If you’re part of an HOA, whether you’re a board member or homeowner, you know how important the community’s financial health is. Regular audits help ensure financial accuracy and transparency within an HOA. Today, we’ll review what an audit is, why they’re important, and more about HOA audits.
Contents of This Article:
- What Is an HOA Audit?
- Importance of Regular HOA Audits
- When Do You Need an HOA Audit
- HOA Audit Checklist
- What Are Auditors Looking For?
- Ensure Compliance With HOA Management
What Is an HOA Audit?
An HOA (homeowner’s association) audit is a comprehensive study of an HOA’s financial records. An independent CPA (certified public accountant) typically conducts an HOA audit. However, internal audits can also be conducted by the board or HOA managers in Philadelphia. Either way, during a professional audit, they look to see that the association’s financial statements are accurate and comply with accounting standards and regulations.
A typical HOA audit involves:
- A financial statement review
- Examining the accuracy of balance sheets
- Looking at income statements
- Evaluating cash flow statements
Additionally, it will examine the effectiveness of procedures in place to manage finances and prevent fraud. Finally, they’ll look to see that all expenses and sources of income are correctly documented.
Importance of Regular HOA Audits
Almost every business does an annual audit of its financial statements to ensure they comply with various requirements, and it’s no different for HOAs. That said, the financial health of your HOA directly correlates with the overall health of your HOA. If your HOA is doing poorly financially, you may find that it’s harder to maintain and improve property values.
As such, to keep HOA properties and assets in top-notch shape, the board must understand its financial position. While several tools can help the board understand its finances, a professional audit is among the most important.
Some of the most important reasons for regular HOA audits include the following.
- Ensures Financial Accuracy- Regular audits ensure all transactions are recorded correctly to prevent errors and reduce the chance of mismanagement or fraud.
- Builds Trust With Homeowners- Homeowners are more likely to trust HOAs that undergo regular audits. After all, transparency in financial matters is important to most community members.
- Identifies Areas for Improvement- Audits provide a detailed review of an HOA’s financial processes and can highlight areas for improvement.
- Ensures Compliance- Compliance with state laws, governing documents, and accounting standards is crucial. Regular HOA audits help ensure the association meets these requirements.
- Prevents Fraud- Audits can help detect signs of fraud or financial mismanagement, allowing the HOA board to address any issues before they escalate.
When Do You Need an HOA Audit
Many HOAs require at least an annual audit. However, aside from a required annual audit, there may be other times when one is necessary. Let’s go over a few scenarios where another HOA audit may be required.
When Bylaws Require One
Whether or not your state requires audits, most HOA bylaws include the need for regular audits to ensure financial transparency and accountability if something is a bit off. So, if your bylaws require an audit, even if your state does not, it’s crucial to comply with the requirement.
To Regulate the HOA Board
HOA audits go a long way toward keeping the board honest. Unfortunately, theft, fraud, or mismanagement can happen to any HOA board. That said, a regular audit can help keep board members accountable and assure community members that measures are in place to keep the board in line.
When Transitioning to New Management
Transitioning to a new HOA management team is a critical time for an HOA. As such, an audit during this time ensures that all financial records are accurate and up-to-date. This gives the new management team a clear picture of the HOA’s financial health, preventing any misunderstandings.
HOA Audit Checklist
HOA audits take quite a while to process. That said, although you likely won’t be the one doing it, it’s important to know the process and what documents you’ll need to provide.
With the help of the HOA board, a CPA collects all the necessary accounting information. Then, they review the documents and send you an audit report. Their report will include their findings and whether or not your HOA has any financial discrepancies.
While every audit has different guidelines, here’s a checklist of what your CPA will likely need to check.
- Financial statements, including balance sheets, income statements, etc.
- Annual budgets
- IRS tax returns
- Board meeting minutes
- Insurance policies
- Bank statements and reconciliations
- Paid invoices
- Vendor contracts
- Investments
- Payroll records
- Receivables
- Reserve schedules
- 1099s for contractors
- Signed contracts and leases
- Proof of ownership
What Are Auditors Looking For?
Regular HOA audits can shed light on several issues that you may not be aware of. Whether they’re due to oversight or ill will, an audit can uncover inappropriate cash use, overbudgeting, inadequate insurance coverage, and even fraud or embezzlement. Some other specific issues auditors look for include the following.
- Unauthorized Transactions- Auditors can find transactions that weren’t approved by the board or made without proper documentation.
- Inaccurate Financial Reporting- They’ll verify the accuracy of financial reports to ensure they present a true and fair view of the HOA’s financial position.
- Non-compliance With Regulations- Auditors ensure that the HOA complies with all relevant laws, regulations, and governing documents.
Ensure Compliance With HOA Management
HOA audits, whether required or not, are crucial to the financial health of any HOA. Meeting financial expectations helps an HOA stay compliant with governing documents and builds trust with homeowners in the community. When an HOA audit uncovers discrepancies, it’s important to resolve them quickly.
Need More Advice? contact us today!
To ensure compliance within your HOA, consider hiring professional management. An experienced team like Bay Property Management Group can help with all your management needs. Whether you need someone to plan and coordinate meetings, create an annual budget, or provide audit support, we’ve got it covered. Contact BMG today to learn more about our HOA management services today.
