Smart financial management is a cornerstone of success for any homeowners association, and an HOA audit plays a big role in that. Audits promote financial transparency and accuracy, helping the board build trust while ensuring long-term stability. Requirements can vary depending on the association.
What is an HOA Audit?
A homeowners association audit is a comprehensive financial examination of the HOA’s records, typically performed by an independent CPA. The goal of the examination is to verify the accuracy of financial records and ensure compliance with legal requirements. An audit can help weed out potential misdeeds, such as fraud or mismanagement, and the CPA can issue an official opinion.
It is important to have an audit conducted by an independent CPA. Neither board members nor the community manager can perform this thorough examination. An independent party is crucial, as it offers fresh eyes, poses no conflict of interest, and reduces the risk of compromise.
HOA Audit vs Financial Review: What’s the Difference?
An audit is a thorough examination of the association’s financial records. It offers the highest level of assurance by testing internal controls, verifying all transactions, and providing an expert opinion. Because of this, it is also the most expensive.
In comparison, a financial review is less comprehensive. It provides limited assurance, as it only analyzes the association’s finances through analytical procedures and inquiries. Finally, a compilation is the least intensive. It offers no assurance whatsoever, as it only involves organizing financial data into a standard format.
Many associations conduct a full audit every few years, with a financial review taking place annually. The type of examination an HOA will undergo depends on state law requirements and the governing documents.
What Does an HOA Audit Examine?
To prepare for an audit, board members must prepare certain documents. An HOA financial audit evaluates the following:
- Bank statements
- Deposits
- Checks
- Invoices
- Cash flow
- Income
- Expenses
- Reserve funds
- Financial reports
- Contracts
- Investments
- Insurance
- Board meeting minutes
It is essential to check all of these documents to reconcile decisions and transactions. This will allow the CPA to identify any gaps or discrepancies that may indicate further financial problems.
Audits are essential because they provide financial transparency. Homeowners tend to have more trust and confidence in their board if they know that funds are being managed properly. Moreover, audits ensure accountability. They can reveal whether or not board members are meeting their obligations to the association.
At the very least, an audit is necessary for compliance. State laws and the association’s governing documents may require regular audits.
Are There HOA Audit Requirements in Virginia?
In Virginia, homeowners associations are not legally required to perform audits. That said, it is best practice to conduct one anyway. The CC&Rs and bylaws of an association may also consist of audit requirements. As these can differ, boards should check their governing documents.
Additionally, homeowners generally have a right to request financial records. Virginia law protects this right under Section 55.1-1945 (for condominiums) and Section 55.1-1815 (for HOAs). Inspecting these records will help owners identify problems with the association’s finances. If any are found, homeowners can take action to get the community back on the right track.
Who Needs an HOA Audit?
Generally, all HOAs and condos, big or small, should perform regular audits. It is a best practice in financial management and supports transparency within the community. That said, some associations may need an audit more than others.
- Associations With Many Assets. Large communities that handle numerous assets would benefit from an audit. It is easier to manage such associations when there is a clear overview of how each asset is faring.
- Associations With Complex Finances. If an HOA has complicated finances and books, a CPA can straighten things out with an audit.
- Associations That Suspect Mismanagement. Communities that show signs of mismanagement or financial crime should have an audit performed. An audit can bring these misdeeds to light, allowing the association to correct them.
- Associations With a New Board or Manager. If an association has a new board or manager, an audit can shed light on the community’s current position. They can discover how previous management handled finances and make plans for the future.
How Much Does an HOA Audit Cost?
A full audit conducted by an independent CPA is typically intensive and detailed. Associations should expect to pay somewhere between $4,000 and $10,000 for this service. Some audits, especially for larger communities or those with more complex needs, may even cost more.
A financial review provides only limited assurance and doesn’t delve into the association’s records. This type of examination costs around $2,000 to $4,000, depending on the association’s needs and size.
Finally, a compilation is a simple organization of records, so it is the least expensive. Compilations usually cost under $2,000.
A number of factors can influence the cost of an audit:
- Size and Complexity. Larger or more complicated HOAs have more transactions. Because there’s more work involved, the service price is usually on the higher end of the spectrum.
- Quality of Financial Records. When books and records are organized, it takes less time to review them. In contrast, disorganized records are a nightmare to deal with, so they fetch a higher price.
- Experience and Location. A more experienced CPA or a certified auditor may charge more than their counterparts. The location of the association can also factor into the cost.
Associations with required audits should budget for them in advance. This way, there are no surprises. Board members can also save on audit costs by keeping their records organized, reducing the time and fees required to examine them. Finally, HOAs should build a relationship with a CPA, as long-term partnerships can lead to discounts for the association.
A Vital Financial Tool
An HOA audit can go a long way toward ensuring the association’s financial health. Even without a legal requirement, boards would be wise to conduct regular audits. This will help promote transparency, support accountability, and reduce risk.
National Realty Partners is a leading provider of HOA financial management services in Virginia. We can help your board manage and enforce the rules. Call us today at 703-435-3800 or request a proposal online!
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