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Why Is An HOA Annual Audit Necessary?

An HOA annual audit is just about as important to an HOA as annual health checkups are to you. HOA financial audits (or any sort of HOA audits in general) ensures the financial health of the association. A complete audit of HOA books, however, can be a costly activity. So, read on to find out why HOA annual audits are a necessary expense. While we’re at it, let’s also look at the cost of HOA audits, and what your options are when it comes to financial review vs audit.

HOA Annual Audit: What Are They and Why Do You Need One?

The health of your association’s finances is the health of your HOA as a whole. Your HOA’s financial situation basically decides the extent of the HOA board’s ability to maintain the community. If your HOA is in bad shape, financially speaking, then the board is in trouble, period. Financial problems will thoroughly cripple an HOA board’s capability to maintain and improve property values.

Thus, in order to keep the HOA properties and assets in good order, it is essential for the HOA board to understand its current financial position. There are many tools available that can help the board get a picture of its finances. The HOA annual audit is one such important tool. There’s an argument to be made that it’s also the most complete tool the HOA can have as well.

While financial reports and regular financial reviews are also highly useful tools, the HOA annual audit is more than just a report. It’s also an authoritative document as well. With an HOA annual audit, the board can support a declaration of its finances.

With a comprehensive HOA annual audits, the board is getting more than just a complete overview of its current finances. It is also providing prospective home buyers a supporting document that will help lenders come to a decision. Home resale disclosures will also provide an HOA annual audit as a document as well. So, not only is your HOA annual audits helping residents move in, but they are also helping owners to sell their homes as well.

What Is a Financial Audit?

A financial audit is a complete study of the financial statements of the organization or the HOA in this case. Just about every business does an annual audit of its financial statements to comply with various requirements. Audits are complete, objective, and impartial evaluations of the organization’s finances. Financial audits can also be done internally. These internal audits are extremely useful for improving internal HOA financial management. Thus, they are usually given directly to the board of directors for review.

For the purposes of our discussion, we’ll be focusing on HOA annual audits that are conducted by external auditors. Independent CPAs are the ones conducting these external audits. They will also use independent auditing standards than the one used internally by the HOA. These audits are the ones for complying with state laws or the association’s own bylaws.

Why Your HOA Needs an HOA Annual Audit

why | hoa auditIn the case of HOAs, many state laws also require a yearly audit. Many associations also include an HOA annual audit in their own bylaws as well. So, if your HOA falls under those cases, then it will need an HOA annual audit for compliance purposes.

If you are serving on a board of directors, you have probably seen the audit or had it included in your management package. If you haven’t read it thoroughly, make a point to pull it out and review it. It is really not as complicated as you may think.

Further, as a board member, you have a fiduciary obligation to understand the financial condition of your association. Monthly financial reports can only cover so much. Thus, only an HOA annual audit can certify that the financial reports you receive monthly actually reflect the true financial status of your association.

1. When Bylaws Require an HOA Annual Audit

Some states require HOA annual audits, but there are also some that don’t. In many cases, the association bylaws will require an HOA annual audit anyway. Even if the state law does not specify requirements for HOA audits. Since it’s the responsibility of the HOA board to follow their own covenants, then an HOA annual audit is mandatory.

2. To Regulate the Board

An HOA annual audit goes a long way to keep the HOA board honest. Theft, fraud, or simple fund mismanagement can happen to any HOA. A regular audit helps to keep board members accountable. Especially so for the HOA manager and the treasurer, who usually have direct access to HOA funds. It also helps assure HOA members that there’s internal control in place to keep the board in line.

3. When Transitioning to New HOA Management

An HOA annual audit is an authoritative source of information on the financial state of the association. Thus, it’s an extremely useful document for the new HOA management to study. If you have a new board of directors, it also helps to reassure them that the association has no lingering financial issues.

How Much Does an HOA Annual Audit Cost?

cost | hoa auditFinancial audits are complete reviews, and an annual audit even more so. Factor in the services of an independent CPA and the cost can be significant. Overall, an HOA can expect to pay around $4,000 to $6,000 for a full review.

Financial Review vs Audit

For internal management, financial reviews let the HOA have a picture of the current financial state of an HOA. Its purpose is more on the informative side of things.

They are valuable resources in understanding your financials. You can have them on a monthly basis, and these can help the board understand what is going on financially month-to-month. Quarterly financial reviews also let the board have a view of what to expect at the end of the year as well as how board decisions will affect the future of the association.

An audit, on the other hand, is more oriented towards verification. That’s when the HOA asks an auditor or CPA to come in and make sure all records are accurate.

An HOA Annual Audit Is the Association’s Financial Pulse

Now that you know why you need an HOA annual audit, take the association’s financial pulse. Whether the results are good or disheartening, consult with the professionals, and decide what needs to be done to establish and maintain a healthy financial posture.

 

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