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 financial statements of the organization or, in this case, the HOA. Just about every business does an annual audit of its financial statements 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 be focusing on HOA annual audits that are conducted by external auditors. Independent CPAs are the ones conducting these external audits. They will also use independent auditing standards than the one used internally by the HOA. These audits are the ones 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, in order to keep the HOA properties and assets in good order, it is essential for the HOA board to understand its current financial position. There are many tools available that can help the board get a picture of its finances. The homeowner association audit is one such important tool. There’s an argument to be made that it’s also the most complete tool the HOA can have as well.
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 as well. With an audit, the board can support a declaration of its finances.
With a comprehensive HOA audit, the board is getting more than just a complete overview of its current finances. It is also providing prospective home buyers a supporting document that will help lenders come to a decision. Home resale disclosures will also provide an HOA audit as a document as well. Not only are your audits helping residents move in, but they are also helping owners sell their homes as well.
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 financial reports you receive monthly actually reflect the true financial status of your association.
HOW OFTEN SHOULD AN HOA BE AUDITED?
In the case of HOAs, many state laws require a yearly audit. 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 own bylaws as well. If your HOA falls under those cases, then 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 annual 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 financial state of the association. 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.
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.
Before the actual process begins, you will need to determine the objectives of the audit and the timing of the fieldwork. You will also need to set a deadline for the audit report.
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.
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.
Although homeowner 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
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 go into completing it. 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 should allocate money in the budget for an audit, especially if your state laws or governing documents require annual ones.
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.
Though, 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 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 to do one on a regular basis, preferably annually. This way, you can remain financially healthy and deter potential fraud.
DEALING WITH THE AFTERMATH
Now that you know why you need an HOA audit, 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 choose to hire management companies to handle the auditing process.