An effective audit alternative for community associations.
Audits, reviews, and compilations are the most recognized types of HOA or community association financial engagements, but there is a great audit alternative that you should consider, called an Agreed-Upon Procedures engagement (AUP). These financial engagements are typically as (or more) effective than official financial audits, but less expensive. Here is a little more information about AUPs, and why they are most likely a smart choice for your community – even if there’s no covenant requirement.
Understanding traditional financial audits
Traditional audit engagements are generally geared toward larger corporations, so they may not be the best fit for smaller businesses like HOAs or community associations. Here’s why:
- The CPAs conducting these audits must follow a long list of steps that aren’t required in other types of engagements.
- The audit deliverable is a written opinion about whether the financial statements have been properly prepared in accordance with US Generally Accepted Accounting Principles (GAAP). The opinion may not help identify or fix issues.
- An audit covers a single year of financial statements, so “auditing” two years of financials requires two separate audits, and double the cost.
For these reasons and a few more, true financial audits are expensive, and may fail to uncover certain types of issues common to community associations.
Agreed-Upon Procedures engagements can be a viable (and lower cost) audit alternative
We had not conducted an Agreed-Upon Procedures engagement until we started working with community associations 15+ years ago. Now this is our go-to engagement, and we feel that this approach is a much better fit. Here’s why:
- AUPs are more flexible, and can be targeted to financial areas that are more prone to issues, or other non-financial areas not normally covered by audits.
- We meet with the board (often facilitated by the property manager) to discuss each community’s needs, make recommendations for areas to cover, and then customize the engagement.
- The deliverable is a report, rather than the opinion mentioned above. Where possible, we include recommendations for correcting current and potential issues.
- AUPs cost less – often 30-50% less than audits.
Targeting the Agreed-Upon Procedures engagement
An AUP can cover a variety of financial and non-financial areas, but we normally try to focus on the areas with the highest likelihood of error or issue. Here are a few examples:
- Cash receipts. Track examples through the system, from initial assessment through bank deposit and general ledger entry.
- Cash disbursements. View a sample of checks, following the payment process from original invoice through approval, payment, and general ledger entry.
- Confirm that contracts are signed and current, and payments match contract amounts.
- Insurance. Review commercial, directors and officers (D&O), and cyber policies to identify potential concerns that may require the assistance of an insurance expert.
- Reserves. Confirm that the study is accurate (as written), current, and fully funded to meet objectives.
Won’t this take a lot of time?
AUPs will take your CPA a lot of time, but, thanks to modern HOA technologies like CINC and VMS, board and property manager involvement should be minimal. We can get the information we need directly from the property management systems, and then follow up to ask questions or get clarification.
Most of the time, the AUP will simply confirm a community association’s sound financial procedures. If there are issues uncovered, they can usually be addressed with minor corrections and process adjustments. Occasionally an AUP will uncover a major issue, but that’s a good topic for another article!
Now that you know more about Agreed-Upon Procedures engagements, hopefully you agree that, where applicable, you get a lot more bang for your buck with an AUP. Unless your covenants dictate otherwise, we recommend commissioning an AUP about every 2 years, or during major community changes like developer departure, new property management company, or major board turnover. Please share the results, as it gives everyone a level of comfort that financial systems are working correctly and the community is being well-managed!
Neal Bach, CPA