An HOA auditor can be an association’s partner in financial integrity and accuracy. Board members must understand the roles and responsibilities of auditors, when to hire one, and whether a third-party auditor is the best option.
What is an HOA Auditor?
An HOA auditor is a qualified professional who independently examines an association’s financial records, including invoices, receipts, ledgers, and financial statements.
The role of an auditor is to determine whether the association’s financial reports accurately and fairly represent its financial activities. While an auditor is usually a Certified Public Accountant (CPA), their job is different from a bookkeeper or accountant, who are responsible for maintaining the association’s financial records. HOA auditors act more as investigators.
What Does an HOA Auditor Do?
An auditor examines the association’s financial records, supporting documentation, and financial statements before providing a professional opinion, but the exact scope can vary depending on the agreement and the HOA’s needs.
Generally, the HOA auditor’s duties and responsibilities include:
- Reviewing bank accounts and reconciliations
- Examining income from dues and other sources
- Reviewing expenses and vendor payments
- Checking accounts payable and receivable
- Examining reserve and operating fund activity
- Reviewing investments and liabilities
- Testing selected transactions and supporting documents
- Confirming certain balances with outside parties
- Reviewing relevant association records and meeting minutes
- Evaluating financial reporting and certain internal controls
- Preparing an audit report complete with audit results and a professional opinion
Can a Board Member Be an HOA Auditor?
Generally, a board member should not serve as the association’s auditor. An auditor needs to be independent to examine the association’s financial statements objectively.
A board member plays a direct role in the association’s decisions and operations. They approve budgets, expenses, contracts, and other financial matters. Having that same person audit the financial records is a conflict of interest.
Is an HOA Audit Required?
State laws and the association’s governing documents determine if an HOA financial audit is mandatory. In Texas, only condo associations are legally required to conduct an independent annual audit as per state law (Section 82.114).
The association’s CC&Rs or bylaws may consist of similar provisions. Sometimes, lenders may also request an audit of the community’s finances before approving financing or refinancing.
When Should an HOA Consider Getting an Audit?
Even when an audit is not legally required, there are situations when a board may want one, such as when the HOA handles significant funds, there’s been a change in management, there are concerns about financial records, the board suspects misuse of association funds, the HOA has never had an audit, or in preparation for a major financial decision.
Let’s discuss each situation below.
1. Handles Significant Funds
An HOA that manages substantial operating and reserve funds has more financial activity to monitor. An independent examination can provide another layer of oversight.
2. Change in Management
It’s always a good idea to do an audit after a change in management, including management companies, bookkeepers, or anyone else who handles finances. The audit can help establish a clear financial record during the transition and identify any discrepancies.
3. Concerns About Financial Records
If the association spots unexplained discrepancies, missing documentation, or unusual transactions, it may be a good time to hire an HOA auditor. Further review can help determine if there are deeper problems that need attention.
4. Suspected Misuse of Association Funds
If directors or homeowners have legitimate reasons to believe that there’s fraud or other financial misconduct afoot, an HOA auditor can help trace transactions and confirm suspicions. Of course, an audit alone may not be enough.
5. Never Had an Audit
An association that has never obtained an independent audit may want to consider one. An HOA auditor can help establish stronger oversight and internal controls.
Audits are particularly essential for condominiums, where there are more shared components, elements, and expenses. A condo association audit should be performed by a professional.
6. In Preparation for a Major Financial Decision
Board members should consider having an audit done if there’s a major financial decision on the horizon. Examples include an HOA loan, a capital improvement, and refinancing.
When is an HOA Auditor Hired?
Generally, an association can hire an auditor after the fiscal year ends. This is when the financial records for that period become available.
Since an HOA annual audit involves reviewing financial records, it helps to have them on hand to avoid delays. That said, exact timing can vary from one community to another. It ultimately depends on the association’s governing documents.
Of course, without a prescribed deadline, the decision is left to the HOA board. Directors shouldn’t wait until the last minute to conduct an audit. The process can take a long time, and the board often requires the auditor’s professional opinion to make future decisions.
Is It Always Best to Hire a Third-Party HOA Auditor?
Industry practice dictates that the HOA auditor should be an independent third party. In general, associations hire a CPA to perform the audit, but this CPA must not have a personal interest in the HOA.
In Texas, condo associations are legally required to hire a CPA to perform an audit if:
- The bylaws stipulate it,
- The condo board votes for it,
- A majority of members vote for it.
Independence matters because it helps avoid conflicts of interest that can compromise the objectivity of the examination. Board members, homeowners, and lenders also tend to have greater confidence in an audit performed by someone outside the community and management company.
When hiring an HOA auditor, the board must consider their professional qualifications. Look for someone who has experience working with HOAs and condo associations of a similar size.
How Often Should an HOA Perform an Audit?
The frequency of an audit depends on state law and the governing documents, but Texas law requires condo associations to conduct an audit every year (Section 82.114). Additionally, these condos must make copies of this audit available to unit owners.
Confidence in HOA Finances
An HOA auditor provides an independent examination of the association’s finances. Even without a legal requirement, associations should consider scheduling an audit and hiring a qualified third party to conduct it. In doing so, they can obtain the highest level of financial assurance.
PAMco offers exceptional HOA management services to communities in Central Texas. Call us today at 512-918-8100 or contact us online to learn more!
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