When and why audits are important to any community association.
Now that new HOA and community association boards are in place, I start getting calls this time of year about financial audits. What is a financial audit? Do we need one? What will it cost? This article will answer these questions and present an effective alternative to a full audit.
What is an HOA or community association audit?
A financial audit is a detailed, methodical, and objective examination of accounts and all other items that support an association’s financial statements. The audit covers the financial statements themselves, plus the annual budget, bank accounts, vendor contracts, reserve account, and other transactional records. The process can be time-consuming, but it may help identify potential issues and risks.
When to conduct an association audit
There are several situations where an audit may be required or requested:
- New board of directors or management company. Ensure that the new team or company is starting fresh, without any concerns about prior issues, inconsistencies, or misappropriations.
- Developer or bank turnover. While there aren’t too many developer turnovers any more, this is a good opportunity to make sure there are no unpaid bills or other liabilities.
- Covenant requirement. Many covenants require an annual audit or review. As a board member, it becomes your fiduciary responsibility to comply.
HOA audit costs and alternatives
An HOA or community association should expect to pay about $5,000-6,000 for a full audit. There are some alternatives that may accomplish some of the goals associated with a full audit without the same time and expense requirements. I listed them below, but only recommend the first option.
- Agreed-upon procedures engagement. This is essentially an audit with specific areas of focus, rather than a complete audit. It is still a very detailed look, but is less costly and can be tailored to meet tighter budgets. At a minimum, you should look at cash receipts, cash disbursements, and vendor contracts. The price for this engagement is around $3,000-4,000.
- Review. This is more of a cursory look at the financial statements confirming that they conform to Generally Accepted accounting Principles (GAAP). Since they are limited in scope, financial reviews may cost around $2,500. I don’t often see actionable results that justify even this lower expense.
- Compilation. This is just a basic review of financial statements without expressing any assurances about them. I mentioned this option simply because some companies offer it as an audit alternative. It is not.
During my 15 years of providing accounting, auditing and tax preparation services to homeowner and community associations, when a full audit is not required I typically recommend agreed-upon procedures engagements. It is more cost effective than a full audit, and most associations have some specific areas of concern that can be adequately addressed through this more targeted approach. We do not recommend financial reviews or compilations, as neither does an adequate job of identifying current issues or potential risks.
Neal Bach, CPA