Want to send shivers up and down someone’s spine? Just mention the word “audit.” Audits, whether individual, business, or HOA, have always had a negative connotation of showing that we’re doing something wrong. That’s not necessarily the case, and often HOA audits prove exactly the opposite – confirmation of sound financial procedures and good financial health.
In this article, Neal Bach, an Atlanta CPA with more than 15 years of experience supporting HOAs and property management companies with their tax and accounting needs, answers some common questions about HOA audits and audit alternatives.
What is an HOA audit?
Neal Bach: Here’s a quick definition. An audit is the detailed financial examination of an HOA’s financial records, conducted by a CPA. In reality, it’s a little more complicated than that, since there are specific rules and procedures to follow to analyze core financial practices and procedures.
What does an HOA audit cover?
NB: An audit covers financial statements as well as supporting information, including the HOA budget, bank accounts, vendor contracts, the reserve account, and other transactional records. The audit output is the CPA’s opinion letter certifying that the financial statements are correct, while highlighting any concerns about financial procedures.
Are there alternatives to conducting a full audit?
NB: Yes, and they can save both time and money. I normally recommend an Agreed-Upon Procedures Engagement where possible. It’s sort of a “mini audit” targeting the areas where most financial issues occur. The focus is up to you and your CPA, but you may want to look at items like cash receipts and disbursements, vendor contracts, reserves, and insurance coverage.
There are a couple of other audit alternatives, but I rarely recommend them. Compilations are just a presentation of the financial statements, with no assurances that they are error-free. Reviews confirm that financial statements are accurate as presented, but often won’t go into enough detail to identify financial issues like fraud.
Why should an HOA conduct an audit, or audit alternative?
NB: Many association covenants or bylaws require some sort of regular financial review, which is why I see more and more boards and property managers asking for audits and audit alternatives. It’s also a smart business decision that can build trust between residents, boards, and property managers.
So audits don’t always have to be bad news?
NB: An audit or audit alternative normally proves that the HOA and property management company are employing sound financial procedures, and the community is in good financial health. When issues are uncovered, they can often be easily addressed. If there’s a major issue like fraud, an audit may be the only way to identify what’s going on before bank accounts are wiped out.
Will it take a lot of time?
NB: Only if you’re the CPA! Thanks to today’s HOA technologies like CINC and VMS, most HOAs can just provide the CPA with online access to the financial data. The CPA will do most of the work, and follow up with the board or property manager with questions.
What types of issues are typically identified?
NB: Here are a few general audit issues that we see from time to time.
- Bank balances don’t match financial statements – normally caused by bank reconciliation errors that can be fixed.
- Misstated financial information – the financial statements report more or less money than is actually available. The CPA will determine why.
- Underfunded reserves – not enough money available to cover major future community maintenance projects.
- Insufficient insurance coverage – includes potential holes in coverage, like cyber liability, or underfunded liability coverage for board members.
What’s the worst issue you’ve ever uncovered?
NB: A property manager stole over $200,000 from a community. The property manager was fabricating the financial statements while taking money from the HOA’s bank accounts. The crime was uncovered during a review of the bank reconciliation, which didn’t match the financial statements. Fortunately, the HOA’s insurance covered most of the loss.
How much do these financial procedures cost?
NB: Full financial audits, because of all the rules and requirements, can be pretty expensive. $8,000+ is pretty typical. Agreed-Upon Procedures Engagements are more flexible and are about half the cost of audits. Compilations and reviews are often less money, but why pay for something that has limited, if any, impact?
When should we conduct an HOA audit?
NB: When your covenants tell you to do so, or every 2 years. Many HOAs also request audits or audit alternatives during developer turnover, when changing property management companies, or during major board member changes.