At their core, homeowners associations (HOAs) are financial organizations. HOAs collect dues and assessments from members, then manage the funds to provide various services and amenities to residents who live in HOA properties. HOAs are run by an elected board who makes financial decisions on behalf of the members. To help the board make well-informed decisions, it’s important for HOAs to perform a type of financial examination called an audit.
An audit is a thorough, detailed examination of all of the association’s financial accounts and financial documents. Usually performed under the expert guidance of a CPA, an audit cross-checks all of the HOA’s financial accounts with physical documentation. During the audit process, a CPA may also call vendors and debtors to confirm outstanding balances associated with the HOA’s accounts payable and receivable.
In some regions, state law requires HOA audits at least once a year. However, whether or not an audit is legally required, all HOAs need to be audited periodically. Audits ensure that current board members understand the financial decisions made by their predecessors. This provides valuable insight that can help them make better choices for the HOA’s future direction.
As an HOA manager, it’s unlikely that you’ll be directly involved in an association audit for your clients. However, you can assist your clients in preparation for an audit by providing them with information and financial reports. When it comes to HOA management, it’s always better to know as much information as you can about the rules and guidelines that may affect an association.
By understanding why HOAs need to be audited, you’ll be able to offer better service to your HOA management company’s clients. Here’s why HOAs need to be audited.
HOAs need to be audited because the process of auditing reveals valuable information about the association’s financial history, its current financial health, and its prospective financial future.
One of the best reasons to conduct an HOA audit is to help evaluate the budget. An audit provides you and your clients with in-depth details about the HOA’s spending, income, reserve fund, investments, liabilities, outstanding debts, liens, and other financial data. You can help your clients create a better budget for the HOA by reviewing the results of an audit with them.
An audit will show you and your clients where the HOA’s financial patterns are working effectively. In these areas, you can help your clients develop a strategy to continue capitalizing on these budgetary successes. Additionally, an audit will reveal where the budget may be falling short. These are the areas that can be improved upon in the next budget.
HOA board members are often tasked with long term financial planning for the association. It’s unlikely that you’ll be making these big decisions yourself, however, you clients will benefit from your expertise. You may be called upon to assist with long-term financial planning as an outside advisor.
If the HOA has been audited recently, the information provided by the audit can be a powerful tool for future plans. For example, the audit may reveal information about previous construction projects or upgrades to shared community spaces. If the audit determines that a prior construction project went over-budget, you and your clients can learn from this mistake and plan the next project differently.
HOAs also need to be audited to help board members assess the association’s fees. Are member fees covering basic operating costs as well as hitting investment targets for the HOA’s reserve fund? If not, regular monthly dues may need to be raised, or the HOA may need to levy a special assessment.
By examining the financial data presented in an HOA budget, you can assist your clients’ board as they make decisions about changing membership fees. You’ll be able to see in detail how the current fee payments fit into the association’s financial goals.
Finally, HOAs need to perform a regular audit to help prevent fraud and misuse. Although no one likes to think about an HOA board member or employee committing fraud, financial abuse is a common occurrence in many fiscal organizations. As an HOA manager, it’s important for you to monitor your clients’ finances and protect them.
By reviewing the information in a financial audit, you’ll be able to gain a stronger understanding of the HOA’s financial history. You can use this as a baseline to spot discrepancies or unusual patterns in financial transactions. This will enable you to catch fraud or misuse.
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Because of the complex nature of an HOA audit, the process can be time-consuming and expensive. Some associations may wish to skip auditing and pursue alternatives. Although we recommend an annual audit for all HOAs, here are some other options. If your clients ask about audit alternatives, you can offer these methods as a suggestion.
The difference between a financial review versus an audit lies in the amount of assurance provided. In other words, a review is less thorough and less detailed than an audit, so the information presented in a review may not be as accurate. However, reviews can be performed in a shorter period of time and do not need to be conducted with a CPA. As a result, reviews are less expensive than an audit.
A financial compilation is even quicker than a financial review. In a compilation, experts examine previous financial statements instead of performing a detailed examination of accounts and financial assets. Compilations can be a great option for mid-year financial assessments.
If you’re wondering whether an HOA needs to be audited, the answer is yes. As an association manager, you can assist your clients with their financial audits by preparing financial reports in your HOA accounting software. If your accounting software can’t generate custom financial reports automatically, try CINC Systems cloud-based software today. Click here to request a free demo.