How Important Is An HOA Audit?

An HOA audit is just about as important to an HOA as annual health checkups are to you. These audits ensure the financial health of the association. A complete audit of HOA books, however, can be a costly activity.

What Is an HOA Audit?

An audit is a complete study of the organization’s financial statements—in this case, the HOA’s. Just about every business performs an annual audit to comply with various requirements. Audits are complete, objective, and impartial evaluations of the organization’s finances.

Financial audits can also be done internally. These internal audits are extremely useful for improving internal HOA financial management. Thus, they are usually given directly to the board of directors for review.

For the purposes of our discussion, we’ll focus on HOA annual audits conducted by external auditors. Independent CPAs conduct these external audits. They will also use independent auditing standards rather than the ones used internally by the HOA. These audits are for complying with state laws or the association’s own bylaws.

The Importance of an HOA Annual Audit

The health of your association’s finances is the health of your HOA as a whole. Your HOA’s financial situation basically decides the extent of the HOA board’s ability to maintain the community. If your HOA is in bad shape, financially speaking, then the board is in trouble, period. Financial problems will thoroughly cripple an HOA board’s capability to maintain and improve property values.

Thus, to keep the HOA properties and assets in good order, the HOA board must understand its current financial position. Many tools are available to help the board get a picture of its finances. The homeowner association audit is one such important tool. It’s also an argument that it’s the most complete tool the HOA can have.

While financial reports and regular financial reviews are also highly useful tools, the HOA audit is more than just a report. It’s also an authoritative document. With an audit, the board can support a declaration of its finances.

With a comprehensive HOA audit, the board gets more than just a complete overview of its current finances. It is also providing prospective home buyers with a supporting document that will help lenders make a decision. Home resale disclosures will also include an HOA audit. Not only are your audits helping residents move in, but they are also helping owners sell their homes.

Furthermore, as a board member, you have a fiduciary obligation to understand the financial condition of your association. Monthly financial reports can only cover so much. Thus, only an HOA annual audit can certify that the monthly financial reports you receive actually reflect the true financial status of your association.

How Often Should an HOA Be Audited?

Many state laws require yearly audits of HOAs. For instance, Florida Statute 720.303(7) requires HOAs with total revenue of $500,000 or more to prepare audited financial statements.

Many associations also include an HOA annual audit in their bylaws. If your HOA falls into one of those cases, it will need an audit every year for compliance purposes.

Here’s when you should go through an audit:

1. When Bylaws Require an HOA Annual Audit

Some states require HOA audits, but there are also some that don’t. In many cases, the association bylaws will require an HOA audit anyway, even if state law does not specify HOA audit requirements. Since it’s the responsibility of the HOA board to follow their own covenants, then an HOA annual audit is mandatory.

2. To Regulate the Board

An HOA yearly audit goes a long way to keep the HOA board honest. Theft, fraud, or simple fund mismanagement can happen to any HOA.

A regular audit helps to keep board members accountable. This especially true for the HOA manager and the treasurer, who usually have direct access to HOA funds. It also helps assure HOA members that there’s internal control in place to keep the board in line.

3. When Transitioning to New HOA Management

An HOA annual audit is an authoritative source of information on the association’s financial state. Thus, it’s an extremely useful document for the new HOA management to study. If you have a new board of directors, it also helps to reassure them that the association has no lingering financial issues.

Who Should Conduct HOA Audits?

A Certified Public Accountant (CPA) should conduct your association audits. CPAs have the necessary expertise and experience required to perform comprehensive audits of your finances.

However, you should keep in mind that there is no nationwide licensing for CPAs. If an accountant received their license to practice in New York through the NYC Board of Accountancy, then they may only perform audits in New York.

When choosing which CPA or accounting firm to hire, look for one that has experience handling homeowners or condo associations. They should know how to perform a proper audit for HOAs and must have been working for at least 5 years. This way, you can be sure that the person you hire to conduct the audit will do it right and thoroughly.

HOA Audit Guide: Understanding the Process

Homeowners and condo association audits take time to accomplish. But, even though you won’t personally be doing it, it still helps to know how to conduct an HOA audit.

1. Outline the HOA Audit’s Objectives

Before the actual process begins, you will need to determine the audit’s objectives. These should include the audit’s purpose of providing direction to the HOA auditor or CPA. They should also include the timing of the fieldwork and set a deadline for the audit report.

2. Collecting Accounting Information

Then, with the help of your HOA board, a CPA will collect all necessary accounting information. The CPA will review your financial statements, annual IRS tax returns, annual budgets, and even board meeting minutes. An examination of other documents, such as vendor contracts and payroll records, will also take place.

Although homeowners association audit guides can vary, here’s a rough HOA audit checklist consisting of the documents your CPA will need to check:

• Financial statements (balance sheet, income statement, etc.)
• Annual IRS tax returns
• Annual budgets
• Board meeting minutes
• Insurance policies
• Bank statements
• Bank reconciliations
• Paid invoices
• Vendor contracts
• Investment information
• Payroll records
• Assessments receivables
• 1099s for HOA contractors
• Signed contracts and leases
• Proof of ownership
• Reserve schedules

3. Receiving Audit Report

After a thorough evaluation of all documents, the CPA will then send you an audit report. This report will include the CPA’s findings, such as any discrepancies in your document and whether or not your HOA is compliant with GAAP.

Common Issues Audits Uncover

Whether committed due to oversight or with ill intentions, an audit can shed light on many issues you may not be aware of. Some of the most common ones include the following:

• Inappropriate petty cash use
• Overbudgeting contracts
• Budgeting for out-of-date contracts
• Inadequate insurance coverage
• Fraud, theft, or embezzlement

How Much Does an Audit Cost?

Audits don’t come cheap, which isn’t much of a surprise considering all the time and work that goes into completing them. But what is the cost of an HOA audit anyway? Full audits are quite expensive, running anywhere from $4,000 to $6,000. For this reason, your HOA board or HOA audit committee should allocate money in the budget for an audit, especially if your state laws or governing documents require annual ones.

HOA Audit Alternatives

A homeowners association has other options when it comes to accounting checks. These alternatives are usually less expensive, though they are also less comprehensive than a full audit.

• Review. A financial review only verifies whether or not an association’s records comply with GAAP. Reviews are a reasonable alternative for internal management, but they don’t give you a full picture of your current financial state.
• Compilation. As its name suggests, a financial compilation only summarizes an association’s financial statements. No analysis or tests are performed.
• Agreed-Upon Procedures Engagement. This procedure does not analyze all of an association’s financial activities, only focusing on areas that are susceptible to error.

What If Homeowners Demand an Audit?

When homeowners suspect the HOA of fraud, they may request the board to perform a full audit of the association’s finances. This can put the board in a tough spot, especially if your state laws or governing documents are mum on the issue. After all, audits cost money.

If the members of your association demand an audit, then it is a good idea to comply. Doing so will help you maintain their trust in the association and the board. Since audits help uncover any financial wrongdoings, performing one is also within the community’s best interest.

Even if audits aren’t mandatory in your state or HOA, it’s still recommended that you conduct one regularly, preferably annually. This will help you remain financially healthy and deter potential fraud.

Dealing With the Aftermath

Now that you know why you need HOA audits, take the association’s financial pulse. Whether the results are good or disheartening, consult with the professionals and decide what needs to be done to establish and maintain a healthy financial posture.

Many homeowners associations hire management companies to handle the auditing process. If you wish to do the same, use our online directory to find the best HOA management company in your area.

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• An HOA Accounting Guide For HOA Board Members
• A Risk Management For HOA Guide
• Should Homeowners Contribute to HOA Reserves? Why Or Why Not?