An HOA audit can reveal hidden problems with an association’s finances. Some states require associations to perform an annual audit, while others do not. Regardless, an audit poses several benefits, from shedding light on poor financial decisions to uncovering concealed fraud. Even if there are no statutory requirements, boards should still consider conducting an audit.
What is an HOA Audit?
An HOA audit is a comprehensive inspection of a homeowners association’s finances. These include the association’s income, expenses, reserves, budgets, and reports. Audits are typically conducted independently by a Certified Public Accountant (CPA) to avoid conflicts of interest.
The chief objective of an audit is to ensure that the association’s records are accurate, transparent, and compliant with state laws and the association’s own governing documents. With an audit, homeowners can rest assured that the board is managing funds appropriately and that there are no fraudulent activities behind the scenes.
A homeowners association audit is very detailed, involving a number of items, including:
- A review of the association’s financial statements, such as the balance sheets, income statements, and cash flow statements.
- An examination of the association’s internal controls and procedures for fund management and fraud prevention.
- A verification of HOA financial compliance with state regulations and the governing documents.
- An assessment of the association’s reserves to ensure there are sufficient funds for future major repairs or replacements.
Audit vs Financial Review vs Compilation
An HOA audit is the most detailed and offers the highest level of assurance regarding accuracy and transparency. It is also the most expensive due to its comprehensive nature.
If an association doesn’t have the budget for an audit or simply requires something less extensive, it can opt for a financial review or compilation. A financial review tends to be more limited and only provides limited assurance. It involves a simple review of the association’s financial reports.
Finally, a compilation provides no assurance at all. It is simply a presentation of the association’s financial records. There are no inquiries, verifications, or in-depth examinations involved.
Should HOAs be Audited?
Whether or not an association is legally required to conduct an audit depends on two things: state laws and the governing documents. In Texas, the audit requirement only applies to condo associations. Homeowners associations, on the other hand, must rely on their CC&Rs and bylaws for guidance.
Under Section 82.114 of the Uniform Condominium Act, COAs must conduct an independent audit annually. The association must also make copies of the audit available for examination by the unit owners. If the bylaws require it or if a vote determines it, the audit must be conducted by a CPA.
For HOAs, it is imperative to review their governing documents to determine whether an audit is required. These documents should also specify who must perform the audit and how often it must be conducted. Additionally, they should detail any distribution requirements to homeowners.
Does Texas Require HOA Audits?
In Texas, HOAs are not legally obligated to obtain an audit, but COAs are. Under Section 82.114, condo associations must:
- Conduct an independent audit of their finances every year,
- Make copies of the audit available to unit owners for inspection, and
- Hire a Certified Public Accountant to perform the audit if the bylaws require it or if a board/membership vote decides it.
On the other hand, HOAs must refer to their governing documents for HOA audit requirements.
Problems an HOA Audit Can Reveal
Even without a legal requirement, associations should consider obtaining an annual audit to ensure financial transparency and accuracy. An HOA audit gives board members a clear picture of how effective their current financial management practices are. Moreover, it can uncover problems before they worsen.
These problems include:
- Financial Mismanagement. If the association is spending inefficiently, overbudgeting, or misallocating funds, an audit can reveal it.
- Fraud and Theft. An HOA audit can expose any unauthorized transactions, misuse of petty cash, and outright embezzlement.
- Budget and Spending Issues. An audit can determine if there are discrepancies between the budget and actual spending. This can also lead to findings on the adequacy of HOA fees.
- Reserve Fund Health. An audit can determine whether there is sufficient money in reserves to cover future costs.
- Internal Controls. Every association has internal procedures designed to prevent errors or fraud, and an audit can identify any gaps or weaknesses in these controls.
- Financial Reporting Accuracy. An audit can reveal if the association’s financial statements are correct.
- Vendor and Contract Issues. An HOA audit examines vendor contracts and invoices, checking for any discrepancies, overcharging, or other errors.
- Compliance. A CPA can determine whether the association’s financials comply with state laws, governing documents, and accounting standards.
In addition to disclosing financial problems, an audit can also help prepare for new management. With an audit, the new HOA management company can verify the accuracy and health of the association’s finances. The new manager can also use this information to develop more informed plans and provide guidance on board decisions.
How Much Does an HOA Audit Cost?
A full, comprehensive HOA audit costs somewhere between $4,000 and $6,000. For larger or more complicated associations, an audit can even cost as much as $10,000 or more. It ultimately depends on the community’s size, its location, and the complexity of the association’s finances.
The price may seem steep, but the work tends to be extensive. For associations legally required to obtain an audit, it is important to allocate budget funds for this purpose.
Financial reviews and compilations tend to be less costly, averaging $2,000 to $4,000 for reviews and $2,000 or less for compilations. That said, these types of financial examinations are also less detailed. A financial review provides limited assurance, while a compilation provides none.
Who Performs an HOA Audit?
While board members may feel tempted to perform the audit themselves, this is not recommended. Associations must hire an independent, external CPA to perform the audit, ensuring there are no conflicts of interest. A CPA can also provide an objective opinion, as they have no direct or indirect involvement with the association.
A Worthwhile Investment
An HOA audit provides assurance to an association that its finances are in good order. Even without a requirement under state laws or the governing documents, boards would be wise to obtain a full audit. While the process can be expensive, the benefits certainly outweigh the costs.
Graham Management offers exceptional HOA management services to Houston communities. Call us today at (713) 334-8000, request a proposal, or contact us online to learn more.
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