (CPA) will contact creditors and debtors to confirm the association’s payables and receivables. The CPA will also compare the association’s financial reports with all of its records, including invoices, ledgers, and receipts.
Audits are comprehensive, so associations should prepare the following records and documents for the CPA to review:
- Financial reports and statements (including the balance sheet, the income statement, the general ledger, etc.)
- Operating budgets
- Invoices and bills
- Bank statements and records
- Reserves and reserve schedule
- Minutes of board meetings
- Engineering studies
- Insurance policies
Due to the nature of audits, they are understandably more expensive than a financial review. However, compiling and organizing your documents ahead of the audit itself can minimize costs. Additionally, it is a good idea that board members make themselves available when an audit is taking place. This is so any questions or concerns that the CPA has can be addressed immediately.
HOA Audit Requirements
Do all homeowners associations require audits? How often should an HOA be audited? These are some of the most common questions people ask when it comes to HOA audits. The answer, though, is not so universal.
Some states have laws that require HOAs and condominiums to perform audits. Others only require a financial review. For instance, California Civil Code § 5305 stipulates that an association shall prepare a review of the financial statements according to the Generally Accepted Accounting Principles (GAAP) for any fiscal year where the HOA’s gross income is over $75,000. The law also states that a licensee of the California Board of Accountancy must conduct it.
Apart from state law, HOA boards should also refer to their governing documents. The bylaws or CC&Rs will likely contain the audit requirements that the HOA must follow. This includes what kind of examination is necessary (financial review or audit) and the frequency of the examination.
Even if no such requirement exists for your association, it is best to have an audit performed at least once every year. An HOA annual audit can ensure the health and accuracy of your finances.
Should You Get an HOA Financial Audit?
When the law or your governing documents don’t require an audit, it is easy to just dismiss it. But, there are plenty of other reasons to do an audit.
1. Keep Large Assets in Check
Whether you have a large HOA or a small one, an audit can help you keep your finances in order. But, given the cost of an audit, smaller associations may not be able to justify the expense every year. In that case, a small community with fewer assets may only need to perform an audit every few years, opting for a financial review annually instead.
On the other hand, larger communities typically have more assets to manage. More assets mean more room for accounting errors. Thus, for such associations, an annual audit is likely the wiser decision.
2. Promote Transparency
Whether it’s in a corporate setting or an HOA setting, transparency is absolutely essential. After all, homeowners have a right to know where their fees are going. Audits can help promote transparency in the association. It assures homeowners that the HOA is spending money wisely and that there are no discrepancies in its financial operations. Additionally, in many cases, homeowners can call for an audit to take place.
3. Facilitate a Smooth Transition
If an HOA is switching from one management company to another, an audit can help with the transition. New management can get a feel of the association’s current financial standing as well as how the previous company did things. The results of the audit can also inform the plans and decisions of the new company in charge.
How Much Does an HOA Audit Cost?
On average, audits can cost anywhere between $4,000 to $6,000. Given the complexity of a financial audit, though, such a price is understandable. Audits are time-consuming and labor-intensive, but their results are well worth the investment.
Alternatively, for associations that only need to conduct financial reviews, the cost expectation is lower. On average, a financial review can cost somewhere between $1,500 to $2,000.
Financial audits and reviews don’t come cheap, but they are often necessary. As such, associations should budget for them early in the year to make sure it has the means to meet the requirement.
Beneficial for All Parties Involved
Clearly, an HOA audit poses several benefits not only for the association itself but also for the members living in the community. With an audit, members are made aware of the association’s financial health. This not only gives them assurance but also ensures transparency, thereby strengthening the trust between the homeowners and the board. On the side of management, an audit will help board members make well-informed and smarter financial decisions.
To make sure you have a smooth audit process, you need to prepare all of your records and documents ahead of time. Keep them all in one place with the help of Condo Manager. Call us today at (800) 626-1267 or get in touch with us online for more information.
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