Four real examples of what an audit or review can uncover.
Last year I wrote an article for CAI’s Georgia Commons magazine about community association (HOAs, condo associations, etc.) financial audits. The article discussed some lower cost alternatives such as agreed-upon procedures engagements, and reviewed some general risks and issues that may be identified during an audit. Let’s get a little more specific here.
The goal of any engagement is to measure the financial health of your association by testing your financial procedures and controls. Here are four potential issues that an audit or other engagement will help uncover:
- Contract fees don’t match the contract
Fees and fee structures change, and are often agreed upon verbally or by email. The Board or vendor needs to document that information, and contracts should be kept current. We often see documentation that the management company or vendor attempted the update, but the board didn’t follow up. It’s best to update your contracts at least every 2-3 years, and ensure that all fees are defined and documented (such as who keeps late fees).
- Personal expenses charged to the association
We’ve seen a variety of personal expenses charged to the association budget, including cell phones, gas, travel, meals, home repairs, and more. We’re supposed to be volunteers! If you are going to compensate board members or others for these expenses, document specific guidelines and disclose them to the community. Try to maintain all committee funds in the main association accounts. Maintain tight control over any petty cash accounts and debit cards. The cash is too hard to manage without documentation..
- Conflicts of interests, or questionable business relationships
While no landscaping vendor would dare list “mow the president’s yard” in the contract, the contract bid process, scope, and cost may raise a red flag that requires further investigation. We can help uncover any impropriety, or at least use our experience to help you find a more cost-effective solution. All business relationships must be fully disclosed during the bidding process, so the community knows, for example, that the board president owns part of the painting company. Hiding this information puts the whole board at risk.
- Missing or incomplete records
Proper record management is critical to the financial success of a community association. It provides an audit trail, but also helps future boards understand how and why earlier decisions were made. Keep expense, deposit, and other financial records safe and organized.
Can you afford NOT to audit?
As I mentioned in the other article, covenants often require some sort of annual review, and it also makes sense to review your association’s financial health during a management company, developer, or board turnover. For established communities, consider conducting a full audit every 2-3 years, with an agreed-upon procedures review (a mini audit) every year.
A CPA is required for any audit or agreed-upon procedures engagement. Make sure you choose an independent CPA with HOA and community association experience. If you would like to learn more about audits (or better engagement alternatives) for your association, please give Bach, James, Mansour & Company a call.
Neal Bach, CPA