An effective alternative to community association audits.
I recently wrote an article about community association (including HOAs, condo associations, etc.) financial audits, and received a lot of positive feedback about one of the presented alternatives – agreed-upon procedures engagements. Let’s spend some more time reviewing the value and advantages of this type of audit alternative.
Differences between a financial audit and agreed-upon procedures engagement
Just to recap, a financial audit is a detailed, methodical, and objective examination of accounts and all other items that support an association’s financial statements. A full audit may not always be necessary, and it can be expensive as well as time-consuming for the board and management company.
While an agreed-upon procedures engagement is different than a complete audit, it is essentially a “mini-audit” with specific areas of focus. It is still a very detailed financial review, but is less costly – 30-50% less depending on scope – and can be tailored to meet budget requirements. Agreed-upon procedures engagements work well regardless of whether your community is self-managed or you have a management company.
Focusing your efforts
When considering an agreed-upon procedures engagement, you should consider focusing your efforts on these financial areas:
- Reserve Account. Confirm that the account is adequately funded, and the contributions match requirements outlined in the reserve study.
- Budget. Ensure that there is adequate funding to maintain the quality of the facilities, and that spending is in-line with projections (budget adherence). Document rationale for any variances.
- Cash management. Disbursements (outgoing and funds) and receipts (incoming funds) have adequate documentation to verify the individual transactions.
- Financial oversight. Includes a confirmation of transparency in financial reporting and project bidding.
- Contracts. Ensure that contracts are closed-ended (scope and timeframes), expenses are reasonable for the type of work, and expenses match contractual obligations.
- General financial review. Recommendations based on experience with similar associations.
What if our covenants require an audit?
The covenants of many associations require a regular or annual audit. You may have some discretion on how you interpret this in your covenants, and some associations have revised the definition so that an agreed-upon procedures engagement is acceptable. Given the potential expense and time savings, this is definitely worth a follow-up discussion with your attorney.
Neutrality is critical for association audits and agreed-upon procedures engagements
A CPA is required for any audit or agreed-upon procedures engagement. Choose an independent CPA with a track record of working with homeowner associations and community associations. If you would like to learn more about audits and alternatives, please give us a call.
Neal Bach, CPA