Self-Managed HOA Audits: What You Need to Know

Self-Managed HOA Audits: What You Need to Know

Sustaining a Business Requires Proper Reporting

An understanding of the money coming in and the money going out is necessary for planning, not to mention for staying in good graces with the Internal Revenue Service (IRS).

The same rings true for running a homeowners association.

Completing different types of HOA audits allows you to keep tabs on financials and verify compliance with regulations. With regular audits, checks, and balances, a self-managed HOA can quickly identify dishonest employees and board members. It also enables associations to address any compliance issues before they become a real problem.

Two Types of HOA Audits Every Self-Managed HOA Should Know About

Two typical HOA audits every association should be familiar with are the Financial Audit and Governing Document Audit.

1. Governing Document Audit
A Governing Document Audit should be completed every few years to ensure compliance with the association’s bylaws, articles of incorporation, Covenants, Conditions & Restrictions (CC&Rs), and other state and federal laws.

An audit that can be completed internally by a board committee, and its purpose is to:

  • Pinpoint any inconsistencies.
  • Help the HOA evolve with the evolving needs of residents.
  • Improve the association position with the community.
  • Uncover enforcement issues.

2. Financial Audit
The regularity of Financial Audits depends on the association’s governing documents and state regulations. If neither specifies when your HOA is required to complete one, you’ll still want to bring in an independent, third-party auditor regularly. Depending on the size of the association, you may want to conduct an audit annually, bi-annually, or every four years or so.

The purpose of a Financial Audit is to:

  • Check for fraudulent activity.
  • Stop minor mistakes from becoming significant issues.
  • Ease the minds of association members that the HOA correctly handles finances.

There are Six Levels of Financial HOA Audits

We wrote about six different types of audits in a previous blog post, so we’ll only touch on the levels below to make sure you’re familiar with them.

1. Annual Financials – These are not actually “audits,” but more so reporting completed by the association and board.
2. Compilation – An outside certified public accountant (CPA) reviews the financial reports prepared by the HOA and confirms everything appears to be in order.
3. Review – A CPA more thoroughly reviews the association’s reports to assure correct preparation of financials.
4. Audit – The CPA looks closer at the financial records for errors and other oddities. This level of scrutiny can take upwards of five weeks to complete due to its breadth.
5. Forensic Audit – If there is suspicion or evidence of fraudulent activity, hire a CPA to investigate the financials and identify fraudulent transactions and activities.
6. Reconstruction Audit – A CPA works to reconstruct accounting records when an association does not have proper records.

Simplifying HOA Audits with Management Software

As you can imagine both types of HOA audits mentioned above can be time-consuming and costly. Conducting audits will be easier if you accurately maintain these six annual financial records for your condo or HOA. And when you’re billed hourly by an auditor, easier usually leads to cost savings.

Self-managed HOA software is key to minimizing stresses during auditing. TOPS provides interactive reporting that’s easily customizable and enables you to drill-down into specific vendors and transactions—a feature your CPA will want to use during a forensic audit.

When was the last time your self-managed HOA conducted an HOA audit? If you can’t remember or it’s been more than a couple of years, it’s probably time.

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