A homeowners association (HOA) audit is a thorough, detailed review of the association’s finances. HOA audits are an important tool for ensuring the association’s lasting success. As an HOA manager, it’s unlikely that you’ll be performing audits yourself. However, you will be called upon to assist your clients and advise them during the process of an audit.
For example, HOA managers can help their clients’ associations prepare for an audit by gathering documentation. You can also use association accounting software like CINC Systems to generate electronic financial reports for your clients, which they can then email to a certified public accountant (CPA) or legal tax counsel.
In some cases, homeowners can demand an HOA audit. This type of audit can potentially occur at any time of year. However, whether or not the members of the association have called for an audit, it’s a good idea to perform an HOA audit once a year. When it comes to HOA audits, it’s better to be safe than sorry.
To assist your clients with their association’s finances, here’s what you need to know about HOA audits.
HOA Audits Vs. Financial Reviews
Whether you’re new to HOA management or simply brushing up on the basics, it’s important to learn the difference between an audit and a financial review. Both HOA audits and financial reviews examine the association’s current financial status. Both provide valuable information that can help the association board make better, more informed choices.
However, a financial review is much smaller in scale than an audit. In a financial review, the HOA (or its CPA) will review financial records for basic information, such as monthly income and expenditures. Financial reviews are useful for creating budgets and other short-term financial management.
An HOA audit takes financial reviewing to the next level. Under the guidance of a CPA, the HOA performs an in-depth analysis of its financial profiles. Then, the CPA verifies all the information presented in these reports. For example, he or she may contact debtors and creditors to verify the outstanding amounts of various accounts payable and accounts receivable.
During an audit, the CPA and the association will also cross-check the HOA’s financial reports with its physical records. This means examining meeting minutes, invoices, bills, and general ledgers to ensure that the information in the HOA’s accounts is truly accurate.
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Benefits of an HOA Audit
Because of everything involved in the audit process, HOA audits can be very time-consuming and costly. However, HOA audits are an important “investment” for your clients. In addition to providing the association board with valuable data about the HOA’s financial health, HOA audits can help you and your client catch minor issues before they become big problems. Skipping an audit can end up being a very expensive headache for the HOA.
HOA audits ensure that the association budgets correctly, spends and saves wisely, and helps catch fraud and accounting errors. If your client believes their HOA is immune to financial misplanning or financial fraud, remind them that an ounce of prevention is worth a pound of cure. Even small HOAs can be subject to financial problems.
For example, HOA members may accidentally pay for repairs from the wrong account, or make deposits incorrectly. These mistakes may be innocent and small in scope, but over time they can ruin the financial viability of an HOA. By encouraging your clients to perform regular HOA audits, you’ll help them avoid these problems.
Types of HOA Audits
There are different types of HOA audits, each designed to fit the unique needs of your clients’ associations. If your client works with a CPA, the CPA will be performing a type of audit that falls under Generally Accepted Accounting Procedures (GAAP). GAAP audits are often the most expensive and time-consuming type of HOA audit.
As an alternative to a GAAP audit, you can assist your HOA clients with one of these types of audits:
- An Agreed-Upon Procedures Engagement: Also known as a targeted examination, this type of audit focuses on specific financial areas that are more prone to accounting errors or other issues.
- A Review Audit: A cursory look at financial statements, which ensures that they conform with GAAP procedures for future audits.
- A Compilation Audit: The simplest type of audit, a compilation is essentially a restatement of the HOA’s prior financial statements.
Each type of HOA audit has pros and cons. Depending on the needs of your client and the advice of their CPA, you can help your client choose the best type of audit for each HOA.
State Laws Governing HOA Audits
Some states have specific laws about HOA audits. These laws can require the HOA to perform an audit on a specific timeline, such as once a year, or require the audit to include certain types of financial data. State and local laws can also govern how the HOA disperses audit information to its members.
As you do your homework for your clients and brush up on relevant laws, make sure you understand how the HOA’s local regulations affect auditing and other financial issues. If you have specific concerns, contact a local government representative or an attorney.
Here are some states that have laws about HOA audits:
- California: The decision to audit is up to the board, however, an audit must be performed at least once a year. The final report must be dispersed to members within 120 days of the end of the year.
- Colorado: Although the board also decides when to perform an HOA audit, members in Colorado have the power to demand an audit of the association’s total revenue or expenditures exceeds $250,000.
- Florida: In Florida, auditing takes a petition by 20% of the HOA’s members.
- Texas: Texas law does not require HOAs to perform an annual audit. However, individual HOAs can define their own rules for audits in the association’s governing documents.
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Try CINC Systems for HOA Financing
If you’re getting ready to assist your client with an HOA audit, try CINC Systems. Our cloud-based accounting software for HOAs can help you stay organized and prepare all the financial reports you and your clients will need. For more information, click here to request a free demo.