Association management companies should perform HOA audits at a minimum of every few years, even if their state or the community’s governing documents do not require them. Not every state requires an annual audit; however, beyond community bylaws, there are situations where an audit may be necessary or requested.
Reasons for HOA Audits
When an association management company adds a new HOA to its portfolio, an audit can ensure the company has a fresh start with the community, unencumbered by financial issues, inconsistencies, or misappropriations. An audit can also help the association transition from developer to homeowner or when the HOA is transitioning from self-management to professional management.
Other reasons an association management company may want to have audit performed include:
- Financial confidence — Audits provide homeowners with assurance in the community management company’s financial representation and the board of directors’ internal controls. Audits are the most significant guarantee certified public accountants (CPAs) can give to HOAs regarding their financial statements.
- Board oversight — Regrettably, for a few community associations, board theft and fraud happens. Regularly performed audits provide board member accountability and can stop any illegal activity before it starts.
Three Kinds of Financial Examinations
There are three financial examination types, including HOA audits, that CPAs can perform for a community association:
In a compilation inspection, an outside accountant does little more than gather financial statements.
An independent CPA reviews the HOA’s accounting methods and documents and makes sure they are accepted accounting principles (GAAP)-compliant.
Audits should generally be performed by CPAs who are not associated with the HOA. This financial examination is the most expensive type and can cost a few thousand dollars or more due to the work level that goes into a full audit. There are three steps of a full audit which include:
- Risk assessment — The CPA performs a risk assessment by identifying potential problems with financial statement preparation or whether something has already gone wrong.
- Fieldwork — The CPA examines reserve study reports, invoices, bank statements, and other documents. He or she also looks at the relationships between an HOAs balance sheet and income statement and checks them against the previous year’s.
- Audit report — In this final step, the CPA reports their findings in an audit report. The audit report will give positive assurance the financial books comply with GAAP or whether there were discrepancies.
Supplemental to conventional financial audits, association managers should consider annual audits of other community management procedures. Changing laws may require certain board procedures to be changed to adhere to new requirements. Homes may have new owners, and contact information may be out of date.
By running an annual check, HOA management companies can be confident they have the required procedures and information necessary to stay in compliance and operate as efficiently as possible.
CINC Helps Association Management Streamline HOA Audits
To streamline your audit reports and ensure GAAP-compliance, implement CINC Systems’ multi-faceted accounting software. CINC’s cloud-based community management software leverages automation and integrated banking to help your accounting team produce and maintain accurate financial reports, so you are always ready for an audit. CINC minimizes mistakes and maximizes efficiency.