HOA audit time is always a busy time for associations. At the end of the year, HOA board members have to start considering whether they need to get a financial audit started. Usually, it is a toss-up between getting a financial review vs audit for HOA books. For some HOAs, there is a need to get both done for the. What about your community association, should your homeowners association audit now? Should you hire for a third-party audit, instead of doing everything yourself?
What Is a Financial Audit?
A financial audit is a study of an association’s financial reports, done in a way that it results in an independent and objective evaluation of the financial reporting process used. Financial audits are important for giving managers and regulators the assurance that your financial statements are as accurate and as complete as they can reasonably be.
Many state laws require HOAs to do annual audits. Even in states where a yearly audit is not required, many associations plan for an annual audit anyway. It’s just great financial sense to have a financial audit prepared at least once a year.
Should Your HOA Have an Audit?
The needs of each homeowner’s association vary. There are communities in certain states that require an audit every year. But for those who are not mandated by the law, how can you tell if you need one? It’s not cheap, after all.
1. State and HOA Bylaws May Require It
Before getting an audit, the HOA board can first refer to the association’s bylaws and check which one is required. Then once the board has decided between doing a review or an audit, members should then plan for when it needs to be done. The minimum requirement in most association bylaws is a yearly financial review.
2. To Manage A Large Number of Assets
The next thing to consider is the size of the community. Larger communities are better off getting both a financial audit and review. Meanwhile, smaller associations will most likely have fewer assets, so an audit may not be needed most of the time.
3. To Be More Transparent To HOA Members
Apart from the bylaws and size of the community, getting an audit can be under the HOA board’s or the homeowner’s discretion. For instance, if anyone feels like the funds are mismanaged and mishandled, then homeowners can urge for a financial audit.
4. Preparing Successors
A change in the HOA management can also be a precursor to getting an audit done. The new manager or management company can have a good idea of the previous handling of finances, current inventory of assets, and the current financial situation of the community association.
This will help the new HOA manager make plans and decisions based on the results of the audit. At the same time, if there are any mishandling of finances or inaccuracies in the reports, this is a good time to learn about them before the management changes hands.
As you can see, a financial audit is a lengthy and thorough analysis. It is beneficial in assessing the possible issues and risks at present or in the future so that the HOA can prepare accordingly.
How Much Is the Cost of an HOA Audit?
What is the cost of an HOA audit? With the amount of work needed for a full financial audit, HOAs should prepare at least $4000 to $6000 for getting it done. Audits are costly, and in some states, these costs are unavoidable. Whether it’s the state regulations or your HOA bylaws that require it, it’s best to budget for the cost of the audit early on. It should be one of the priorities when the HOA board starts planning a budget.
Financial Review vs HOA Audit
These two sound similar to one another, but they’re very different tools. An HOA financial review is a review of the financial records or reports of the HOA. The HOA will seek the help of a certified public accountant (CPA) to do the checking and make sure all records are accurate.
The financial audit requires more work from the CPA to analyze the HOA’s current financial situation. It’s not just about checking the reports, but the CPA has to verify all the information on those reports. This includes calling debtors to see how much people owe the community association. The CPA will also call creditors to confirm how much the association owes.
What Do You Need to Prepare for an HOA Audit?
Ideally, an independent CPA goes through the documents that an HOA presents. These documents will undergo a detailed and rigorous inspection, so they need to be in order.
The CPA not only goes through contracts, for example. They will go through the detailed minutes of the meeting between the HOA and a contractor to make sure all the arrangements are in order.
To help minimize the cost of a third-party audit, it helps to be prepared well ahead of time. The HOA board should make sure that their documents are compiled and well organized. They should also be available in time for the CPA to work with them.
Here’s a quick breakdown of what a CPA checks in the auditing process:
- Bank statements (including deposit slips, canceled checks, etc.)
- Invoices
- Board meeting minutes
- Major contracts
- Investments
- Insurance coverage
- Budget (current and next year)
- Receivables
- Reserve schedule
- 1099s
- Engineering studies
Aim for Financial Stability and Transparency
Getting an audit is for the benefit of the HOA board and homeowners. The community as a whole becomes more aware of the financial situation of their association. This will promote financial transparency and prevent problems between the homeowners and the management. The financial audit will show everyone the association’s financial health. It also helps the HOA to better prepare and make necessary adjustments for the next financial year, as well.
An Expert Financial Partner Can Help You Manage Your HOA Audits
If you’re unsure what your HOA needs, it is best to talk to a professional to make sure you’re spending your money right. If you’ve been having trouble with your financial documents and need assistance in making sure the reports are accurate, an expert solutions provider can help you with financial management. Give us a call.
RELATED ARTICLES:
- How Much Does An HOA Audit Cost?
- What Are The Standard Financial Statements For An HOA?
- HOA Financial Reports: What Every HOA Board Member Should Know