An HOA audit is a useful tool that ensures the accuracy and completeness of an association’s financial statements. It essentially helps maintain the long-term financial health of the association. That said, many boards struggle with audits and their requirements.
What is an HOA Audit?
An HOA financial audit is an in-depth investigation of the association’s financial statements. It is an objective examination, typically conducted by an experienced third-party professional.
The purpose of an audit is to ensure that the association’s financials are accurate and complete. It serves as a way to verify the association’s financial health and identify any discrepancies or signs of potential mismanagement.
Audit vs Financial Review
While the two may seem similar, an audit is more comprehensive than a financial review. An audit is a thorough examination of financial records, internal controls, and supporting documents. Meanwhile, a financial review does not test internal controls or transactions.
The Importance of an HOA Audit
A homeowners association audit plays a key role in maintaining the financial integrity of a homeowners association. It involves an independent evaluation of the association’s financial records, which helps confirm that the reports accurately reflect the actual financial position of the organization.
This process reassures homeowners that the board is handling the funds appropriately. It boosts transparency within the community. An audit can also identify signs of financial mismanagement, such as missing funds or unauthorized expenses.
Additionally, many lenders will ask associations for audited financial statements before approving financing for major projects. If an association wishes to borrow money for capital improvements, an audit is a valuable tool.
Finally, some association bylaws or state laws may require an annual audit, especially for larger communities with more complex budgets. Even when not needed, performing an audit is still beneficial, as it strengthens the association’s financial position.
Are HOA Audits Required?
Two things determine the legal requirement of audits: state laws and the governing documents. In some states, associations are obligated to perform an audit of the HOA’s finances every few years.
Texas HOA audit requirements only apply to condo associations. Section 82.114 of the Texas Property Code requires condo associations to obtain an independent audit every year. The COA must then make copies of this audit available to unit owners.
Absent such a requirement, associations should check their governing documents. The CC&Rs and bylaws should detail the following:
- Whether or not the association is required to obtain an audit;
- Who must conduct the audit;
- The frequency of the audit; and,
- Distribution requirements to members.
While Texas law does not explicitly require property owners’ associations to conduct audits, Section 209.005 does address the mandatory retention time for audits. Audit records must be retained for at least 7 years.
Who Conducts HOA Audits?
Most associations hire a professional HOA auditor or Certified Public Accountant (CPA) to conduct an audit of the financial records. Professional audits prevent biases from clouding the judgment and evaluation of the association’s finances. Because it tends to be more objective, it is the recommended option.
On the other hand, some associations conduct internal audits. The association board performs this type of audit. Smaller associations usually prefer internal audits because there’s not much to examine, and there may be budget constraints.
The downside to an internal audit is that it isn’t always accurate. Board members may have biases or personal judgments that cause them to overlook certain details or problems. Moreover, not all association boards have the necessary financial expertise to perform an effective audit.
How Much Does an HOA Audit Cost?
Audits involve a thorough examination of an association’s financial records. There are many documents to review and a lot of moving parts. Because of this, audits tend to be expensive.
On average, an HOA audit costs somewhere between $4,000 and $6,000. Smaller communities can expect a lower fee since there are fewer records and transactions to sift through.
Financial reviews are less comprehensive, so they are also more affordable. On average, the cost of a financial review falls between $1,500 and $2,000.
Documents to Prepare for an HOA Audit
Association boards should prepare several documents for the audit. This may vary depending on the operational and financial components involved, so boards should ask their auditor or CPA.
The documents necessary for an audit can include, but are not limited to:
- Bank statements
- Deposit slips
- Cancelled checks
- Invoices
- Financial statements (balance sheets, income statements, cash flow statements, etc.)
- Meeting minutes
- Insurance policies
- Investment portfolios
- Tax reports
- Operating budgets
- Receivables reports
- Engineering studies
- Large-scale contracts
- Reserve study and schedule
- 1099 forms
- Delinquency reports
The auditor or CPA will rigorously inspect these documents. They might also ask to speak with those who prepared the reports or studies to confirm details with them. This ensures that everything is in order and no dollar is unaccounted for.
Producing these documents can take time and cost money. To minimize expenses, association boards should compile, organize, and prepare these records ahead of time.
Hiring an HOA Management Company
Many HOA management companies offer auditing services to associations. Some companies have an in-house auditor or accountant, while others maintain a network of qualified professionals.
Associations with HOA management companies should ask their manager about an audit. It may be included in the management contract or available for an extra fee. If an association doesn’t have an HOA management company yet, it is worth looking for one that offers auditing services.
Beneficial to all Associations
An HOA audit is clearly a valuable tool that every association board should use. Even though it is not legally required in all states, board members should allocate time and budget for the job. A professionally conducted audit will help ensure the association’s finances are accurate, complete, and in good condition.
Preferred Association Management Company offers exceptional HOA financial services to communities in Central Texas. Call us today at 512-918-8100 or contact us online to learn more!
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